Priorities

Question 1

Priority Between Perfected Secured Parties

Answer 1

• when there are conflicting perfected security interests in the same collateral, priority goes to whichever party was the first to either file or perfect (whichever earlier) provided that there’s no period thereafter when there’s neither filing nor perfection
• CORE POINT: priority determined by date of filing or perfection, NOT attachment

Question 2

Priority Between Unperfected Secured Parties

Answer 2

• when 2 unperfected security interests conflict, the first to attach has priority

Question 3

Priority Between Unperfected and Perfected Secured Parties

Answer 3

• perfected security interest generally prevails over an unperfected security interest

Question 4

PMSI Superpriority

Answer 4

• PMSIs enjoy superpriority -> superior even to prior perfected security interests in the same collateral if certain conditions are met

Question 5

PMSI Superpriority - Goods Other Than Inventory or Livestock

Answer 5

• PMSI in goods other than inventory + livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods

Question 6

PMSI Superpriority - Inventory and Livestock

Answer 6

• PMSI in inventory collateral has priority over conflicting security interest in same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:
  -> it’s perfected at time debtor gets possession of the inventory (filing must take place before inventory delivered to debtor) AND
  -> any secured party who has filed their security interest in the same inventory receives 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
  -> the notification is effective for deliveries of the same type of collateral for 5 yrs
• livestock generally follows the same rules

Question 7

Consignors - PMSI in Inventory

Answer 7

• under Art 9, consignor’s interest in consigned goods is considered to be a PMSI in Inventory
• therefore, consignor can acquire PMSI superpriority in consigned goods if consignor complies w/ above reqs for gaining PMSI superpriority in inventory

Question 8

Conflicting PMSIs

Answer 8

If more than one party has PMSI superpriority in collateral, following rules apply:
- secured party who has a PMSI in collateral as a seller (seller-financed PMSI) has priority over secured party who has a PMSI in the same collateral as a lender (a financer-financed PMSI)
- otherwise, the first secured party to file or perfect prevails

Question 9

Reminders for Perfection wrt PMSIs

Answer 9

• PMSI in consumer goods is automatically perfected
• PMSI in equipment can be perfected (usually by filing) any time w/in 20 days after debtor gets possession of the collateral AND
• PMSI in inventory must be perfected (usually by filing) by the time the debtor gets possession of the collateral (no 20-day grace period) and others w/ a previously filed security interest in the inventory must be given notice

Question 10

Special Priority Rules for Conflicting Security Interests in Investment Property

Answer 10

• security interest perfected by control has priority over a security interest perfected by any other method (i.e. filing or automatic)
• for conflicting security interests perfected by control, they rank according to the time of obtaining control (unless one of the secured parties with control is a securities intermediary, in which case the securities intermediary will prevail)
• in all other cases, “first to file or perfect” rule governs priority q’s for investment property

Question 11

Special Priority Rules for Conflicting Security Interests in Deposit Accounts

Answer 11

• security interest in a deposit account that is perfected by control has priority over a conflicting security interest that is perfected by another method (namely, as proceeds of other collateral)

If all perfected by control, they rank according to T of obtaining control, subject to following exceptions:
- secured party who has obtained control by putting deposit account in the party’s name has priority over all other secured parties w/ control AND
- bank that has control b/c maintains the deposit account has priority over all secured parties w/ control, other than party who has obtained control by putting account in their name

Question 12

Special Priority Rules for Conflicting Security Interests in Deposit Accounts - Transfer of Funds

Answer 12

• if debtor transfers $ or deposit account funds to a person, that person takes free of any security interest in the $ or funds, unless the transferee acts in collusion w/ debtor in violating the rights of the secured party

Question 13

Purchaser of Chattel Paper and Instruments

Answer 13

• Art 9 contains special rules for “purchasers” of chattel paper and instruments, which includes parties who take a security interest

Question 14

Chattel Paper Purchasers

Answer 14

If purchaser of chattel paper in good faith gives new value + takes possession of the chattel paper in the ordinary course of business (or takes control of electronic chattel paper), the purchaser has priority over:
- a security interest in chattel paper that arises merely as proceeds of inventory, as long as the chattel paper doesn’t indicate that it has been assigned to anyone other than the purchaser AND
- any other security interest in the chattel paper, as long as the chattel paper purchaser acquired their interest w/o knowledge that its purchase violated the rights of the secured party

Question 15

Chattel Paper Purchaser - Priority in the Proceeds of the Chattel Paper

Answer 15

• has priority if either:
  1) purchaser would have had priority under the general priority rules (the purchaser was the first party to file or perfect) OR
  2) the proceeds are the specific goods covered by the chattel paper or cash proceeds of the specific goods

Question 16

Instrument Purchasers

Answer 16

• purchaser of an instrument has priority over a perfected security interest in the instrument if purchaser gives value + takes possession of the instrument in good faith and w/o knowledge that the purchase violates the rights of the secured party

