CHAPTER 6 .

1-2: PRIORITY
Interests taking Priority over Unperfected/Unfiled SI
 Another perfected creditor
 A person becoming lien creditor before the SI is perfected
o Lien creditor is a creditor acquiring a lien on property involved by attachment of
judgment/levy/ a bankruptcy trustee from date of petition filing (over all debtor’s
assets).
 A buyer, other than a secured party of documents, goods, instruments, or a security
certificate, tangible chattel paper if the buyer gives value and takes delivery of collateral
without knowledge of the SI before it’s perfected
 A lessee of the goods if the lessee gives value and takes delivery of collateral without
knowledge of the SI before it’s perfected
 A licensee of general intangible property if the licensee gives value without knowledge of
the SI and before it’s perfected
 a PMSI in goods (excluding inventory or livestock) and/or it’s identifiable
proceeds has priority over a conflicting security interest in the same
goods/proceeds if the purchase-money security interest is perfected within 20 days
of the debtor receiving possession of the collateral.
Priority Among Conflicting SI in the Same Collateral
 Priority according to first to file OR perfect, if there is no period therafter when
there is neither filing nor perfection.
 A perfected security interest has priority over a conflicting unperfected security
interest.
 If conflicting interests are unperfected, the first security interest to attach or
become effective has priority
Purchase Money Security Interests
 a PMSI in goods (excluding inventory or livestock) and/or it’s identifiable
proceeds has priority over a conflicting security interest in the same
goods/proceeds if the purchase-money security interest is perfected within 20 days
of the debtor receiving possession of the collateral.
 A PMSI in inventory has priority over a conflicting security interest in the same
inventory, chattel paper or an instrument constituting proceeds of the inventory and
in proceeds of the chattel paper, and identifiable cash proceeds of the inventory to
the extent received before the inventory’s delivery to buyer if the PMSI is: 1)
perfected on/before debtor taking possession of inventory by delivery and 2) PMSI
party notifies holder of the has or expects to obtain a conflicting security interest
and this notice occurs within five years before the debtor receives possession of the
inventory.
 When a seller and a lender both have a PMSI in collateral, the party selling the
collateral takes priority over the party funding the purchase.
Future Advances
 Future Advances generally go by first to file or perfect
Consignment
 The SI of a consignor in goods subject to a consignment of goods is a PMSI in
inventory.
  So, consignor has priority over consignee’s secured creditors if consignor: 1) filed
before consignment, and 2) gave notice to creditor
Dragnet
 Some courts hold a dragnet clause is only effect as to debt related categorically to
collateral, while others take broader approach.
Problems
Problem 59
Epstein’s Bookstore borrowed $10,000 from ONB, signing a security agreement giving the
bank a floating lien over the store’s inventory. ONB, due to negligence, never got around
to filing the financing statement. Martin’s Travel Service was an unpaid creditor of the
bookstore that sued on the debt an recovered a judgment against the store. It then had the
sheriff levy on the inventory. ONB learned of this and calls you, ONB’s attorney. Does
ONB or Martin’s Travel Service get paid first when the inventory is sold?

ONB is an unperfected creditor and Martin is a judgment creditor, thus, they are a “lien
creditor” and they have priority over ONB

Problem 60
Coke Travel Agency used its accounts receivable as collateral for a loan from Mansfield State
Bank, but the bank failed to file the financing statement that Coke Travel Agency had signed
because the bank’s attorney lost the statement in the maze of papers on his desk. Six months
later, Coke Travel Agency needed another loan and applied for one from Bentham National
Bank, which searched the files, discovered that there were no financing statements recorded for
Coke Travel Agency as debtor, and took a security interest in the agency’s accounts receivable.
Bentham National Bank did file a financing statement in the proper place. Which bank has the
superior interest in the collateral?

