PRIORITIES 1
Mar 28, 2015
PRIORITIES
1
Basic Approach
1. Classify the persons claiming the collateral.
2. Apply appropriate priority rules.
2
Secured Creditor vs. Lien Creditor
Lien creditor Unsecured (general) creditor who
sued and obtained a lien. Trustee in bankruptcy.
3
Secured Creditor vs. Lien Creditor
Prevailing creditor is first to: Perfect, or Obtain lien.
Problem 314 – p. 869
4
Secured creditor vs. Unsecured creditor
[House (any kind) vs. homeless]
Secured creditor wins.
5
Unperfected secured creditor vs. Unperfected secured creditor
[straw house vs. straw house]
First to attach wins.
6
Perfected secured creditor vs. Unperfected secured creditor
[wood house vs. straw house]
Perfected wins Temporal order
irrelevant Knowledge that
unperfected creditor first irrelevant
Problem 315 – p. 870
7
8
Perfected secured creditor vs. Perfected secured creditor
[wood house vs. wood house]
First creditor who either: filed, or perfected.
9
Perfected secured creditor vs. Perfected secured creditor
Problem 316 – p.870
Problem 317 – p. 871
Problem 318 – p. 871
Problem 319 – p. 871
Problem 320 – p. 872 Dragnet clause
10
Special Rule: One creditor has PMSI in non-inventory goods
PMSI creditor can win (even though not first to file or first to perfect) if perfected within 20 days of when the debtor receives possession of the collateral.
Problem 322 – p. 879Problem 323 – p. 882Problem 324 – p. 882 11
Special Rule: One creditor has PMSI in inventory
PMSI creditor can win (even though not first to file or first to perfect) if:
1. Perfected when the debtor receives possession of the inventory, and
12
Special Rule: One creditor has PMSI in inventory
PMSI creditor can win (even though not first to file or first to perfect) if: 2. Gives notice to holders of
conflicting security interests before debtor receives possession of the inventory.▪ Explain that creditor is getting PMSI.▪ Describe the collateral.▪ Notice is effective for five years.
13
Special Rule: One creditor has PMSI in inventory
Problem 325 – p. 883
Problem 326 – p.894
Problem 327 – p. 894
14
Review – Two perfected creditors General Rule = First creditor to
either: File, or Perfect.
Exceptions: PMSI (equipment, consumer goods)
▪ Perfected within 20 days of debtor’s possession.
PMSI (inventory, livestock)▪ Perfected and notice to prior creditors by
time of debtor’s possession. 15
Special Rule: Investment property
If one creditor perfected by control, that creditor wins.
Problem 328 – p. 896
16
Special Rule: Deposit Accounts
Secured party with control prevails (only perfection method for deposit accounts).
Problem 329 – p. 896
17
Secured creditor vs. Donee
Secured creditor wins.
18
Secured creditor vs. Purchaser of collateral
Presumption = Secured creditor wins.
BUT, many exceptions so purchaser often wins.
19
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business.
20
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith
▪ Honest in fact, plus▪ Observance of reasonable commercial
standards.
21
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith 2. Without knowledge of security
interest violation▪ OK to know about the security interest.
22
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith 2. Without knowledge of security
interest violation 3. Purchased goods that are not
farm products▪ Farm products are governed by the
Federal Food Security Act.23
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith 2. Without knowledge of security
interest violation 3. Purchased goods that are not
farm products 4. Ordinary purchase (from
inventory)▪ “business of selling goods of the kind”▪ But, not a pawn shop.
24
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith 2. Without knowledge of security
interest violation 3. Purchased goods that are not
farm products 4. Ordinary purchase (from
inventory) 5. Security interest created by
seller▪ Not a security interest created by the
seller’s seller.
25
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith 2. Without knowledge of security interest
violation 3. Purchased goods that are not farm
products 4. Ordinary purchase (from inventory) 5. Security interest created by seller 6. New value
▪ Not to pay for a preexisting debt.
26
Secured creditor vs. Purchaser of collateral
27
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business. 1. Good faith 2. Without knowledge of security interest
violation 3. Purchased goods that are not farm
products 4. Ordinary purchase (from inventory) 5. Security interest created by seller 6. New value 7. Creditor not perfected by possession
28
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser is a buyer in the ordinary course of business.
Problem 331 – p. 898 Problem 332 – p. 903 Problem 333 – p. 904 Problem 334 – p.909 Problem 341 – p. 925
29
Secured creditor vs. HDC
HDC wins as takes free of all claims.
Problem 335 – p. 910
30
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer.
