Priorities

Question 1

Priority between unperfected secured parties?

Answer 1

If both security interests are unperfected, the first to attach has priority.

Question 2

Priority between unperfected and perfected secured parties?

Answer 2

Generally, a perfected security interest prevails over an unperfected security interest, even if the perfected secured party takes her security interest with knowledge of the earlier unperfected security interest

Question 3

General rule for priority between perfected secured parties?

Answer 3

The general rule is that priority goes to whichever party was the first to either file or perfect, whichever is earlier, provided that there is no period thereafter when there is neither filing nor perfection

Question 4

What is the special priority rule for investment property?

Answer 4

A security interest perfected by control has priority over a security interest perfected by any other method.

• If there are conflicting security interests perfected by control, they rank according to the time of obtaining control

Question 5

What is the special priority rule for deposit accounts?

Answer 5

A security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method. Conflicting security interests that are perfected by control rank according to the time of obtaining control, subject to the following exceptions:

1. a secured party who has obtaining control by putting the deposit account in the party’s name has priority over all other secured parties with control; and
2. a bank that has control because it maintains the deposit account has priority over all secured parties with control, other than the party that has obtained control by putting the account in her name

Question 6

PMSI “superpriority”

Answer 6

PMSIs enjoy a superpriority–they are superior to prior perfected security interests in the same goods if certain conditions are met.

Question 7

PMSI in inventory

Answer 7

A PMSI in inventory has priority over a conflicting security interest in the inventory itself , proceeds that are chattel paper, proceeds that are instruments, and any identifiable cash proceeds that are received on or before delivery to a buyer if:

1. the PMSI in inventory is perfected at the time the debtor gets possession of the inventory (the filing must take place before the inventory is delivered to the debtor); and
2. any secured party who has filed her security interest in the same inventory receives an authenticated notification of the PMSI before the debtor receives possession of the inventory, and the notification states that the purchase money party has or expects to take a PMSI in inventory of the debtor described by kind or type (this notification is effective for deliveries of the same type of collateral for five years)

Question 8

Consignor has PMSI in inventory

Answer 8

Under Article 9, a consignor’s interest in the consigned goods is considered to be a PMSI in inventory. Therefore, a consignor can acquire PMSI superpriority in consigned goods if she complies with the requirements for gaining PMSI superpriority in inventory.

Question 9

PMSI in goods other than inventory and livestock

Answer 9

Such a PMSI has priority over conflicting security interests in the same goods and their identifiable proceeds only if the interest is perfected before or within 20 days after the debtor receives possession of the goods

• No notification requirements

Question 10

PMSI in software

Answer 10

Remember: a PMSI in software arises if there is a PMSI covering both the software and the computer. This PMSI in software and its identifiable proceeds has the same priority as the security interest in the computer in which the software is used.

• So, if the computer is inventory, the PMSI in software has superpriority if the PMSI in the computer has superpriority
• If the computer is not inventory, the PMSI in the software has superpriority if the PMSI in the computer has superpriority under the applicable rule for noninventory goods

Question 11

Conflicting PMSIs

Answer 11

If more than one party has PMSI superpriority in collateral, the following rules apply:

1. a secured party who has a PMSI in collateral as a seller has priority over a secured party who has a PMSI in the same collateral as a lender
2. Otherwise, the first secured party to file or perfect prevails

Question 12

“Purchasers” of Chattel paper - special rules

Answer 12

If a purchaser of chattel paper in good faith gives new value and takes possession of the chattel paper in the ordinary course of business (or takes control of ECP), the purchaser will have priority over:

1. a security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper does not indicate that it has been assigned to anyone other than the purchaser; and
2. any other security interest in the chattel paper as long as the chattel paper purchaser acquired its interest without knowledge that its purchase violated the rights of the secured party. Any notation on the chattel paper stating that the chattel paper has been assigned to a secured party is sufficient to give the purchaser knowledge that the purchase violates the rights of the secured party.

Question 13

“Purchasers” of instruments - special rules

Answer 13

A purchaser of an instrument has priority over a perfected security interest in the instrument if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.

• any notation on the instrument stating that the instrument has been assigned to a secured party is sufficient for knowledge
• here, the purchaser does not have to give “new” value or take possession “in the ordinary course of business.”

Question 14

How is the priority in proceeds determined?

Answer 14

Article 9 divides collateral into “filing collateral” and “non-filing collateral.” Filing collateral is collateral in which a secured party would normally achieve priority by filing a financing statement (goods, accounts, commercial tort claims, general intangibles, and nonnegotiable documents). Non-filing collateral is collateral in which a secured party would normally achieve priority by possession or control, rather than filing (e.g., cash, chattel paper, NDAs, negotiable documents, instruments, and IP).

