Quiz 3 Priority Flashcards
General Rule
First in Time, First in Line
The claimant with the earliest priority date wins.
Secured Creditor v. General Unsecured Creditor
A secured creditor, whether perfected or not, will always have superior priority over a general unsecured creditor who has failed to reduce her claim to judgement and acquire a lien on the collateral.
Perfected Secured Creditor v. Perfected Secured Creditor
The general priority rule among conflicting perfected security interests in the same collateral is that the first to file or perfect wins.
Each competing perfected secured creditor’s priority date is the earlier of (1) the date on which any financing statement was filed or (2) the date on which the security interest was actually perfected.
A security interest cannot be perfected unless it has attached. This rule allows a creditor to file a financing statement before its security interest has even attached. Once the security interest attaches, it will be perfected; its priority will relate back to the date of filing.
Purchase Money Security Interest
Holders of perfected PMSIs may enjoy super priority. This means that PMSI holder takes priority over earlier, perfected secured creditors.
The Basic Rule – for all goods other than inventory or livestock (and consumer goods bc automatically perfected), if the PMSI is perfected within 20 days of the debtor’s receiving possession of the goods, the holder will have super priority both in those goods and in their identifiable proceeds.
PMSI - Inventory
If the collateral is inventory, the PMSI holder must take four specific steps to achieve super priority:
Perfected When Debtor Receives Possession — The PMSI is perfected when the debtor receives possession of the inventory
Authenticated Notification — The PMSI holder must send an authenticated notification to specific creditors with conflicting security interests in the inventory, including those perfected by filing
Timely Notification — The competing claimants must receive the notification within five years before the debtor receives possession of the inventory
Contents of Notification — The notification must describe the inventory and clearly state that the person sending the notification has or expects to have a PMSI in that inventory
PMSI - Livestock
To achieve super priority in livestock, a creditor with a PMSI in livestock must take the same steps as one with a PMSI in inventory. However, with livestock, the authenticated notification must be received within six months before the debtor receives possession of the collateral, not five years.
Control and Priority
because security interests in deposit accounts and letter-of-credit rights must be perfected by control, the secured party with control of the collateral has priority over any other secured party lacking control.
1. Generally one has control over a certificated security by taking delivery of it along with any necessary indorsements
1. Same is true of uncert securities
Control Over Investment Properties
For investment property, a creditor perfected by control has priority over a competing creditor perfected by filing.
“Investment property” means a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account.
2 ways a S.I. is taken in investment property: Filing of a financing statement and/or Taking control over the investment property with the latter trumping the former. Secured party who has control has priority over one who has merely filed
Control Over Deposit Accounts
For competing perfected secured creditors in the same deposit account, priority often depends on how each secured creditor established control
Depositary Bank’s Customer — If the secured party achieves control by becoming the depositary bank’s customer with respect to the deposit account, then that secured party beats out any competing secured party to achieve control by some other method
Depositary Bank — If neither competing secured party achieved control by becoming the depositary bank’s customer on the deposit account, then the prevailing secured party is the one to achieve control by being the bank with which the deposit account is maintained, or the depositary bank
Authenticated Control Agreements — If each competing creditor achieved control of the deposit account through an authenticated record or agreement, then whichever creditor obtained control first will have priority
Control Over Letter of Credit Rights
If the competing secured creditors are perfected in the same letter-of-credit right through control, the first creditor to achieve control has priority
If one party does not trust the other to make payments on time they could require payment be made directly by a bank of good reputation. The bank will issue a letter of credit to the person to whom payment is to be made (the beneficiary) specifying the circumstances under which the bank will honor drafts drawn on it by that person. The other party to the transaction who persuades the bank to issue it is called the applicant. The beneficiary may use its rights under the letter of credit as collateral for a diff loan with a diff creditor who will then want to perfect its S.I. in the rights represented by the letter of credit.
