VI. PRIORITIES

Question 1

Two step process:

Answer 1

1. Classify persons claiming the collateral.
2. Determine who prevails.

Note: By contract, the competing parties may agree to a priority order different from the normal rules. This is called subordination

Question 2

A. SECURED CREDITOR vs. UNSECURED/GENERAL CREDITOR

Answer 2

secured creditor prevails.

Perfected status of secured creditor is irrelevant

Question 3

B. SECURED PARTY vs. SECURED PARTY

Answer 3

1. Both Creditors Unperfected = first to attach prevails

2. One Creditor Perfected = the perfected creditor prevails

Question 4

3. Both Creditors Perfected

Answer 4

a. General Rule = first creditor to either (1) file or (2) perfect
(not both)
Doesn’t matter which creditor first had a security agreement with the debtor.
Doesn’t matter which creditor attached first.
Doesn’t matter which creditor perfected first if one creditor filed before that perfection.
Knowledge of Creditor A who filed first that Creditor B has subsequently filed and perfected, but before Creditor A perfects, is irrelevant.

Question 5

3. Both Creditors Perfected
   * **exceptions

b. Exception if One Creditor Has Purchase Money Security in Goods (other than inventory and livestock)

Answer 5

b. Exception if One Creditor Has Purchase Money Security Interest in Goods (other than inventory and livestock)
The purchase-money security interest creditor prevails (even though second) if it is perfected:
(1) at the time the debtor receives possession of the collateral, or
(2) within 20 days of when the debtor received possession of the collateral.

Question 6

3. Both Creditors Perfected
   * **exceptions

c. Exception if One Creditor Has Purchase-Money Security Interest in Inventory

Answer 6

Purchase-money security interest creditor prevails if:
(1) Purchase-Money Security Interest Creditor Perfected at Time Debtor Receives possession of the Inventory, and

(2) Proper Notice to Holders of Conflicting Security Interests
Authenticated notification to all creditors who have already filed with respect to the collateral. This notice must:
􏰁 —explain that the creditor is obtaining a purchase-money security interest in inventory,
􏰁 —describe the collateral, and
􏰁 —be given before the debtor receives possession of inventory

The notice is effective for deliveries of the same type of collateral for 5 yrs.

Question 7

3. Both Creditors Perfected
   * **exceptions
   d. Exception if One Creditor has a Purchase-Money Security Interest in Livestock

e. Exception for Deposit Accounts
f. Exception for Investment Property

Answer 7

d. Exception if One Creditor has a Purchase-Money Security Interest in Livestock
Basically, apply the same rules as for purchase-money security interest in inventory.
Purchase-money security interest creditor prevails if:
(1) Purchase-Money Security Interest Creditor Perfected at Time Debtor Receives possession of the Inventory, and
(2) Proper Notice to Holders of Conflicting Security Interests (before the debtor receives possession of inventory)

e. Exception for Deposit Accounts
Secured party with control prevails.

f. Exception for Investment Property
Secured party who has control over investment property has priority over a secured party who does not have control (e.g., a secured party who perfected by filing).

Question 8

C. SECURED PARTY vs. DONEE

Answer 8

C. SECURED PARTY vs. DONEE
If the debtor makes a gift of the collateral to a donee, the collateral remains subject to the security interest in the donee’s hands.

Question 9

D. SECURED PARTY vs. PURCHASER

1. General Rule
2. Debtor has Permission to Sell
3. Secured Party Unperfected at Time of Purchase
   b. Purchase-Money Security Interest Exception

Answer 9

D. SECURED PARTY vs. PURCHASER
1. General Rule = secured party prevails
2. Debtor has Permission to Sell = purchaser prevails
3. Secured Party Unperfected at Time of Purchase
a. General Rule
Purchaser wins if:
(1) Buyer gives value,
(2) Buyer receives delivery of the item, and
(3) Buyer has no knowledge of security interest at time of delivery.

b. Purchase-Money Security Interest Exception
If purchase-money security interest creditor perfects within 20 days after debtor receives the collateral but after debtor sells collateral to purchaser, creditor will prevail over the “gap” purchaser.

Question 10

D. SECURED PARTY vs. PURCHASER

4. Buyers in the Ordinary Course of Business

Answer 10

4. Buyers in the Ordinary Course of Business
   A buyer in the ordinary course of business can prevail even over a perfected creditor if the following requirements are satisfied.

a. Good Faith
Honesty in fact and observance of reasonable commercial standards.
b. Without Knowledge of a Security Interest violation
c. Purchase of Goods that are Not Farm Products
d. Ordinary Purchase
Purchase must be from a person in the business of selling goods of the kind. Example: purchase out of inventory, cant be from pawn broker
e. Security Interest Created by the seller
f. Creditor Not Perfected by possession

Question 11

D. SECURED PARTY vs. PURCHASER

5. Consumer Purchasers of Consumer Goods

Answer 11

Purchaser prevails if:

a. Consumer goods in seller’s hands.
b. Consumer goods in buyer’s hands.
c. Buyer has no knowledge of security interest.
d. Buyer pays value.
e. Creditor Not Perfected by possession
f. Creditor’s interest is unfiled prior to purchase.

Question 12

D. SECURED PARTY vs. PURCHASER
6. Buyers Not in the Ordinary Course of Business vis-à-vis Future Advances

7. Holder in Due Course of Negotiable Instrument

Answer 12

6. Buyers Not in the Ordinary Course of Business vis-à-vis Future Advances
   The creditor gives more money to the debtor based on collateral that the debtor has already sold to a purchaser who does not qualify as a buyer in the ordinary course of business.
   A non-buyer in the ordinary course of business can prevail over a secured creditor for future advance amounts (not the prior advances) made after the first of these events occurs:
   a. Secured creditor obtains knowledge of the purchase, or
   b. 45 days have elapsed from the date of the purchase.

