Priority Rules for Conflicting Security Interests - Explained
When there are More than One Security Interest in Collateral
Written by Jason Gordon
Updated at April 6th, 2023
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What are the general priority rules for security interests?
The following are the general priority rules for security interests:
Next Article: Special Priority Rules for Proceeds from Sale of Collateral Back to: SECURED TRANSACTIONS
Perfected vs Unperfected Security Interests - A perfected security interest has priority over an unperfected security interest. This is true even if the unperfected security interest was established well before the perfected security interest.
Note: This fact can give rise to issues when a party's security interest has temporary automatic perfection.
Unperfected vs Unperfected Security Interests - Unperfected security interests have priority based upon the order of attachment of the security interest. In this case, the earlier party to establish the security interest has priority over those coming later.
Note: A later unsecured party may establish priority by filing her security interest (or otherwise perfecting) before the other secured parties.
Multiple Perfected Security Interests - The first secured party to file or perfect is entitled to priority over secured parties later acquiring or perfecting their interest in the subject collateral. This situation also brings up an issue for temporary automatic perfection. If a party takes the steps necessary to continue the temporary automatic perfection, her perfection date is retroactive back to the date and time that the security interest attached. This becomes and issue when the collateral is also subject to an after-acquired collateral clause. If she fails to take the steps necessary to continue the security interest, any third party may establish a security interest in the collateral and gain priority over her unperfected security interest.
Note: An issue arises for collateral that is used to secure future advances.
These are default rules. Any of these rules can be changed pursuant to agreement between the parties. That is, a party can agree to subordinate her security interest to the security interests of others. This is important when new lenders require priority of a security interest before extending new credit to a debtor.
Discussion Question
How do you feel about the above-stated priority rules applicable to security interests? Is it fair that a party can establish priority over an earlier security interest by being the first to file? Why or why not? Can you think of any situations where the automatic temporary perfection rules could cause an issue?
Practice Question
Heidi purchases a piece of equipment from Indira. Indira finances the purchase and attaches a security interest. Heidi has a loan outstanding to Jan that has an after-acquired property clause in the security agreement. After the purchase of the equipment, Heidi borrows money from Kyle, who takes a security interest in all of Heidi's assets. If Heidi defaults on all of her debts, who has priority of payment from the sale of the equipment? What other information do we need to know to answer this question?
Related Topics
- Secured Transactions Law (Intro)
- What is a Security Interest?
- Collateral
- Pledge as Collateral
- Collateralize
- 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?
- Defeasance
- 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?
