UCCs & Priority of a Security Interest

UCC Filings Part 4 | Priority of a Security Interest

In part 4 of our secured transaction series, we’ll review Priority under Article 9.

Review Part 1 | Introduction & Scope of Article 9, Part 2 | Conveying a Security Interest and Perfection & Priority under Article 9 and Part 3 | Perfection of a Security Interest

Who Has Priority?

Generally, a creditor’s priority is based on whether the creditor has a perfected security interest, and priority dates from the time of filing or perfection, whichever is first.

If an interest in the same collateral exists, the creditor with the perfected security interest has priority over the creditor with the unperfected security interest. Further, the creditor with the unperfected security interest has priority over general unsecured creditors.

Exceptions to Priority Rules

Buyers of Goods

Ordinary Course of Business: If, in the ordinary course of business, a buyer purchases goods, the goods are free of a security interest (except for farm products).

Consumer Goods: If the buyer purchases consumer goods, the goods are free of a security interest if the buyer had no knowledge of a security interest, if the goods are purchased for value, the goods are primarily for the buyer’s personal use, and if the buyer purchases the goods prior to the filing of the Financing Statement by the Secured Party.

Buyers of Instruments and Chattel Paper

Buyers have priority over non-possessory interest in proceeds of non-inventory collateral if

• value has been given to the collateral,
• the buyer takes possession of instrument or chattel paper in the ordinary course of business, and
• the buyer acts with knowledge of competing security interest.

PMSI: Equipment & Inventory

A perfected PMSI in Equipment or Inventory generally has priority over other security interests.

9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS.

(a) [General rule: purchase-money priority.]

Except as otherwise provided in subsection (g), a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9-327, a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

Ensure the PMSI is Perfected

To perfect a PMSI in Equipment, a Secured Party must have the debtor execute a security agreement containing the appropriate granting and authorization language and file a Financing Statement in the appropriate jurisdiction before or within 20 days after the debtor receives possession of the equipment.

To perfect a PMSI in Inventory, a Secured Party must have the debtor execute a security agreement containing the appropriate granting and authorization language, file a Financing Statement in the appropriate jurisdiction before the debtor receives possession of the inventory and notify existing holders of security interests of record in the same type of collateral that the Secured Party intends to take a PMSI in Inventory within five years before the debtor receives possession of the inventory.

What Happens with Security Interests in Fixtures vs. Real Estate Interests?

When one party has a security interest in real estate and another party has a security interest in a fixture to the real estate, the fixture filing has priority if the Financing Statement was filed before the mortgage is recorded. If the mortgage was recorded prior to the fixture filing, then the mortgage has priority.