Rules of PRIORITY when more than one creditor has a stake in the same collateral

Question 1

Each claimant is entitled to _________ before a subordinated/lower ranked claimant is entitled to take.

Answer 1

Satisfaction in full

Question 2

Typical Rank of Priorities

Answer 2

1- Buyer in the ordinary course
2- Perfected attached creditor
3- lien creditor
4- non-ordinary course buyer
5- attached but UNperfected creditor
6- general unsecured creditor

Question 3

Def: Buyer in the Ordinary Course

Answer 3

Someone who purchases the collateral from a merchant’s inventory.

Question 4

Def: Perfected Attached Creditor

Answer 4

The article 9 creditor who succeeds in attaching and attaining perfection

Question 5

Def: Lien Creditor

Answer 5

A general unsecured creditor who goes to court and gets a judicial lien on the collateral

Question 6

Def: Non-Ordinary Course Buyer

Answer 6

This is someone who purchases the collateral outside the ordinary stream of commerce.

Ex- buying a guitar from your auto mechanic

Question 7

Def: Attached UNproteted Creditor

Answer 7

The article 9 creditor who creates an enforceable security interest (aka attaches) but either never bothers to perfect or tries to perfect but botches the effort (perhaps by filing in the wrong place).

Question 8

Def: General Unsecured Creditor

Answer 8

This is the lender who never bothered to take collateral. For example, Jared lends the Subway Sandwich Co. $50,000, and, believing him to be a good credit risk, takes no collateral to back up its extension of value

THE SUPREME LOSER

Question 9

Specific Contests:

Attached Unperfected Creditor v. The World

Answer 9

• AUC’s interest is enforceable against the debtor
• will defeat any SUBSEQUENT AUC
• will defeat any general unsecured creditor
• will lose to perfected attached creditor (PAC), lien creditor, and ANY BUYER w/o knowledge of the security interest (whether buyer in ordinary course or not)

Question 10

Specific Contests:

Perfected Attached Creditor v. The World

Answer 10

PAC Defeats all EXCEPT

• another PAC who filed/perfected first
• certain PMSI holders
• buyers in the ordinary course

Question 11

Early Filing

Answer 11

Article 9 gives special effect to filing. It allows for early filing, even at the onset of loan negotiations. If an early filer subsequently attaches, she is allowed the benefit of her early filing. Priority will relate back to the early filing date.

Keep this in mind when you have PAC v. PAC

Question 12

Specific Contests:

After-Acquired Collateral Financier (aka floating lien holder) PAC v. PMSI-holder & the collateral is EQUIPMENT

Answer 12

RULE = PMSI can get first priority on the inventory by filing properly within 20 days after debtor takes possession of the equipment

EXAMPLE:

• On March 1, Macy’s borrows $2 million from Bank, granting Bank a security interest “in all of Macy’s business equipment, whether now held or hereafter acquired.” Bank properly perfects its interest. Bank is an After-Acquired Collateral Financier (AACF) and a PAC.
• Later, on August 1, Macy’s buys 10 new cash registers on credit from Office Depot, granting Office Depot a security interest in the new cash registers. Office Depot is a PMSI holder.
• the collateral is classified as equipment b/c equipment is items used in business
• Office Depot can get first priority in the 10 cash registers if it files properly w/in 20 days after macys takes possession of the cash registers.

Question 13

Specific Contests

After-Acquired Collateral Financier (aka floating lien holder) PAC v. PMSI & the collateral is INVENTORY

Answer 13

RULE = PMSO-holder can achieve first priority in the inventory by: (1) filing properly BEFORE debtor takes possession; AND (2) notifying the AACF PAC BEFORE debtor takes possession

EXAMPLE:

• On Oct. 1, Macy’s borrows $2 million from Bank, granting Bank a security interest “in all of Macy’s inventory, whether now held or hereafter acquired.” Bank properly perfects its interest. Bank is an AACF PAC
• Later, on Jan. 1, Macy’s acquires Armani’s spring line of clothing on credit, granting Armani a security interest in the line. Armani is PMSI-holder
• the collateral is “inventory” b/c its goods held for sale or lease
• Armani can achieve first priority in the spring line by (1) filing properly before Macy takes possession of the spring line, AND (2) notifying bank before Macy takes possession

Question 14

Specific Contests:

Perfected Attached Creditor v. Buyer In the Ordinary

Answer 14

General Rule- PAC loses to BIOC. A buyer in the ordinary course of business takes free of a perfected security interest in seller’s inventory