Lesson 16: Special Priority Rules for Certain Types of Collateral

Welcome to Lesson 16 of our instructable on Exploring secured transactions law fundamentals, best practices, and legal insights. In this lesson, we will delve into the special priority rules that apply to certain types of collateral under the Uniform Commercial Code (UCC) Article 9. By the end of this lesson, you'll be able to navigate these rules with the finesse of a legal ninja!

Introduction

Understanding the priority rules for different types of collateral is crucial for navigating secured transactions. While general priority rules are discussed in Lesson 15, certain types of collateral have unique priority rules. It's like knowing the special moves in a video game—it can be the difference between victory and defeat!

Types of Collateral with Special Priority Rules

Purchase Money Security Interests (PMSI)
Investment Property
Deposit Accounts
Letter-of-Credit Rights
Agricultural Liens

Purchase Money Security Interests (PMSI)

A Purchase Money Security Interest (PMSI) has special priority rules because it allows a creditor who finances a debtor's acquisition of goods to have superior rights over other secured creditors. Think of it like a VIP pass—it gives you front-of-the-line access!

Important: To perfect a PMSI in inventory, the secured party must notify other perfected secured parties before the debtor takes possession of the inventory.

Investment Property

Investment property includes securities, security entitlements, and commodity contracts. The priority rules for investment property often depend on the method of perfection:

Control
Filing

Perfection by control gives a secured party a higher priority than perfection by filing.

Priority Rule Diagram for Investment Property

flowchart TD A["Perfection by Control"] --> B["Higher Priority"] C["Perfection by Filing"] --> D["Lower Priority"]

Deposit Accounts

A security interest in a deposit account is generally perfected by control. The party with control over the deposit account has priority over other secured parties.

Methods of obtaining control:

Being the bank at which the deposit account is maintained
Becoming the bank's customer with respect to the deposit account
Control agreement with the debtor and the bank

Letter-of-Credit Rights

Like deposit accounts, letter-of-credit rights are typically perfected by control. The secured party with control over the letter-of-credit right has priority.

Agricultural Liens

Agricultural liens are non-possessory security interests in farm products that secure payment or performance of an obligation for goods or services furnished in connection with a debtor's farming operation.

Note: Agricultural liens have special priority rules under state law that may differ from the UCC.

Priority Conflicts and Solutions

When multiple secured parties have an interest in the same collateral, understanding priority rules is essential to resolve conflicts. For example, a perfected PMSI in inventory will prevail over a conflicting security interest in the same inventory if certain conditions are met.

flowchart LR X["Perfected PMSI in Inventory"] -->|"Prevails Over"| Y["Conflicting Security Interest"]

Conclusion

Special priority rules for certain types of collateral are a vital aspect of secured transactions. By understanding and applying these rules, secured parties can better navigate the complexities of secured transactions law.

For further reading, check out our lessons on Competing Claims and Subordination and Tangible Collateral (Goods).