Example: Adam Attorney sells his office computer to Paula on May 1. Unbeknownst to Paula, Adam had granted Bank a security interest in the computer and had received a $500 loan. On September 1, Bank loans Adam $250 under a future advance provision in the original security agreement. Adam stops making payments to Bank. Paula cannot qualify as a buyer in the ordinary course of business because she did not buy the computer from a person in the business of selling computers. Likewise, the consumer purchaser of consumer goods exception does not apply because Paula purchased equipment, not consumer goods. Thus, the computer is still subject to the original $500 loan. However, Paula takes free of the $250 future advance because it was made more than 45 days after she purchased the computer.

7. Holder in Due Course of Negotiable Instrument
   A holder in due course will prevail over earlier perfected interests in the negotiable instrument.

Question 13

E. SECURED CREDITOR vs. LIEN CREDITOR

4. Future Advances

Answer 13

E. SECURED CREDITOR vs. LIEN CREDITOR
1. Lien Creditors Defined (***bankruptcy proceeding begins)
General (unsecured) creditors who have acquired a judicial lien by a levy on the debtor’s property.
The term also includes the bankruptcy trustee.
2. General Priority Rules
a. If Secured Creditor Unperfected at Time Lien Attached = lien creditor prevails
b. If Secured Creditor Perfected at Time Lien Attached = secured prevails
3. Purchase Money Security Interest Exception
If a purchase-money secured creditor perfects by filing within 20 days after the debtor receives possession, the creditor will defeat lien creditors who obtained their liens in the gap period.
4. Future Advances
The secured creditor will lose priority to a lien creditor for future advances after both of the following two things occur:
(a) the secured creditor obtains knowledge of the lien, and (b) 45 days elapse from the date of the lien.

Example: Debtor grants Bank a security interest in a machine. Bank properly perfects. On March 1, Palsgraf obtains a valid judicial lien on this machine. Palsgraf immediately tells Bank about her lien. On April 1, Bank loans Debtor $1,000. On May 1, Bank loans Debtor an additional $500. Bank will have priority for the $1,000 future advance because although it knew of the lien, 45 days had not elapsed. However, Bank won’t have priority for the $500 future advance because it knew of the lien and 45 days had elapsed from the date of the lien.

Question 14

F. SECURED CREDITOR vs. STATUTORY MECHANIC’S LIEN

Answer 14

F. SECURED CREDITOR vs. STATUTORY MECHANIC’S LIEN
Statutory lien prevails if following conditions satisfied:
1. Person furnished services or materials with respect to the goods covered by the security interest,
2. Furnishing was in ordinary course of business, and
3. Collateral is in the possession of the statutory lien holder.

Example: Antitrust National Bank (ANB) had a perfected security interest in Karla Consumer’s car. When the car broke down, she took it to George’s Garage and had it repaired. George’s statutory mechanic’s lien has priority over ANB’s security interest as long as George retains possession of the car, unless the statute creating the mechanic’s lien expressly states otherwise.

Question 15

G. PROCEEDS

Answer 15

Priority for the proceeds is the _same as the priority in the original collateral as long as the security interest in the proceeds is perfected.

Question 16

H. FIXTURES — SECURED PARTY vs. HOLDER OF REAL PROPERTY MORTGAGE
1. Fixture Defined

Answer 16

1. Fixture Defined
   Ordinary building materials (e.g., brick, lumber, nail, siding, shingles, wiring, pipes, etc.) cease to be goods when incorporated into a structure and are real property.
   Thus, a creditor with a security interest in these ordinary building materials loses its security interest once construction occurs.

A fixture is a good which is not completely integrated into the building although it is so related to the real estate that an interest in it arises under the real estate law.
A fixture can be removed but some damage will occur to the realty. Examples: furnice, central air conditioning, sinks, water heater, built-in microwave

Question 17

H. FIXTURES — SECURED PARTY vs. HOLDER OF REAL PROPERTY MORTGAGE

2. General Rule
3. Purchase Money Security Interest Exception

Answer 17

2. General Rule
   Secured party may win if:
   a. Perfected before Real Estate Interest Recorded, and
   b. Perfected With a fixture Filing
   A fixture filing is a financing statement which meets the following additional requirements.
   (1) describe the real property
   (2) Filed in office where a mortgage on the real property would be recorded
3. Purchase Money Security Interest Exception
   Purchase-money secured creditor, even though perfected after real property interest is of record, can prevail if:
   a. Purchase-Money Secured Creditor Perfected by Fixture Filing,
   b. Perfected Within 20 days of Good Becoming a Fixture, and
   c. Competing Real Estate Interest is Not a Construction Mortgage
   Construction mortgage is the loan which enabled the whole building process to begin and thus it is not defeated by a later purchase-money security interest.

Question 18

H. FIXTURES — SECURED PARTY vs. HOLDER OF REAL PROPERTY MORTGAGE

4. Readily Removable Collateral
5. Judicial Liens

Answer 18

4. Readily Removable Collateral
   Sometimes, there is a debate whether an item is a fixture or merely a good. Generally, if the good is readily removable, it will be treated as a regular good, rather than as a fixture, and thus may be perfected without a fixture filing.
   Examples: fridge
5. Judicial Liens
   A security interest in fixtures that is perfected in any manner prevail over a later-acquired judicial lien, even if the perfection was not done via a fixture filing.

Question 19

I. CROPS

Answer 19

A perfected security interest in crops has priority over a conflicting interest in the land on which the crops are growing. It does not matter who filed or perfected first.