31
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer. 1. Consumer goods in seller’s
hands
32
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer. 1. Consumer goods in seller’s
hands 2. Consumer goods in buyer’s
hands
33
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer. 1. Consumer goods in seller’s
hands 2. Consumer goods in buyer’s
hands 3. Buyer has no knowledge of
security interest
34
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer. 1. Consumer goods in seller’s
hands 2. Consumer goods in buyer’s
hands 3. Buyer has no knowledge of
security interest 4. Buyer pays value
35
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer. 1. Consumer goods in seller’s
hands 2. Consumer goods in buyer’s
hands 3. Buyer has no knowledge of
security interest 4. Buyer pays value 5. Creditor not perfected by
possession
36
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer. 1. Consumer goods in seller’s
hands 2. Consumer goods in buyer’s
hands 3. Buyer has no knowledge of
security interest 4. Buyer pays value 5. Creditor not perfected by
possession 6. Creditor’s interest is unfiled
prior to purchase
37
Secured creditor vs. Purchaser of collateral
Purchaser wins if purchaser qualifies as a “garage sale” or “e-Bay” buyer.
Problem 336 – p. 910 Problem 337(a) – p. 911
38
Secured creditor vs. Purchaser of collateral
Purchaser wins if secured creditor unperfected at time of purchase if:
1. Purchaser paid value (not a gift),
39
Secured creditor vs. Purchaser of collateral
Purchaser wins if secured creditor unperfected at time of purchase if:
1. Purchaser paid value (not a gift),
2. Purchaser took delivery of the collateral, and
40
Secured creditor vs. Purchaser of collateral
Purchaser wins if secured creditor unperfected at time of purchase if:
1. Purchaser paid value (not a gift),
2. Purchaser took delivery of the collateral,
3. Purchaser had no knowledge of the security interest at time of delivery, and
41
Secured creditor vs. Purchaser of collateral
42
Secured creditor vs. Purchaser of collateral
Purchaser wins if secured creditor unperfected at time of purchase if:
1. Purchaser paid value (not a gift), 2. Purchaser took delivery of the
collateral, 3. Purchaser had no knowledge of the
security interest at time of delivery, and
4. Creditor did not use PMSI 20-day grace period to perfect.
43
Secured creditor vs. Purchaser of collateral
Purchaser wins if secured creditor unperfected at time of purchase if:
Problem 337(b) – p. 911 Problem 338 – p. 911
44
Secured creditor vs. Purchaser of collateral
Purchaser wins if secured creditor gave debtor permission to sell. Problem 337(c) – p. 911
45
Secured Creditor vs. Statutory Mechanics Lien
46
Secured Creditor vs. Statutory Mechanics Lien
Statutory mechanics lien wins if:
1. Lien holder furnished services or materials with respect to the collateral,
47
Secured Creditor vs. Statutory Mechanics Lien
Statutory mechanics lien wins if:
1. Lien holder furnished services or materials with respect to the collateral,
2. Furnishing was in ordinary course of business, and
48
Secured Creditor vs. Statutory Mechanics Lien
Statutory mechanics lien wins if:
1. Lien holder furnished services or materials with respect to the collateral,
2. Furnishing was in ordinary course of business, and
3. Collateral is in possession of lien holder
49
Secured Creditor vs. Statutory Mechanics Lien
Problem 347 – p. 936
50
Fixture Priority
Ordinary building materials transform from goods to real property so prior Article 9 interests are gone. 51
Fixture Priority
So related to the real estate that an interest in it arises under real estate law
52
Fixture Priority
General Rule – Secured creditor wins only if: 1. Perfected before the real estate
interest is recorded,
53
Fixture Priority
General Rule – Secured creditor wins only if: 1. Perfected before the real estate
interest is recorded, and
2. Perfected using a fixture filing [a financing statement that describes land and is filed in land records where land is located]
54
Fixture Priority
Special rule for purchase-money security interest – PMSI creditor can defeat a prior recorded real property interest if:
55
Fixture Priority
Special rule for purchase-money security interest – PMSI creditor can defeat a prior recorded real property interest if: 1. PMSI creditor perfected with
fixture filing,
56
Fixture Priority
Special rule for purchase-money security interest – PMSI creditor can defeat a prior recorded real property interest if: 1. PMSI creditor perfected with
fixture filing, 2. PMSI creditor perfected with 20
days of installation, and
57
Fixture Priority
Special rule for purchase-money security interest – PMSI creditor can defeat a prior recorded real property interest if: 1. PMSI creditor perfected with
fixture filing, 2. PMSI creditor perfected with 20
days of installation, and 3. Real property interest is not a
construction mortgage.58
Fixture Priority
Special rule for purchase-money security interest
Problem 349 – p. 941 Problem 353 – p. 946 Problem 354 – p. 946
59
Fixture Priority
Special rule for readily removable collateral: Factory or office machines Equipment not primarily used in the
operation of the real property Replacements of consumer goods or
domestic appliances.