Question 15

What is the general rule for priority in proceeds?

Answer 15

Generally, under the “first to file or perfect” rule, a perfected security interest in proceeds will have the same date of priority as the perfected security interest in the original collateral, as long as the perfection of the security interest in the proceeds extends beyond the 20-day temporary perfection period.

Question 16

Special rules for priority in proceeds

Answer 16

A secured party has priority in the proceeds of non-filing collateral if:

1. she has priority in the original collateral,
2. her security interest in the proceeds is perfected, and
3. the proceeds are cash proceeds or proceeds of the same type as the original collateral

If the proceeds are proceeds of proceeds, all intervening proceeds must either be cash proceeds, proceeds of the same type as the original collateral or accounts relating to the collateral.

Question 17

What is the exception for filing collateral that comes as proceeds of non-filing collateral?

Answer 17

If a security interest in original collateral that is non-filing collateral is perfected by a method other than filing, and the proceeds of the original collateral are filing collateral, the first secured party to file a financing statement covering the proceeds has priority in the proceeds.

Question 18

What is the general rule for the priority of a security interest in a fixture over a security interest in the real estate to which the fixture is attached?

Answer 18

Fixtures are goods that become so attached or otherwise related to real property that an interest in them arises under real property law. A security interest in fixtures generally is not valid against someone with a conflicting interest in the real property unless:

1. the security interest was perfected by making a fixture filing, and
2. the real property interest arose after either the goods were affixed or the security interest was perfected, whichever occurred later

Question 19

What is a “fixture filing”?

Answer 19

To gain priority over a holder of an interest in real property, a party with a security interest in a fixture must perfect by making a fixture filing. A fixture filing is accomplished by filing a financing statement in the office of the clerk of the circuit court. The financinc statement must ALSO contain a description of the real property to which the fixture is attached.

Question 20

Exceptions to the general rule re: perfected security interest in fixtures

Answer 20

A perfected security interest in fixtures has priority over a conflicting interest in the related real property if:

1. the security interest was perfected pursuant to Florida’s certificate of title law;
2. the security interest was created in a manufactured-home transaction; or
3. the party with a real property interest consented to the security interest or disclaimed an interest in the fixtures

Question 21

What is the general rule for the priority of a security interest in an accession over a security interest in the goods to which it is attached?

Answer 21

Accessions are goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. The general rules for priority apply to accessions

Question 22

Exception to the general rule re: accessions

Answer 22

However, if the accession becomes a part of the whole that is subject to a security interest perfected by notation on a certificate of title, the security interest in the whole (e.g. the car) has priority over the security interest in the accession (e.g., a new motor)

Question 23

Secured party vs. buyer or other transferee

Answer 23

A purchaser of goods acquires whatever rights in the goods his transferor had the power to transfer, to the extent of the interest purchased. However, in certain situations, the buyer can take to goods free of their attached security interest.

Question 24

Unperfected secured party vs. buyer

General Rule

Answer 24

The general rule is that the buyer prevails. A buyer of collateral (or a lessee of goods) takes free of a security interest covering the collateral IF she both gives value and receives delivery of the collateral without knowledge of the security interest before it is perfected.

Question 25

**Exceptions** Buyer of receivables

Answer 25

The purchaser is not considered a “buyer." Rights between such purchasers of receivables and other holders of security interests in the same accounts are governed by the rules applicable between conflicting security interests.

Question 26

**Exception** PMSI Grace Period

Answer 26

If a secured party attaches a PMSI in the debtor's collateral ***before*** the buyer or lessee without knowledge pays value and receives delivery, the secured party will have ***priority*** over the buyer or lessee if she ***files within 20 days*** after the ***debtor receives the collateral***

Question 27

Perfected secured party vs. buyer

Answer 27

Generally, a perfected security interest in goods is good against subsequent buyers. There are, however, some cases in which the buyer will defeat even a perfected prior security interest.

Question 28

**Perfected Secured Party vs. Buyer** Secured party consents to sale

Answer 28

If the secured party consents to a sale, lease or other transfer of the collateral free of the security interest, the transferee will take free of the secured party's perfected security interest. * the authorization may be express, or it may be implied from the type of sale or the seller's conduct

Question 29

**Perfected Secured Party vs. Buyer** Buyer in the ordinary course of business

Answer 29

A BIOC (one who buys goods in good faith and in the ordinary course of business from a seller who is engaged in the business of selling goods of the kind purchased) generally ***takes free of a nonpossessory perfected security interest created by the seller*** of the inventory EVEN IF the buyer knows of it *unless* the buyer also knows that the sale is in violation of the terms of the security agreement.

