What is a secured party's priority in future advances of funds to the debtor?

Future advances of funds are funds provided to a debtor based upon an existing lending agreement. This is common when a debtor establishes a line of credit with a lender. The lender will advance funds to the debtor when requested. Generally, a security agreement will provide that the lender is secured by any collateral securing a future advance or new collateral acquired with the advanced funds.

• Relevant Law: Section 9-323 contains the priority rules relating to future advances. Generally, the time of perfection establishes priority with respect to future advances. 9-203, Cmt. 3.

The rules for priority in future advances are as follows:

Time of Perfection - Generally, the time of perfection of a security interest establishes priority with respect to future advances. That is, if a lender makes an advance of funds based upon a prior agreement, the priority of the lenders security interest in collateral securing the advance is determined by the time of the filing of the financing statement covering the collateral. If the debtor has secured creditors with priority above that of the lender, these creditors retain priority in the collateral despite the future advance.

Example: First Bank lends money to Mark and takes a security interest in Marks lawn mower. Mark later borrows money from Second Bank that takes a security interest in all of Marks assets. As such, First Banks security interest in the lawn mower has priority over that of Second Bank. If First Bank makes a future advance to Mark pursuant to the original lending agreement, First Bank will have priority based upon its original security agreement and financing statement. If, however, First Banks security agreement does not cover future advances, Second Banks security interest in the collateral will have priority over a subsequent security interest filed by First Bank against the collateral to secure payment of the future advance.

Priority over Lien Creditors - Per 9-323(b), a secured party that advances additional funds and claims a security interest against the original collateral has priority over a lien creditors of the debtor if:

The secured party made the advance of new credit within 45 days after the lien attaches, or

The secured party made the advance of funds more than 45 days after the lien attaches, but without knowledge of the lien or pursuant to a prior agreement entered into without knowledge of the lien.

Example: First Bank lends money to Katherine and takes a security interest in Katherines jewelry. A creditor receives a judgment against Katherine and establishes a lien against her jewelry. First Bank later makes a future advance to Katherine that is secured by her jewelry. If First Bank made the advance within 45 days of the lien creditor establishing its lien, then First Bank will have priority. If First Bank makes the future advance more than 45 days after the lien is established, it will have priority if the future advance was pursuant to the original lending agreement providing for a security interest in the collateral or if First Bank had no knowledge of the other creditors lien at the time of the advance.

Priority over Buyers of Collateral - Per 9-323(d) and (e), a secured party who makes future advances against collateral has priority over a buyer of the collateral in the ordinary course if:

The secured party's advance is made within 45 days and without knowledge of the purchase; or

The advance was made pursuant to a commitment established within 45 days of and without knowledge of the purchase.

Note: This provision keeps a debtor from selling collateral and then seeking a future advance secured by the collateral.

Example: First Bank has a security interest in ABCs inventory. ABC sells an item of inventory to Fanny. Fanny takes the item subject to First Banks security interest in the inventory if the advance was made within 45 days of the sale or the advance was made pursuant to a security agreement entered into within 45 days and without knowledge of the sale to Fanny.

Related Topics

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• 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
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• What role does perfection play in establishing the Priority of a secured party?
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• Lien - Definition
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• Unperfected Lien
• Possessory Lien 
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• 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?
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• What is a secured party's priority in future advances to a debtor?
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• What is the priority of conflicting PMSIs?
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