Unit 14 - Priority (Basic Rules)

Unit 13 Review

  • PERFECTION

    • POSSESSION

      • Direct Possession

      • Third-party possession (authenticated acknowledgment)

      • Multiple methods for perfection without gaps

    • AUTOMATIC PERFECTION

      • PMSI in Consumer Goods (excluding motor vehicles)

      • Insignificant Accounts

      • Health-care insurance receivables

CHAPTER 18: PRIORITY: BASIC RULES

Priority: Introduction

  • Concept of priority regarding collateral distribution to secured creditors

    • Case: Debtor grants security interests to multiple creditors

    • First priority security interest receives payment from collateral first

    • Example: Debtor borrows from Bank 1 and Bank 2 against the same inventory worth $75,000

    • If Bank 1 has first priority, it gets paid in full before Bank 2 gets any leftover funds.

General Priority Rules: Secured Party vs. Secured Party

  • § 9-322: Priorities Among Conflicting Security Interests

    1. Perfected Interests ranked by filing or perfection timing

    2. Perfected interests hold priority over unperfected interests

    3. Priority goes to the first to attach for unperfected interests

Problem Examples

Problem 18-1: First-to-File-or-Perfect (Filing First)

  • Case Overview: Wayne’s Widget Store secures loans with inventory

    • First Bank loans $50,000, files on May 1.

    • Second Bank loans $75,000, secures and files on May 10-11.



    • Wayne’s SA with First Bank signed May 20.A) Which bank was first to perfect?B) Which bank has priority?

Problem 18-2: First-to-File-or-Perfect (Perfecting First)

  • Case Overview: Wayne grants a security interest in a valuable painting

    • Second Bank loans $50,000 and secures on June 1, followed by First Bank's loan.




    • Second Bank takes possession before filing.A) Which bank filed first?B) Which bank perfected first?C) Which bank has priority?

Problem 18-3: Continuous Perfection

  • Background: Wayne changes corporate name; secures loans under new and old names.

  • Original lender: First Bank secures under old name and updates filing upon learning of the name change.

  • New inventory arrives; who has priority based on the filing of each bank's interest?

Problem 18-4: Perfection Beats Nonperfection

  • Case Overview: Kevin’s Laundromat secures loans to purchase equipment.


  • First Bank files first, Second Bank files later. A) Which bank claims priority over equipment?B) Implications of First Bank also filing in Delaware.

Problem 18-5: First to Attach

  • Situation: Paula borrows from both banks, different filing errors involved.


  • First Bank’s errors vs. Second Bank’s perfecting actions.A) Which bank has priority? B) If First Bank had secured properly earlier, how does that change the outcome?

Problem 18-6: Secured Party vs. Lien Creditor



  • Conflict: David’s Donut Shop case involving contract disputes leads to granted interests and lien creditor actions.A) Identify priority of secured party vs. lien creditor in the seized equipment.B) Impact of different filing/loan timings on priority conclusions.


Unit 13 Review

PERFECTION

Perfection in secured transactions is crucial for establishing priority among creditors. It involves possession, either direct possession or third-party possession through authenticated acknowledgment. There are multiple methods for achieving perfection without any gaps, highlighting the various strategies creditors can employ.

AUTOMATIC PERFECTION

Automatic perfection arises in certain situations, such as for Purchase Money Security Interests (PMSI) in consumer goods, which notably excludes motor vehicles. Furthermore, insignificant accounts and healthcare insurance receivables also fall under special considerations for perfection.

CHAPTER 18: PRIORITY: BASIC RULES

Priority is an essential concept regarding the distribution of collateral to secured creditors, especially when a debtor grants security interests to multiple creditors. In such cases, the security interest with the first priority receives payment from the collateral first. For instance, if a debtor borrows from both Bank 1 and Bank 2 against the same inventory valued at $75,000, Bank 1, holding the first priority, will be paid in full before any payments are made to Bank 2.

General Priority Rules

The general rules governing priority are established under § 9-322, which stipulates priority among conflicting security interests. Perfected interests, ranked by the timing of their filing or perfection, take precedence over unperfected interests. Moreover, when dealing with unperfected interests, priority is granted to the first party to attach.

Problem Examples

Several problem scenarios illustrate the application of these principles. In Problem 18-1, Wayne’s Widget Store secures loans with inventory, with First Bank filing first on May 1, followed by Second Bank on May 10-11. Analysis of which bank perfected first and has priority forms the crux of the case. Problem 18-2 presents another case where Wayne grants a security interest in a valuable painting; the timing of filings between first and second banks is crucial for determining perfection and priority.

Problem 18-3 involves continuous perfection, wherein Wayne secures loans under both new and old corporate names, examining how name changes affect priority. Problem 18-4 discusses the implications of First Bank filing first for equipment purchases, comparing this with Second Bank’s later filing. Problem 18-5 focuses on the ramifications of filling errors when both banks are involved.

Finally, Problem 18-6 addresses a conflict involving David’s Donut Shop, emphasizing the interplay between secured parties and lien creditors. The priority of the secured party relative to the lien creditor is pivotal, particularly in light of different timings for filing and loan securing, impacting conclusions regarding priority.