Priority

Question 1

General Priority Rules

1. Between Two Secured Creditors
   
   1. Both Perfected
   2. Both Unperfected
2. Between Secured Creditor and Lien Creditor
   
   1. Consumer PMSI Exception
3. Priority Based on Future Advances
   
   1. Secured Creditors
   2. Lien Creditors

Answer 1

General Priority Rules

1. Between Two Secured Creditors
   
   1. Both Perfected - first to file or first to perfect
   2. Both Unperfected - first to attach
2. Between Secured Creditor and Lien Creditor - lien creditor beats secured creditor unless
   
   1. secured creditor perfected first;
   2. secured creditor filed financing statement and debtor signed security agreement; or
   3. PMSI creditor in consumer goods files financing statement within 20 days of delivery to debtor.
3. Priority Based on Future Advances
   
   1. Between Secured Creditors - just like the actual lien itself, future advances based on perfected security interests relate back to the time of filing or perfection
   2. Secured vs Lien Creditors -
      
      1. advances made within 45 days of competing lien’s creation always win.
      2. advances after 45 days only win if (a) made without knowledge of the lien; and (2) pursuant to a contractual committment.

Question 2

Control and Deposity Accounts

1. General Rule
2. Exceptions

Answer 2

1. General Rule – When two conflicting parties have control over the same account, order of priority is based on who obtained control first.
2. Exceptions –
   
   1. Bank Creditor With Control By Maintenance- If security interest deposit account is perfected by control in bank where account is located = that bank has priority.
   2. Creditor With Control as Customer of Bank - Security interest perfected by control through becoming member of bank has priority over bank’s perfected interest in maintaining account.

Question 3

Priority of Security Intrests in Transferred Collateral

1. General Rule

Answer 3

Priority of Security Intrests in Transferred Collateral

1. General Rule - UCC 9-325(a) – a security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if:
   
   1. the debtor acquired the collateral subject to the security interest created by the other person; and
   2. the security interest created by the other person was perfected when the debtor acquired the collateral …

Question 4

Priority for Future Advances

1. General Rule
2. Limitations

Answer 4

Priority for Future Advances

1. General Rule - UCC 9-322(a)(1) – First to file or perfect wins. Therefore, a future advance (supported by a perfected security interest) relates back to the time of perfection.
2. Limitations - for automatic or temporarily perfected security interests** in future advances, priority is based on the **date of advance rather than relating back to the date of filing or perfection.

Question 5

Priority in After-Acquired Property

1. General Rule
2. Effect

Answer 5

1. UCC 9-322(a)(1) – as between secured creditors, the first to file or perfect wins.
   
   1. Effect - a security interest has the same priority with respect to after-acquired property that it has with respect to the original collateral.

Question 6

Priority in Purchase Money Security Interests

1. General Rule
2. PMSI Rule for Inventory and Livestock
3. Priority Between Venor and Lender PMSI

Answer 6

1. General Rule 9-324(a) – A PMSI has priority over a competing security interest in goods other than inventory or livestock and over identifiable proceeds (except for deposit accounts which require control) if its perfected when the debtor receives the collateral or within 20 days.
2. PMSI for Inventory - A PMSI in inventory (usually a bank lender) has priority over competing interest in the same inventory (usually the inventory lender), if: (1) Creditor Perfected On or Before Debtor’s Receipt of Inventory; AND (2) Creditor Sent Advance Notice to Conflicting Security Interests of Intent to Take PMSI.
   
   1. creditor has to resend notice at least once very five years to preserve priority
   2. PMSI for livestock is the same
3. Priority Between Conflicting Vendor and Lender PMSI -
   
   1. when vender and lender PMSIs are in conflict, venders beat lenders.
   2. If two competing PMSIs are of the same type, they share priority pro rata.

Question 7

Priority in Comingled Goods

1. Commingling
2. Accession

Answer 7

1. Identity is Lost - UCC 9-336(c) - where the identity of the collateral is lost by commingling, the security interest “continues in the product or mass.”
   
