Priority

Question 1

BASIC RULES

2 types of rules

Answer 1

1. two or more creditors try to collect their debts from the same property, or
2. when creditors try to collect debts from property that their debtor has sold to a third party.

Question 2

SECURED PARTY V. SECURED PARTY // BASIC RULES

3 basic rules

Answer 2

1. First-to-File-or-Perfect (Two Perfected Security Interests)
2. Perfected Secured Interests Have Priority over Unperfected Secured Interests
3. First to Attach (Between Two Unperfected Security Interests)

Question 3

SECURED PARTY V. SECURED PARTY // BASIC RULES

Rule + application of First-to-File-or-Perfect

Answer 3

= security interests rank according to priority of time of filing or perfection AKA the first secured creditor to do either one of those things

• most important rule and most commonly applicable one
• applies when the priority dispute is between two or more perfected Article 9 security interests

Question 4

SECURED PARTY V. SECURED PARTY // BASIC RULES

2 takeaways from First-to-File-or-Perfect

Answer 4

1. UCC actually allows a secured party to file before it has attached
2. not actually enough to be the first to file or perfect–have to be the first to file or perfect, be perfected, and STAY CONTINUOUSLY PERFECTED

Question 5

SECURED PARTY V. SECURED PARTY // BASIC RULES

Perfected Secured Interests Have Priority over Unperfected Secured Interests

Answer 5

Between two security interests, if one is perfected and one is not, then the perfected security interest has priority over the unperfected security interest
AKA perfection beats nonperfection
(NOTE: this is not really a “first-in-time” rule b/c only one security interest is currently perfected—that security interest is not necessarily the “first” one to initially be perfected, it’s the only one to perfect (or at least to currently be perfected))

Question 6

SECURED PARTY V. SECURED PARTY // BASIC RULES

First to Attach (Between Two Unperfected Security Interests)

Answer 6

= the first security interest to attach or become effective has priority if conflicting security interests are unperfected
AKA first to attach has priority
(applies when sometimes, although not often, there may be a priority dispute between two secured parties, and neither one of their security interests are perfected; this may be because both security interests have lapsed in perfection, or possibly because neither of them was ever perfected in the first place (or possibly some combination of the two))

Question 7

SECURED PARTY V. LIEN CREDITOR // BASIC RULES

Lien creditor

Answer 7

= a creditor that originally obtained a money judgment in court, on either a debt or contract or tort.

Question 8

SECURED PARTY V. LIEN CREDITOR // BASIC RULES

Priority rule

Answer 8

a secured party defeats a lien creditor in priority by
1. Perfecting before judicial lien arises by sheriff’s levy OR
2. Having debtor sign a proper security agreement granting a security interest in the property at issue AND filing a financing statement describing that property (this could technically be before the secured party is perfect since the loan may not have been made yet–no value)
(first-in-time, first-in-right rule)

Question 9

SECURED PARTY V. SECURED PARTY

the rules to know

Answer 9

1. 3 general priority rules
2. 2 PMSI rules
3. Consignor rule
4. Conflicting PMSI rule

Question 10

SECURED PARTY V. SECURED PARTY

rule of priority btwn 2 perfected secured creditors

Answer 10

= first to 
1. file OR
2. perfect
wins
(whichever date is earlier)

Question 11

SECURED PARTY V. SECURED PARTY

rule of priority btwn 2 unperfected secured creditors

Answer 11

= first to attach wins

Question 12

SECURED PARTY V. SECURED PARTY

rule of priority btwn unperfected and perfected secured creditors

Answer 12

= perfected wins

Question 13

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
2 key situations

Answer 13

1. PMSI in goods other than inventory or livestock

2. PMSI in inventory

Question 14

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in goods other than inventory or livestock rule (+ effect of superpriority)

Answer 14

= PMSI in such goods has priority over a conflicting interest in the same goods OR its proceeds
ONLY IF the PMSI is perfected within 20 days of the debtor receives possession of the collateral
(most common = normally covers PMSI in equipment)