Question 17

Priority in Proceeds - Kinds of Collateral

Answer 17

• to determine priority of security interests in proceeds, Code divides collateral into “filing collateral” and “non-filing collateral”

Question 18

Filing Collateral

Answer 18

• collateral in which a secured party would normally achieve priority by filing a financing statement
• ex: goods, accounts, commercial tort claims, general intangibles + nonnegotiable docs

Question 19

Non-Filing Collateral

Answer 19

• collateral in which a secured party would normally achieve priority by possession or control, rather than filing
• ex: cash, chattel paper, nonconsumer deposit accounts, negotiable docs, instruments + investment property

Question 20

Priority in Proceeds - General Rule

Answer 20

• perfected security interest in proceeds will have 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
• keep in mind there are also special superpriority rules for certain proceeds of collateral subject to PMSIs

Question 21

Special Rule for Certain Proceeds of Non-Filing Collateral - Rationale

Answer 21

• b/c rules governing priority in non-filing collateral contain many exceptions to “first to file or perfect” rule
• Code contains special priority rule for certain proceeds of that collateral

Question 22

Special Rule for Certain Proceeds of Non-Filing Collateral - Details of Rule

Answer 22

Secured party has priority in proceeds of non-filing collateral if:
1) secured party has priority in og collateral
2) their security interest in the proceeds is perfected AND
3) the proceeds are cash proceeds or proceeds of the same type as the og collateral

• if the proceeds are proceeds of proceeds, all intervening proceeds must be cash proceeds, proceeds of the same type as the original collateral, or accounts relating to the collateral

Question 23

Special Rule for Certain Proceeds of Non-Filing Collateral - Exception

Answer 23

• if security interest in og collateral that is non-filing collateral is perfected by a method other than filing, + the proceeds of the og collateral are filing collateral, the first secured party to file a financing statement covering the proceeds has priority in the proceeds

Question 24

Secured Party vs. Buyer or Other Transferee - General Concept

Answer 24

• when buyer buys or leases something with a security interest on it, security interest stays on the item
• BUT there are a few exceptions

Question 25

Secured Party vs. Buyer or Other Transferee - Authorized Sales

Answer 25

- if sale or lease of collateral is authorized by secured party free of the security interest, the transferee takes free of the security interest - the authorization may be express, or it may be implied from the type of sale or from the seller's conduct

Question 26

Secured Party vs. Buyer or Other Transferee - Unauthorized Sales: General Rule

Answer 26

- buyer in the ordinary course of business takes free of a nonpossessory security interest in the goods created by the buyer's seller, even though the security interest is perfected and even though the buyer knows of the security interest - rule also applies to lessees of goods

Question 27

Definition of Buyer in the Ordinary Course

Answer 27

One who buys good: 1) in good faith 2) w/o knowledge that the sale violates the rights of another person in the goods AND 3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased - typical case of buyer knowing that the sale violates the rights of another is where the buyer knows that the sale violates the security agreement

Question 28

Secured Party vs. Buyer or Other Transferee - Unauthorized Sales: Buyer NOT in the Ordinary Course of Business

Answer 28

- takes subject to perfected security interests AND - takes free from unperfected security interests unless they know of the security interest when they give value or take delivery

Question 29

Secured Party vs. Buyer or Other Transferee - Unauthorized Sales: Buyer NOT in the Ordinary Course of Business - Exception Re Future Advances

Answer 29

- buyer or lessee not in ordinary course of business has priority over future advances or commitments to make future advances made by a secured party either after the secured party learns of the purchase or lease or more than 45 days after the purchase or lease

Question 30

Secured Party vs. Buyer or Other Transferee - Unauthorized Sales: Buyer NOT in the Ordinary Course of Business - Exception Re PMSI Grace Period

Answer 30

- if a secured party attaches a PMSI in the debtor's collateral before the buyer or lessee without knowledge pays value = receives delivery, the secured party will have priority over the buyer or lessee if the secured party files w/in 20 days after debtor receives the collateral

Question 31

Secured Party vs. Buyer or Other Transferee - Consumer-to-Consumer Sales

Answer 31

- in case of consumer goods, buyer takes free of security interest, even though it's perfected, if buyer buys: 1) w/o knowledge of the security interest 2) for value 3) for the buyer's own personal, family, or household purposes AND 4) before a financing statement covering the goods has been filed - note that the goods must be consumer goods in the hands of both the buyer and the seller - reminder that even though PMSIs in consumer goods are automatically perfected, they lose to consumer buyers w/o financing statement under this rule

Question 32

Secured Party vs. Holder in Due Course or the Like

Answer 32

- holder in due course of a negotiable instrument (+ similar holders of negotiable docs of title or securities) has priority over a security interest in the negotiable instrument