Priority Regarding Conflicts in Security Interests - Explained
Who has priority with Conflicting Security Interests?
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What are the common types of conflicts regarding the priority of security interests?
The following types of security interest are often in conflict:
Lien Creditors vs. Security Interest - A lien creditor who establishes an interest in a debtors property prior to perfection by another secured party has priority over that secured party. Depending upon the type of lien, a lien creditor may have priority in collateral above a perfected secured party. This is true for possessory liens but not non-possessory liens.
Example: Fay holds a perfected security interest in an antique piece of furniture that John owns. Don performs restoration work on Johns furniture. If John does not pay for the work, Don may retain possession of the furniture pursuant to a possessory lien. This lien has priority over Fays perfected security interest.
Buyers of Collateral vs. Security Interest - Generally, buyers who take possession of the collateral in many situation take the collateral subject to a perfected security interest. Two notable exceptions arise when 1) the collateral is a consumer good for personal use being sold to another consumer for personal use, and 2) when the collateral is inventory for the debtor. In either situation, a buyer of collateral subject to a security interest generally takes the collateral free of a security interest if the collateral is inventory for the seller or the security interest has not been perfected.
Note: A purchaser of goods subject to an unperfected security interest takes the goods free of the security interest only if the purchaser is unaware of the existence of the security interest.
Example: Hazel owns a small store. Gail holds a security interest in all of Hazels assets, which consists of some equipment and lots of inventory. Ira purchases goods from Hazel. She takes these goods free of Gail's security interest because the goods are inventory for Hazels business. Juliet later purchases a piece of equipment from Hazel that is not part of her inventory. If she is unaware of the existence of the security interest at the time of her purchase, she takes the equipment free of Gails security interest.
Note: Gail likely has a security interest in the proceeds from the sale of Hazels inventory.
Perfected vs Unperfected - A perfected security interest in collateral has priority over an unperfected security interest in the same collateral. This is true regardless of the timing of attachment of the security interest.
Example: Kyle takes a security interest in Leos property on October 1. He never perfects his security interest. On December 1, Marty takes a security interest in Leos property and perfects his interest by filing in a public office. Marty's security interest has priority over Kyles security interest.
Next Article: Priority of Common Law and Statutory Liens Back to: SECURED TRANSACTIONS
Why do you think the priority of the above types of secured creditor often comes into conflict? Do you generally agree with the order of priority? Why or why not? Do you notice any common principles reflected in the established order of priority?
Beverly purchases a piece of equipment from Eve. Eve establishes an attached security interest in the collateral. Carlos later purchases the equipment from Eve. What additional information about this situation do you need to determine whether Carlos equipment is subject to Eves security interests?
- Secured Transactions Law (Intro)
- What is a Security Interest?
- Pledge as Collateral
- Cross Collateralization
- After-Acquired Collateral
Unsecured Loan Definition
- Unencumbered Asset
- What is a Secured Creditor?
- Unsecured Creditor
- What are the benefits of security interests for creditors?
- Limited Recourse Debt
Uniform Commercial Code - Article 9
- What are the common types of security interest in real property (land)?
- What is a mortgage?
- How does a security interest protect the mortgage holder?
- Lis Pendens
- Deficiency Judgment
- What is a Deed of Trust or Security Deed?
- What is a Land Sale Contract?
- What is a security interest in personal property?
- How does one establish a security interest in personal property?
- What is Perfection of a security interest?
- What are the methods of perfecting a security interest in personal property?
- UCC-1 Statement
- How does one establish a security interest in real property (land)?
- Register of Deeds
- What is Automatic Perfection of a security interest?
- What is a Purchase Money Security Interest (PMSI) in consumer goods?
- What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
- How does one continue perfection of a PMSI in non-consumer goods?
- What is Temporary Automatic Perfection in Proceeds from the sale of goods?
- How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
- How does one perfect a security interest by Possession of the collateral?
- How does on perfect a security interest by Control of collateral?
- How does one perfect a security interest by Filing a Financing Statement?
- What authorization is required to file a financing statement?
- Where is the appropriate office to file a financing statement?
- Continuation Statement
- What is Priority of a security interest?
- What role does perfection play in establishing the Priority of a secured party?
- What are the common conflicts arising as to priority of a security interest?
- What is the priority of parties secured by common law and statutory liens?
- Lien - Definition
- Blanket Lien Definition
- Unperfected Lien
- Possessory Lien
- Non-Possessory Lien
- Tax Lien
- Mechanics Lien Definition
- Construction Lien
- Cloud on Title
- What is the priority of a buyer of collateral that is subject to a security interest?
- What is required to be a buyer in the ordinary course of business?
- How does 9-320(b) protect consumers who purchase goods from other consumers?
- What is the Shelter Principle?
- What are the general Priority Rules for Conflicting security interests?
- Subordination Agreement
- Who has Priority in Proceeds from the sale of collateral?
- What is a secured party's priority in future advances to a debtor?
- What is the priority of a PMSI in goods (other than inventory and livestock)?
- What is the priority of a PMSI in inventory?
- What is the priority of conflicting PMSIs?
- What is the priority of security interests in fixtures?
- What is the scope of fixture priority rules?