Question 15

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory superpriority scope

Answer 15

PMSI in inventory has priority over a conflicting security interest in

1. the same inventory
2. Proceeds of that inventory that are chattel paper
3. Proceeds of that inventory that are instruments
4. Any identifiable cash proceeds

Question 16

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory rule

Answer 16

PMSI in inventory has priority over conflicting security interest
ONLY IF
1. PMSI in inventory is perfected AT THE TIME the debtor gets possession of the inventory
(filing must take place before inventory delivered to debtor)
AND
2. the notification requirement is satisfied

Question 17

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory notification requirement

Answer 17

Any secured party

• who has FILED her security interest in the same inventory
  1. must RECEIVE
• an AUTHENTICATED NOTIFICATION of the PMSI
• that states that the PMSI lender has or expects to take a PMSI in inventory of the debtor (described by kind or type)
  2. BEFORE debtor receives possession of the inventory

Question 18

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
PMSI in inventory notification effect

Answer 18

notification is effective

• for deliveries of the same type of collateral
• for 5 years

Question 19

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
Consignors rule

Answer 19

= interest in the consigned goods is treated just like PMSI in inventory
AKA consignors get superpriority of PMSI in inventory (as long as they meet the requirements)

Question 20

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
Conflicting PMSI rule

Answer 20

conflict btwn seller-financed PMSI and financer-financed PMSI
= seller-financed PMSI wins
(pretty rare situation)

Question 21

SPECIAL PMSI PRIORITY RULES // SECURED PARTY V. SECURED PARTY
operation of special rules (if you fail to satisfy the triggers of special rules, do you lose?)

Answer 21

Not necessarily, you just revert back to default rules

Question 22

NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Secured creditor v. buyer of collateral

Answer 22

General rule = buy with security interest on it, bring it home with security interest on it

Question 23

NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Exceptions

Answer 23

1. Authorized sale exception
2. Unauthorized sales to the buyer in the ordinary course of business
3. Consumer to consumer sale of consumer goods (garage sale rule)

Question 24

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT

Authorized sale

Answer 24

If the sale is authorized by secured creditor free of security interest, then buyer takes free of security interest

Question 25

AUTHORIZED SALE EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT Express authorization

Answer 25

look at the security agreement, must be explicitly stated therein

Question 26

AUTHORIZED SALE EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT Examples of implied authorization

Answer 26

1. Sale of inventory to an ordinary consumer is impliedly authorized by secured party 2. Acquiescence

Question 27

AUTHORIZED SALE EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT Implied authorization by acquiescence

Answer 27

1. Knew about the sale and 2. Didn’t stop it (pretty much estoppel or maybe waiver)

Question 28

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT | Unauthorized sales to the buyer in the ordinary course of business

Answer 28

= buyer in the ordinary course of business takes free of a security interest created by his seller EVEN THOUGH he knows it’s perfected and knows of its interest (but can’t know that sale violates a specific creditor’s rights)

Question 29

UNAUTHORIZED SALES EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT Buyer in the ordinary course of business

Answer 29

= buyer who buys goods 1. From a person in the business of selling goods of that kind 2. in good faith 3. Without knowledge that the sale violates the rights of secured party

Question 30

UNAUTHORIZED SALES EXCEPTION // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT Buyer not in the ordinary course of business rule

Answer 30

- If you don’t know there’s a security interest = you take subject only to perfected security interest (but not to unperfected security interest) - If you know there’s a security interest = you take subject to perfected or unperfected security interest

Question 31

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT | Garage sale rule

Answer 31

AKA Consumer to consumer sale of consumer goods rule 1. if he buys without knowledge of security interest 2. consumer goods (in both the hands of seller and buyer) 3. for value 4. for personal, family, or household purposes UNLESS the secured party files a financing statement BEFORE the C2C purchase