Perfected before became fixtures by any method defeats real property interest.
60
Fixture Priority
Special rule for readily removable collateral:
Problem 350 – p. 942 Problem 352 – p. 946
61
Fixture Priority
Special rule for judicial liens:
A security interest in fixtures that is perfected in any manner prevails over a later-acquired judicial lien.
Problem 351 – p. 946
62
Fixture Priority
Special rule for transmitting utilities:
Railroads, subways, etc. Electricity, phone, etc. Pipeline (water, sewer,
oil, gas, etc.)
Just one filling in Secretary of State’s office is needed.
Problem 348 – p. 941 63
Crops
• Perfected interest in crops defeats a real property interest.
• Problem 355 – p. 95164
Manufactured Housing
Problem 356 – p. 951
65
Accessions – defined
Goods physically united with other goods but identity of original goods not lost.
66
Accessions – General Rule
67
New hard drive
Notebookcomputer
Normal priority rules apply between security interests in the whole (computer) and the accession (new hard drive).
Accessions – Exception if whole covered by certificate of title
68
• Creditor with COT perfection in the whole (car) prevails over creditor with security interest in the accession (engine).
• Problem 357 – p. 952
New engine
car
Commingling
69
Goods combined so that they cannot be separated.
Commingling
Security interests in the original goods are lost.
But a security interest arises in the mass.
If perfected in original, perfected in the mass.
Priority rules in § 9-336(f) [not tested].
70
Federal Tax Lien
71
Federal Tax Lien – Generally
Lien covers all of taxpayer’s property.
Elements of Federal Tax Lien: 1. Taxpayer fails to pay tax. 2. IRS makes demand for payment. 3. Taxpayer does not pay.
72
Federal Tax Lien – Basic Priority Rules
Creditor unperfected = tax lien prevails
Creditor perfected before tax lien filed = creditor prevails.
Tax lien filed before creditor perfected = tax lien prevails. Exception – PMSIs prevail over prior filed
tax lien Problem 359 – p. 971
73
Federal Tax Lien – After-acquired property rule
A creditor with an after-acquired property clause can prevail if: Security agreement entered into
before tax lien filing,
74
Federal Tax Lien – After-acquired property rule
A creditor with an after-acquired property clause can prevail if: Security agreement entered into
before tax lien filing, Creditor without knowledge of tax
lien when loan made,
75
Federal Tax Lien – After-acquired property rule
A creditor with an after-acquired property clause can prevail if: Security agreement entered into
before tax lien filing, Creditor without knowledge of tax
lien when loan made, Debtor obtains the after-acquired
property within 45 days of the tax lien filing,
76
Federal Tax Lien – After-acquired property rule
A creditor with an after-acquired property clause can prevail if: Security agreement entered into before
tax lien filing, Creditor without knowledge of tax lien
when loan made, Debtor obtains the after-acquired property
within 45 days of the tax lien filing, and Collateral is inventory, accounts
receivable, or commercial paper (not equipment).
77
Federal Tax Lien – After-acquired property rule
A creditor with an after-acquired property clause can prevail if: Security agreement entered into before tax
lien filing, Creditor without knowledge of tax lien
when loan made, Debtor obtains the after-acquired property
within 45 days of the tax lien filing, and Collateral is inventory, accounts receivable,
or commercial paper (not equipment). Problem 358 – p. 963
78
Federal Tax Lien – Future Advance Rule
A secured creditor who was perfected before the tax lien was filed, will lose priority for future advances (not the prior advances) upon the first of: Secured creditor obtaining
knowledge of the tax lien, or 45 days elapsing from the date of
tax lien filing.
Problem 360(a) – p. 97279
Other future advance situations
Non-BIOCOB
Lien Creditor
80
Buyers not in ordinary course v. Future advances
The buyer not in the ordinary course of business can prevail over future advances if either:
The secured credit knows of the purchase, or
45 days have elapsed since the date of the purchase.
Problem 360(b) – p. 97281
Lien creditors vs. future advances
The secured creditor will lose priority to a lien creditor for future advances after both:
The secured creditor has knowledge of the lien, and
45 elapse from the date of the lien.
Problem 360(c) – p. 972
82