Here, Mansfield did not perfect so they are an unperfected creditor so Bentham, as a perfected
creditor takes priority

Problem 61
Jay Eastriver ran a clothing store and needed money. He went to two banks, the First National
Bank and the Second State Bank, and asked each to loan him money using his inventory as
collateral. They each made him sign a security agreement and a financing statement. First
National Bank filed first, on September 25, but did not loan Eastriver any money (nor did it make
any commitment to do so) until November 10. On October 2, Second State both loaned Eastriver
the money and filed the financing statement. Eastriver paid neither bank. Answer these
questions:
(a) Did both banks have a perfected security interest, assuming they filed in the proper
place? That is, is it possible for two creditors to have perfected security interests in the
same collateral?
YES.
(b) Remembering that attachment is a prerequisite to perfection and that attachment cannot
occur until the creditor gives value, decide which bank has the superior right to the
inventory.
Although it is true that the bank did not give value until November 10 and at that point
the security interest “attached” and perfection occurred at that point, First National still
retains a superior position because the rule is first to FILE OR PERFECT. Here they did
not perfect before Second State BUT they did FILE first.
Problem 62
When First National Bank took a perfected security interest in the inventory of Jay
Eastriver’s clothing store, the security agreement provided that the inventory would
secure not only the current loan, “but all future advances of whatever kind.” Six months
later First National loaned Eastriver and additional $10,000 and had him sign a new
promissory note for that amount. Do the existing filed financing statement and security
agreement need to be altered in any way, or are they sufficient as to protect the bank?

The financing statement CAN apply to cover the future advances as long as the security
agreement contemplates future advances
Problem 63

Assume in the last problem that after First National made Eastriver the first loan and filed its
financing statement, he then borrowed more money from Second State Bank, using the same
inventory as collateral, and this lender also filed a financing statement in the correct place.
Eastriver then paid off the loan to First National completely, but the bank never filed a
termination statement. One month later, First National loaned Eastriver more money. The
parties signed a new security agreement, but no new financing statement was filed. First
National’s attorney reasoned that the earlier financing statement would protect the later loan’s
priority, even though this loan was not contemplated when the first financing statement was filed.
Is this right? Second State would prefer that the court rule that the first financing statement was
“spent” when the underlying debt was paid off, and could not be used to give top priority to a
later uncontemplated loan.

Even if the prior financing statement has been “exhausted” but not terminated, if the security
agreement contemplates future advances then the new loan is covered and will get the priority
date or the original filing date

Problem 64
Phillip Philately pledged his valuable stamp collection to CNB in return for a loan (he gave CNB
an oral security interest in the collateral; no financing statement was signed). The bank put the
stamp collection in its vault. Philately later borrowed money from his father, Filbert Philately,
and gave him a signed security agreement in the same stamp collection. The father filed a
financing statement in the proper place. Answer these questions:
(a) Who has priority between CNB and the father?
This is perfected creditor v. perfected creditor, CNB has perfected by possession and the
father perfected by filing a financing statement, so the first to file or perfect has priority.
Because CNB perfected before the father filed, CNB has priority
(b) If Philip goes to the Bank and takes the collection home so he can add new stamps but
does not return it, does the answer change?
Because editor #1 perfected by possession, as soon as they lost possession, they had only
20 days to get it back to remain perfected, if they did not get it back in that time then they
loose their priority and the father wins.
(c) If CNB makes Phillip sign a security agreement and then turns the collection over to him
but never files a financing statement, who wins?
 At this point, the bank would be unperfected so the father would win. In this case CNB
should file a financing statement.
Problem 65
Howard “Red” Poll decided to go into the cattle business and borrowed $65,000 from
Brangus National Bank to finance part of the purchase of the initial herd. Poll signed a
security agreement using the cattle as collateral for this “and all other obligations now or
hereafter owed to the bank.” A financing statement covering this transaction was filed in
the appropriate place. Two years later Poll received a charge card from the same bank
and used it to finance a trip to Australia to look over cattle ranching there. When he
failed to pay the credit card bill, the bank repossessed the cattle (even though his
payments on the cattle purchase loan were current). Did the bank’s security interest in the
cattle encompass the credit card obligation? Would it make a difference if he had gone to
Australia in search of the perfect wave for surfing?

