39. What is the scope of fixture priority rules?
The following rules govern the priority as between secured parties with security interests in fixtures and persons who claim in interest in real property to which the fixture attaches.
Purchase-Money Priority in Fixtures – The UCC provides for priority for purchase money security interest in fixtures. To establish priority over conflicting security interests in the real estate, the following conditions must be met:
• Recorded Interest in Real Estate – The debtor has a record interest in or possession of the real estate;
• PMSI in Fixture – The secured party holds a purchase-money security interest in the fixture;
• Prior Ownership of Real Property – The interest of the mortgage holder of the real property arose before the goods became fixtures; and
• Prior Fixture Filing – The security interest is perfected by a fixture filing before the goods became fixtures or within 20 days thereafter.
The twenty-day grace period can cause issues for the secured party holding a PMSI in the equipment. If a third-party perfects a security interest in the real estate after the fixture is installed but before the PMSI secured party can make a fixture filing, the third-party has priority in the fixture. The way to maintain priority is either file before the fixture is installed or the PMSI holder files before any third parties file an interest in the real estate.
• Note: A security interest in a fixture (whether perfected or no) has priority over a conflicting security interest in real property if the owner of the real property has consented to the security interest or disclaimed an interest in the goods as fixtures in an authenticated record.
• Discussion: How do you feel about the requirement for a party with a PMSI in a good to file a financing statement within 20 days of the good becoming a fixture? Does this run counter to the objectives of providing priority to a PMSI over other security interests?
• Practice Question: ABC Corp loans money to 123, LLC to purchase equipment for its business operations. ABC Corp attaches a security interest in the equipment and files a financing statement. 123 intends to install the equipment on its real estate that is subject to a mortgage held be First Bank. ABC initially forbids 123 from permanently installing the equipment, but they withdraw their objection when First Bank acknowledges ABC’s rights in the equipment in an email. 123 later falls on hard times and defaults on all of its obligations. What is the priority of security interests in the fixture? What do you need to know about this situation to accurately answer this question?