Secured Transactions - Priorities

Question 1

Perfected v. unperfected interests

Answer 1

A perfected security interest has priority over a conflicting unperfected security interest in the same collateral (even if the unperfected interest is a purchase-money security interest in inventory).

Question 2

Between multiple perfected creditors, who obtains priority?

Answer 2

the first to file obtains priority (even if a party files before they perfect for priority purposes).

Question 3

Who has priority when collateral not subject to state filing sytem or cannot otherwise be filed?

Answer 3

Some collateral is not subject to the state filing system or cannot otherwise be filed. In these instances, the first to perfect obtains priority.

Question 4

Generally, knowledge of a prior unperfected interest will…

Answer 4

… not prevent a potential secured party from filing first to obtain priority.

Question 5

What status to lien creditors hold?

Answer 5

Lien creditors possess virtually the same status as perfected secured creditors. Accordingly, if a party becomes a lien creditor before a secured party files or perfects, the lien creditor will enjoy priority over that party. Their priority also extends to future advances secured:
1.Before the lien arose;

2. Within 45 days of the lien;

OR

3. Without knowledge of the lien.

Question 6

What protections are enjoyed by buyers in the ordinary course of business?

Answer 6

Buyers in the ordinary course of business are protected even though their interest in the property is created after the attachment or perfection of a security interest.

Under UCC § 9-320(a), “. . . a buyer in ordinary course of business . . . takes free of a security
interest created by the buyer’s seller, even if the security interest is perfected and the buyer
knows of its existence.”

Question 7

Buyers in the ordinary course of business…

Answer 7

… take the collateral free of the security interest created by the seller.

Question 8

A buyer in the ordinary course of business is a person who:

Answer 8

1. In good faith and without knowledge that the sale to him is in violation of the security interest of a third party;
2. Buys in the ordinary course from a person in the business of selling goods of that kind.

Under UCC § 9-320(a), “. . . a buyer in ordinary course of business . . . takes free of a security
interest created by the buyer’s seller, even if the security interest is perfected and the buyer
knows of its existence.”

Thus, as long as the buyer in the ordinary course of business buys with knowledge of the security interest prior but without knowledge that the transaction violates the rights of another person in the goods, then they are protected and that creditor with the perfected security interest cannot come after them.
Seems weird, but just beacuse I know you have a store and don’t own outright everything, as you work with a bank for financing, does not mean that I do not think I am buying it free and clear of any encumbrance by the bank to come back and get it from me as the buyer buying in ordinary course.

Question 9

What is the Shelter Principle?

Answer 9

The protected buyer may sell the purchased collateral to a third-party
free of the secured party’s security interest.

Question 10

A buyer of consumer goods take the goods free of a security interest, even if perfected, if the buyer buys:

Answer 10

1. Without knowledge of the security interest;
2. For value;
3. Primarily for the buyer’s personal, family, or household purposes;

AND

4. Before the filing of a financing statement covering the goods.

Question 11

Generally, purchase-money security interests (PMSIs) have priority over…

Answer 11

… prior perfected security interests if the PMSI is properly executed.

Question 12

A PMSI is either:

Answer 12

1. A security interest held by the seller of collateral to secure payment of all or part of the price;

OR

2. A security interest of a person that gives value to a debtor so that the debtor may acquire rights in or the use of collateral.

Question 13

A PMSI in inventory collateral has priority over a conflicting security interest in the same collateral if…

Answer 13

… the PMSI is perfected at the time the debtor receives possession and notice is provided to prior creditors.

However, an unperfected PMSI in inventory will NOT have priority over a perfected security interest in the same collateral.

Question 14

A PMSI in non-inventory collateral (e.g., regular goods) has priority over a conflicting security interest in the same collateral if…

Answer 14

…the PMSI is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter (i.e., the creditor has a 20-day grace period to file upon receipt of the collateral).

Question 15

As to fixtures, if a PMSI in equipment is filed with state and perfected, does the PMSI have priority over the bank who holds a mortgage on the property where the fixture is locateD?

Answer 15

NO. NOT UNLESS THEY FILE A FIXTURE FILING IN THE COUNTY WHERE PROPERTY LOCATED.

A fixture filing must provide a description of the real property to which
the collateral is related and must be filed in the office in which a mortgage on the related real
estate would be filed, not in the state’s central filing office.

Question 16

Where should security interests be filed in order to be protected?

Answer 16

In the state where the debtor is. In the case of a business, it is where they are incorporated, as it is in that state where the laws will govern priority, etc.