If perfection is all about ensuring potential creditors are notified of an interest in certain property, then priority is all about who “gets first dibs” at the security interest if there comes a time where the collateral needs to be collected. There are several priority rules, which vary depending on several factors. Of these factors, two are more important: 1) The type of collateral involved and 2) the type of interest involved (e.g., security interest, statutory lien, judgement lien, etc.). Other factors include whether and how perfection occurred; whether the interest is a PMSI; or whether there are future advances, commingled goods, or accession of fixtures.
These notes will be organized be evaluating what kinds of interests the parties have. The articles here and that follow will start simple and become more complicated. Among the simplest of priority rules are the competing interests between a secured party and a lien creditor (i.e., a debtor consensually provided an interest to a secured party while a lien creditor obtains a non-consensual interest in the same property).
[General effectiveness.] Except as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms between the parties, against purchases of the collateral, and against creditors.
In other words, a security interest prevails over purchasers and creditors, unless there is an exception.
The main exception is outlined in 9-317(a)(2). That is, a lien creditor can have priority over a secured party if the creditor interest arises before the secured party either 1) perfects or 2) authenticates a security agreement and files a sufficient financing statement. Thus, if either one of these actions is completed before the lien creditor obtains an interest, then the secured party will win. The reason for the second part of the rule is so that a secured party can obtain priority before they make a decision about issuing a loan. Otherwise, an interest may arise between an inspection and the perfection step. In other words, the rules are set up to protect a secured party but still provide an exception for lien creditors.
PMSI vs. Lien Creditor
There is an exception to the exception of 9-317(a)(2). The exception is found in 9-317(e). That is, a secured party will win (9-201(a)) unless they fail to perfect or file before a lien creditor takes interest (9-317(a)(2)), unless the security interest is a PMSI (notice that this is different than a PMSI in a consumer good that would automatically attach).
To explain this rule, consider the following scenario:
A party makes a purchase which is secured on credit (PMSI). Directly after the purchase, a lien creditor obtains an interest. After the lien creditor obtains an interest, the creditor files a financing statement.
The example above perfectly illustrates the rule. In the scenario, the lien creditor would have had priority (the security interest was not perfected and there was no filing), except the purchase was a PMSI. Therefore, the secured party has 20 days grace period to perfect and can still maintain priority during that time.
Picture the following timeline:
- Initial loan is secured.
- Perfection occurs by filing
- A third-party obtains a levy on the collateral
- A future advance is issued by the initial loan provider.
In this situation, does the secured party of the lien holder have priority based on the advance? It depends. According to 9-323(b), if the advance is made within 45 days after the levy, or if the advance was made later than 45 days if the secured party did not know about the levy, then the security interest will have priority.
Security Interest vs. Statutory/Possessory Creditor
Essentially, a possessory lien over collateral will have priority over a security interest if 1) the lien holder has possession of the collateral and 2) the statute that created the lien does not have an exception.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.