Question 32

EXCEPTIONS // NON-SECURED PARTY V. NON-ARTICLE 9 CLAIMANT | Only rule where it doesn’t matter whether you know that there’s a security interest on purchase

Answer 32

= buyer in the ordinary course of business rule

Question 33

more more more too much more PMSI SUPERPRIORITY // SPECIAL RULES Rationale

Answer 33

- Capitalism = want debtors to buy things and like creditors to enable them to buy things - also doesn’t really harm the non-PMSI secured creditors b/c without the PMSI creditor, their interest in collateral couldn’t exist

Question 34

more more more too much more PMSI SUPERPRIORITY // SPECIAL RULES Definition of superpriority

Answer 34

= PMSI secured parties will enjoy priority in the collateral, even if they’re not first AKA “second-in-time, but first in right”

Question 35

more more more too much more PMSI SUPERPRIORITY // SPECIAL RULES rules for 4 types of situations

Answer 35

1. general rule for a PMSI secured party vs. a non-PMSI secured party 2. rule for a PMSI in inventory vs. a non-PMSI security interest in inventory 3. PMSI secured party vs. another PMSI secured party. 4. PMSI secured party vs. a lien creditor

Question 36

more more more too much more PMSI V. NON-PMSI // SPECIAL RULES General rule

Answer 36

a perfected purchase-money security interest - in goods other than inventory - has priority over a conflicting security interest in the same goods - IF the purchase-money security interest is perfected 1. when the debtor receives possession of the collateral OR 2. within 20 days thereafter

Question 37

more more more too much more PMSI V. NON-PMSI // SPECIAL RULES 3 takeaways of general rule

Answer 37

1. Only applies to PMSIs 2. applies to non-inventory goods (there’s a special rules that applies if PMSI goods are inventory) - as a practical matter, we are talking about either equipment or consumer goods (but mostly equipment) - AKA stuff that a business uses in running its business, as opposed to stuff that it’s in the business of selling - (e.g., Best Buy’s Wesco forklift in the back warehouse, not its TVs and computers) 3. PMSI secured party has a deadline to perfect, which is no later than 20 days after the debtor obtains possession of the goods = if they have a PMSI in non-inventory goods, and they perfect within 20 days after debtor gets possession of the goods, they win the priority dispute, even though their security interest came later

Question 38

more more more too much more PMSI V. NON-PMSI // SPECIAL RULES general rule example (just read it okay) - Say that on February 1, Wayne’s Widget Warehouse (in the business of selling widgets) borrowed $100,000 from First Bank for general operating expenses. - In order to secure the loan, Wayne signed a security agreement granting First Bank a security interest in all his equipment, now owned or thereafter acquired. First Bank filed a proper financing statement on February 2. - On March 1, Wayne purchased a new Acme XL400 Widget-Making-Machine from Paula’s World-of-Appliances, for a price of $50,000. Wayne planned to use the Acme XL400 to manufacture widgets for sale. - Paula directly financed the purchase with Wayne. Wayne paid $10,000 down, and agreed to pay the remaining $40,000 over 3 years with interest. Wayne also signed a security agreement granting Paula a security interest in the Acme XL400 Widget-Making-Machine. - The Acme XL400 was delivered to Wayne’s place of business on March 5. Paula filed a proper financing statement on March 15.

Answer 38

- In this case, although both First Bank and Paula would have perfected security interests in the Acme XL400, Paula’s security interest would have priority. - This is because it was a PMSI (she extended credit to enable Wayne to purchase the machine), and Paula properly filed within 20 days of Wayne’s receipt of possession of the machine on March 5. If Paula had not filed until, say, April 1, she would not obtain PMSI superpriority—although her security would still be perfected, it would not have PMSI superpriority because she did not file within 20 days of possession (March 5) as required by 9–324(a). She needed to file by March 25 or before to make this happen.