The security agreement is a contract and we must look to the language of the agreement
to see what rights the creditor had. Normally, credit card debt is unsecured but this earlier
security interest seems to contemplate this credit card debt. This is a matter of contract
interpretation. If the security agreement did contemplate this transaction then the bank is a
secured and perfected creditor and if not then they are unsecured. In this case, a court may
find this credit card debt covered because he got the credit card and used it in Australia to
do cattle business so there is a connection to the earlier business loan

Problem 66

Problem 67
When Paramount Homes finished building “Utopia, Ltd.,” its newest fancy apartment complex,
it had to furnish the clubhouse, so it sent its construction manager, Bill Gilbert, to Sophy’s
Interiors, a furniture store, where he made $2,000 worth of credit purchases and signed a
security agreement on behalf of Paramount Homes in favor of the seller. The agreement was
signed on June 8; the goods were delivered that same day. Bill failed to mention that all his
employer’s assets (equipment and inventory) were designated as collateral on an existing
security agreement and financing statement in favor of Sullivan National Bank. This agreement
contained am “after-acquired property” clause, which stated that later similar collateral coming
into the buyer’s estate would automatically fall under the bank’s security interest. The policy of
Sophy’s Interiors was not to file financing statements for its credit furniture sales.
(a) Why might it have such a policy? Is it wise here?

FIRST, the security agreement has attached because they signed a SA, the debtor had rights in
the collateral and the creditor gave value. Sophy’s then argues that even though they did not file
a financing statement, they are still perfected because they have a PMSI which perfect
automatically. Sophy’s does NOT have a perfected security interest because they did not file and
only purchase money security interests IN CONSUMER GOODS perfects automatically In this
case, these were not consumer goods in the hands of the debtor, they were for use in the
apartment complex So, we have a prior perfected security and under the general rule they would
have priority over Sophy’s and the PMSI rule cannot trump the general rule because the PMSI
was not perfected, if it was than Sophy’s interest would trump the earlier priority date. Sophy’s,
however, would have only 20 days to perfect.

Problem 68
Video Wonder, an electronics store, had granted a floating lien over its inventory and equipment
to Last National Bank, which perfected its security interest by filing a financing statement in the
appropriate place. Needing a guard dog for the store, Video Wonder’s manager responded to
an ad in the newspaper placed by Agatha Shaw, who was selling her beloved German Sheperd,
Fang. She had bought him for protection when he was but a pup, but he had proven too much
for her, having seriously injured a meter-reader and two mailmen. She checked out the store
carefully before agreeing to sell Video Wonder the dog, saying she wanted a good home for
Fang. He cost the store $1,200. The manager agreed to send her $100/month until the dog was
paid for, at which time she agreed in writing to sign over Fang’s papers. Ms. Shaw and the
manager agreed that the store would not get any title to Fang until all payments had been made.
Fang proved to be a fine watchdog for the store, but when Video Wonder stopped making
payments to all creditors two months later, LNB seized all of the store’s assets, including Fang.
Agatha Shaw is upset. She calls you, her attorney. Is there any hope for her? Can she argue
that the bank’s security interest only attached to Video Wonder’s equity in the dog, or that until
Video Wonder had paid the entire debt, it had no property interest to which the bank’s floating
lien could attach?

First, Article 9 will override the form of the agreement here as a conditional sale and will treat it
as a sale on credit with the seller retaining a security interest in the dog. Second, the security
interest attached as all three elements were met.
In this case, the dog is “goods” but is not a consumer goods because it is used as a guard dog so
it fits the default category of “equipment.” As a result, the security interest DID NOT attach
automatically because it is not a PMSI in consumer goods
Thus, the bank has a perfected security interest and Angela is unperfected until she files a
financing statement or takes possession of the dog
If Angela perfects within 20 days, then the PMSI would get priority over the prior perfected
security interest. If she does not file within 20 days then she will loose to the bank

Problem 69
Hart Farm Equipment leased a construction backhoe to Farmer Bean for a six-month period
with the understanding that Farmer Bean would be given the option to purchase the backhoe at
any time during that period, and, in fact, the lease at one point called this a “sale on approval.”
Farmer Bean’s equipment was already subject to a perfected floating lien in favor of ONB.
Three months after the delivery of the backhoe, Farmer Bean agreed to buy the backhoe, and
Hart Farm Equipment filed its financing statement the next day, claiming its purchase money
security interest. Who wins in the priority battle between Hart Farm Equipment and ONB?

The lease here contained an option to purchase and the debtor exercised the option and the seller
retained a PMSI in the backhoe and filed immediately thereafter
The bank claims that the lessor does not have priority even though they have a PMSI because the
lessor gave possession to the debtor 4 months ago thus when they filed their financing statement
it was well beyond the 20 days limit. The official comments say a debtor receives possession of
collateral only when it becomes collateral, which occurred at the sale.

Problem 70
The Merchants Credit Association held a perfected security interest in the inventory of Harold’s
Clothing Store. Harold went to a fashion showing in New York and contracted to buy $4,000
worth of new cloths for resale; the seller was to be Madame Belinda’s Fashions, Inc., which took
a purchase money security interest in the clothes on December 10, the date of sale. Madame
Belinda herself wrote the Merchants Credit Association on December 11 and informed the credit
manager of the sale. He protested but did nothing. Madame Belinda filed on December 11; the
goods were delivered to the store on December 12.

The three requirements for attachment are met and they perfected so we have two perfected
creditors in the sale collateral. The general rule states that MCA would take priority because the
filed first (assuming it includes inventory whenever acquired).
The PMSI may trump here BUT we must apply the inventory rule. In order to have priority, she
must have given notice to MCA PRIOR to the debtor receiving possession
In this case, the PMSI rule for inventory DOES apply because she perfected prior to the debtor
receiving possession, she gave notice to MCA and they received notice before the debtor
received possession so she takes priority

Problem 72

Hans Racing Equipment bought much of its inventory from Standard Auto Wholesalers, Inc.,
which always took a purchase money security interest in the goods sold to Hans and which filed
a financing statement on the same day. Hans also borrowed money from the Matching Dishes
National Bank (MDNB) to finance the purchase of inventory from wholesalers, part of which
was used to pay off Standard Auto. MDNB filed a financing statement, claiming a security
interest in Hans’s inventory. On March 28, Hans contracted to buy $3,000 in goods from
Standard, making a down payment of $1,500 and giving Standard a purchase money security
interest in the goods for the rest. On that same day he borrowed the $1,500 down payment from
MDNB and also gave the bank a PMSI in the same goods. Both creditors knew of the other, so
they both sent written notice to each other. The goods were delivered to Hans on April 2. Which
creditor has priority?

Here, we have two perfected creditors both of whom have PMSIs. When both parties have a
PMSI, VENDOR BEATS LENDER (the party selling the collateral takes priority over the party
funding the purchase

Problem 73
Barbara Shipek was pleased and flattered when Tim Isle, owner of Isle’s Fine Art Works, asked
her if he could exhibit and sell some of her pottery. She gave him five of her favorite pieces. The
next day she took a party of friends down to the store to see the display and was astounded to
learn that ONB, which had a perfected floating lien on the store’s inventory, had foreclosed and
seized everything in the store, including Barb’s pottery. Can ONB do this to her?
 NO. FIRST: Article 9 DOES apply to this transaction because, under 9-109(4), this a
consignment (in this case it fits within the article 9 definition of consignment). In this priority
dispute, the bank has a perfected security interest and she was unperfected, so the BANK WINS
(at least it appears that way) If she had perfected her interest, then the first to file or perfect
would have had priority Under § 9-103(d) , the security interest of a consignor is a PURCHASE
MONEY SECURITY INTEREST IN INVENTORY. So she CAN get priority over even an
earlier perfected creditor if she can meet the heightened standards.

Cases
Wollin

In re Wild West

Kunkel