Priority of Secured Transactions

Question 1

Priority

Answer 1

The general rule regarding priority under Article 9 is “first in time, first in right”
- Among unperfected security interests, the first security interest to attach will prevail
- Between a perfected security interest and an unperfected security interest, a perfected security interest will prevail
- Between two perfected security interests, the security interest with the earliest time of filing or of perfection, which has continued without interruption, will prevail

Question 2

Priority - Instruments or Chattel Paper

Answer 2

When the collateral is an instrument or chattel paper, the secured party who perfects by taking possession will have priority over the secured party who perfects by filing

Question 3

Priority - PMSI

Answer 3

A perfected PMSI will prevail over a conflicting security interest if the PMSI is perfected when the debtor receives possession of the collateral or within 20 days thereafter
- “second-in-time, first-in-right” priority.
However, when the collateral is inventory, the purchase-money secured party has to take additional steps to acquire priority over the first-in-time secured party
- The most important extra steps are:
- the purchase-money secured party must notify the first secured party in an authenticated record that it expects to obtain a PMSI in the debtor’s collateral; and
- the PMSI must be perfected at the time the debtor receives possession of the inventory

Question 4

Priority - PMSI v Lien

Answer 4

If the PMSI is perfected within 20 days after the debtor receives the collateral, the PMSI will take priority over an intervening lien creditor

Question 5

Priority - Accessions

Answer 5

Goods that are physically united with other goods in such a manner that the identity of the original goods is not lost
- The priority of a security interest in an accession is determined in the same manner as with any other collateral, except that a security interest in an accession is subordinate to a security interest in the whole, which is perfected by compliance with the requirements of a certificate of title statute (i.e., cars and trucks)

Question 6

Priority - Commingled Goods

Answer 6

Goods that are physically united with other goods in such a manner that their identity is lost
- A security interest does not exist per se in commingled goods, but attaches to the product that results when goods become commingled goods
- Multiple security interests in commingled goods will rank equally in proportion to the value of the collateral at the time it became commingled goods. Otherwise, the ordinary priority rules apply

Question 7

Priority - Buyer

Answer 7

A security interest survives a sale of the collateral
There are several exceptions to this rule:
- The secured party authorizes the sale free of the security interest
- The buyer is a buyer in the ordinary course of business (BIOCOB)
- To determine whether a buyer is a BIOCOB, look at the business of the seller/debtor
- A BIOCOB is a person who:
- buys goods in good faith;
- without knowledge that the sale violates the rights of another person in the goods;
- in the ordinary course of business; and
- from a person in the business of selling goods of that kind
- The sale qualifies as a consumer-to-consumer or “garage sale” exception
- This exception applies only when a person buys goods for personal, family, or household use from someone who used the goods for that purpose
- Such a buyer takes free of a security interest created by his seller if:
- he buys for value;
- without knowledge of the security interest; and
- before a financing statement is filed
- Remember that a PMSI in consumer goods can be perfected without filing a financing statement.
- A buyer of chattel paper has priority over a security interest in proceeds of inventory subject to a security interest if:
- the buyer buys in good faith and in the ordinary course of business;
- the buyer gives value and takes possession or control of the chattel paper; and
- the chattel paper does not indicate that it has been assigned to another party

Question 8

Priority - Fixtures

Answer 8

When the collateral consists of a fixture, the creditor with a security interest in the fixture will want priority over the creditor who holds the mortgage on the real property to which the fixture is attached
The only way that such a creditor can obtain priority over the mortgagee is by filing a fixture filing
A secured party with priority over a mortgagee has the right to remove the fixture from the real property upon the debtor’s default
- The general priority rule is first-in time, first-in-right
- If the mortgage is recorded before the security interest in the fixture is perfected by a fixture filing, then the mortgage has priority
- However, if the security interest in the fixture is a PMSI then second-in-time, first-in-right priority applies, so long as the security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter