Rules of Priority

Question 1

What is the basic conflict w/r/t priority?

Answer 1

More than one Creditor has a claim to the same collateral. Priority determines the payout waterfall.

Question 2

What is the basic purpose of priority?

Answer 2

The Secured Party seeks to subordinate other creditors, not to share with them

(i.e. Waterfall: Preferred creditors are satisfied IN FULL before junior creditors can assert their claims)

Question 3

What are the six types of Creditors in order of preference (i.e. Most secured –> Unsecured)?

Answer 3

1. Buyer in Ordinary Course (BIOC)
2. Perfected Attached Creditor (PAC)
3. Lien Creditor (LC)
4. Non-Ordinary Course Buyer (NOCie)
5. Attached Unperfected Creditor (AUC)
6. General Unsecured Creditor (GUC)

Question 4

What is a BIOC? What is his order in the creditor preference waterfall?
(What is an example?)

Answer 4

BUYER in Ordinary Course (BIOC):

Someone who purchases the collateral from a merchant’s inventory

1st in line to get satisfaction in full in the collateral

(e.g., Regina buys a new handbag from Juicy. Regina is a bioc(h))

Question 5

What is a PAC? What is his order in the creditor preference waterfall?

Answer 5

Perfected Attached Creditor (PAC):

Art. 9 Creditor who successfully attains perfection

2nd in line to get satisfaction in full in the collateral

Question 6

What is a LC? What is his order in the creditor preference waterfall?

Answer 6

Lien Creditor (LC):

General unsecured creditor who goes to court to get a judicial lien on the collateral

3rd in line to get satisfaction in full in the collateral

Question 7

What is a NOCie? What is his order in the creditor preference waterfall?
(What is an example?)

Answer 7

Non-Ordinary Course BUYER (NOCie)

Someone who buys the collateral OUTSIDE the ordinary stream of commerce

4th in line to get satisfaction in full in the collateral

(e.g., Nelly buys a nose ring from her friend, not from a earring store. She is Nocie Nelly)

Question 8

What is a AUC? What is his order in the creditor preference waterfall?

Answer 8

Attached Unperfected Creditor (AUC):

Art. 9 Creditor who creates an enforceable security interest (i.e., it’s attached), but does not perfect it

5th in line to get satisfaction in full in the collateral

Question 9

What is a GUC? What is his order in the creditor preference waterfall?

Answer 9

General Unsecured Creditor (GUC):

Lender who does not take any collateral from the Debtor, so has no claim to it

6th (Last) in line to get satisfaction in full in the collateral

Question 10

CREDITOR CONTESTS: AUC

Who does AUC (#5) beat? (3 people)

Who does AUC lose to? (4 people)

Answer 10

AUC beats:

1. Any subsequent AUC
2. Any GUC
3. The Debtor

AUC loses to:

1. Any NOCie (buyer)
2. Any LC
3. Any PAC
4. Any BIOC (buyer)

Question 11

CREDITOR CONTESTS: PAC

General rule: PAC beats all.

Who does PAC lose to? (3 people)

Answer 11

PAC loses to:

1. A prior-filing PAC
2. Certain PMSI-holders
3. Any BIOC (buyer)

**See further PAC breakdowns

Question 12

CREDITOR CONTESTS: PAC

**1. PAC vs. PAC

What is the general rule?

What is a special note w/r/t filing?

Answer 12

General rule: In PAC vs. PAC, “first in time = first in right”
(i.e., the PAC to perfect first has priority over subsequent-to-perfect PACs)

Special note: Art. 9 gives special effect to filing, giving priority to a first filer who LATER attaches!
(i.e., Debtor and Creditor begin negotiating on Jan. 1, and C files a financing stmt. Agreement is reached on March 1, when D signs the agreement. C’s priority in the collateral relates back to Jan 1!)

Question 13

CREDITOR CONTESTS: PAC

**2. PAC vs. Certain PMSI-holders

Who are the players?

What is the game? (2 types)

Answer 13

Players:

(1) PAC = After-acquired collateral financier (AACF), vs.
(2) PMSI

Games:

1. AACF vs. PMSI-holder when collateral is EQUIPMENT
2. AACF vs. PMSI-holder when collateral is INVENTORY

Question 14

What is an AACF?

a.k.a. “Floating Lien-Holder”

Answer 14

After-acquired collateral financier (AACF):

A secured creditor (PAC) whose collateral is a security interest in “all Debtor’s [inventory / equipment / goods / …] whether now held or hereafter acquired”

IF after-acquired collateral clause, THEN AACF

Question 15

What are two common bar exam examples of PMSIs?

Answer 15

1. Debtor purchases a $4k TV from Best Buy on credit, granting BB a security interest in the TV. BB has a PMSI.
2. Debtor borrows $4k from Bank to buy a TV from Best Buy, granting Bank a security interest in the TV. Bank has a PMSI.

Question 16

What is the difference between AACF vs. PMSI-holder when the collateral is equipment vs. when it is inventory?

Answer 16

WHEN EQUIPMENT:
All the leader-in-time PMSI-holder must do to achieve priority in equipment over lead AACF creditor is file properly within 20 days after Debtor takes possession of the new collateral.

WHEN INVENTORY:
Now, to achieve priority in inventory over lead AACF creditor, the leader-in-time PMSI-holder must (1) file properly before Debtor takes possession of the new inventory AND (2) notify the AACF before Debtor takes possession.

Question 17

CREDITOR CONTESTS: PAC

**3. PAC vs. BIOC

What is the general rule?

Answer 17

General rule:

PAC loses to BIOC. A BIOC takes free of a perfected security interest in seller’s inventory.