Question 30

**Perfected Secured Party vs. Buyer** Buyer in the ordinary course of business *Seller must be in business of selling goods of the kind*

Answer 30

A buyer will NOT qualify as a buyer in the ordinary course unless the seller is in the business of selling goods of the kind that the buyer buys

Question 31

**Perfected Secured Party vs. Buyer** Buyer in the ordinary course of business *Buyer takes free ONLY of interests created by his seller*

Answer 31

To qualify under the BIOC rule, the security interest must have been ***created by the buyer's seller;*** if the security interest was created by someone else, the BIOC rule does NOT apply

Question 32

**Perfected Secured Party vs. Buyer** Buyer in the ordinary course of business *Knowledge*

Answer 32

Note that a buyer may still qualify under the BIOC rule, even if the buyer knows that the inventory is subject to a security interest ***unless*** the buyer also knows that the sale violates the security agreement

Question 33

**Perfected Secured Party vs. Buyer** PMSI in Consumer goods *“Garage Sale” Rule*

Answer 33

If the buyer of the consumer goods in turn resells them to another consumer, the second buyer takes free of the security interest if he **buys without knowledge of it for value and before a financing statement covering the goods has been filed.**

Question 34

**Perfected Secured Party vs. Buyer** Future Advances

Answer 34

Generally if a creditor makes a future advance, the time of perfection of the future advances relates back to the time of perfection of the **original advance.** * However, a buyer (or lessee) ***not in the ordinary course of business*** can gain priority over a secured party who makes a future advance on collateral after the buyer purchases the collateral * Such a buyer has priority over a future advance made: * (1) after the secured party ***learned*** of the purchase; or * (2) more than ***45 days*** after the purchase

Question 35

**Secured Party vs. Holder in Due Course (HDC)**

Answer 35

A HDC of a negotiable instrument takes priority over any security interest in the negotiable instrument.

Question 36

**Secured Party vs. Transferee of Money or Deposit Account Funds**

Answer 36

If a debtor transfers money or deposit account funds to a person, that person ***takes free of any security interest in the money or funds,*** unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

Question 37

**Unperfected Secured Party vs. Judicial Lien Creditor**

Answer 37

A judicial lien creditor (a person who has acquired a lien on the collateral through judicial attachment, levy, etc) prevails over the holder of a security interest in the collateral IF the lien creditor becomes such ***before the security interest is perfected.***

Question 38

**Unperfected Secured Party vs. Judicial Lien Creditor** Trustee in Bankruptcy

Answer 38

Judicial “lien creditor” includes a trustee in bankruptcy, who is said to be a hypothetical judicial lien creditor in all of the debtor's property beginning on the date the bankruptcy petition is filed

Question 39

**Unperfected Secured Party vs. Judicial Lien Creditor** PMSI Grace Period Exception

Answer 39

A secured party who attaches a PMSI in the debtor's collateral before a judicial lien creditor acquires an interest in the collateral will have priority over the judicial lien creditor ***if it files within 20 days after the debtor receives the collateral***

Question 40

**Perfected Secured Party vs. Judicial Lien Creditor** General Rule

Answer 40

A prior perfected security interest in the collateral has priority over a judicial lien creditor's interest in the same collateral.

Question 41

**Perfected Secured Party vs. Judicial Lien Creditor** General Rule *Prior Filed Security Interest May Also Have Priority*

Answer 41

If a secured party files a security interest but does not attach (and therefore does not perfect) before a judicial lien creditor's interest arises, the secured party has priority over the judicial lien creditor as long as the secured party: 1. evidences its security agreement with an authenticated security agreement, possession, or control, and 2. eventually attaches and perfects its security interest

Question 42

**Perfected Secured Party vs. Judicial Lien Creditor** General Rule *Lien Has Priority Over Some Future Advances*

Answer 42

A judicial lien creditor's interest can gain priority over certain future advances that would otherwise have priority under the above general rule; that is, under the general rule, the future advances would have priority if they were made pursuant to a perfected security interest that was filed or perfected before the lien arose. The judicial lien creditor will have priority if the future advance was made ***more than 45 days after the lien arose unless*** the future advance was made: 1. without knowledge of the lien, or 2. pursuant to a commitment made without knowledge of the lien