   1. Multiple security interests in same product or mass rank equally and share pro rata.
2. Identity is Not Lost (i.e. Accession)- UCC 9-335 - If the secured party has taken a security interest in an identifiable part in a larger whole the secured party’s interest will continue to be perfected, and will have priority over later-perfected interests in the whole.
   
   1. But any secured party with priority over the accession-secured party is entitled to prevent removal of the accession from the whole.

Question 8

Rules Governing Title to Personal Property

Answer 8

1. Void Title Rule - An outright thief obtains no title (a “void” title) to the property he or she steals. Thus the purchaser from the thief obtains no title, and thus can convey no title to anyone else.
2. Merchant Rule – UCC 2-403(2),(3) - Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. . . . “Entrusting” includes any delivery and any acquiescence in retention of possession
3. Voidable Title/Good Faith Purchaser Rule – UCC 2-403(1) - A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though
   
   1. the transferor was deceived as to the identity of the purchaser, or
   2. the delivery was in exchange for a check which is later dishonored, or
   3. it was agreed that the transaction was to be a “cash sale”, or
   4. the delivery was procured through fraud punishable as larcenous under the criminal law
4. Shelter Doctrine - a good faith purchaser also has the power to transfer the rights of a good faith purchaser to a person who is not a good faith purchaser.
5. Buyers in the Ordinary Course of Business - UCC §§1-201(b)(9) - “Buyer in ordinary course of business” means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind.

Question 9

Seller’s Right of Reclamation

Question 10

Seller’s Right of Reclamation

1. General Rule
   
   1. Exception
2. In Bankruptcy

Answer 10

Seller’s Right of Reclamation

1. General Rule - UCC 2-702 - if a seller discovers that its buyer received goods on credit while insolvent, the seller may reclaim the goods by demand within ten days of buyer’s receipt.
   
   1. Exception for Buyers In Ordinary Course - The seller’s right to reclaim is subject to the rights of a buyer in ordinary course or other good faith purchaser under this Article (Section 2-403). Successful reclamation of goods excludes all other remedies with respect to them.
2. In Bankruptcy - The seller need only make its demand within 45 days of the debtor’s receipt of the goods and not less than 20 days after the commencement of the bankruptcy case,
   
   1. demand must be in writing.

Question 11

Secured Creditors Against Subsequent Buyers

1. General Rule
2. Exceptions

Answer 11

Secured Creditors Against Subsequent Buyers

1. General Rule - buyers take subject to pre-existing security interests.
2. Exceptions
   
   1. Buyers in the Ordinary Course of Business
   2. Buyer not in OCB can take free of unperfected security interest if
      
      1. gives value; AND
      2. receives delivery w/o knowledge of the security interest (not required for intangibles re can’t deliver)
   3. Authorized Disposition by Secured Party
      
      1. can be implied
   4. Garage Sale Exception (consumer to consumer)
      
      1. only for consumer goods
      2. garage sale exception also beats a PMSI creditor in consumer goods unless the creditor files a financing statement

Question 12

Priority in Fixtures

1. General Rule
2. Exception
3. Exception to the Exceptions
   
   1. Exception

Answer 12

1. General Rule – 9-334(c) - a security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor.
2. Exceptions -
   
   1. PMSI in Fixtures
   2. Fixture Filed First
   3. Non-Fixture Exception for readily removable
      
      1. factor or office machines
      2. equipment not primarily used or leased for use in operation of the real property; or
      3. replacements of domestic appliances that are consumer goods
   4. Fixture Filed First Before Lien Creditors and Bankruptcy Trustees
   5. Mobile Home Transactions - fixture filed according to state certificate of title statutes (if it has one)
   6. Subordination by Contract
   7. Leased Land Exception - fixture has priority if debtor has right to remove goods as against encumbrancer or owner.
3. Exception to the Exceptions - Construction Mortgages - a security interest in fixtures is subordinate to a construction mortgage if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before the completion of the construction.
   
   1. Exceptions - the below beat the construction mortgage:
      
      1. First-in-Time
      2. Non-Fixtures
      3. Lien and Bankruptcy
      4. Contractual Subordination