Lesson 44: Priority of Security Interests

Welcome to Lesson 44 of our instructable on Explaining Uniform Commercial Code. In this lesson, we will discuss the concept of Priority of Security Interests under Article 9 of the UCC. This topic is crucial for understanding which creditor gets paid first when debtors default on their obligations.

Understanding Priority Rules

The UCC sets forth a detailed framework for determining the priority of competing security interests in the same collateral. The basic priority rules can be summarized as follows:

  1. First to File or Perfect: The general rule is that the first creditor to either file a financing statement or perfect their security interest has priority.
  2. Purchase Money Security Interests (PMSIs): PMSIs generally have super-priority over other types of security interests if certain conditions are met.
  3. Control: For certain types of collateral, such as deposit accounts, control can confer priority over other interests.

Priority Rule Diagram

graph TD; A["First to File or Perfect"] --> B["Super-Priority of PMSIs"]; B --> C["Control (for specific collateral types)"];

First to File or Perfect

Under UCC ยง 9-322, the general rule prioritizes creditors based on the time of filing or perfection. The creditor who first files a financing statement or perfects their interest has priority over subsequently filing or perfecting creditors.

Example

Consider the following example:


Lender A files a financing statement on May 1.
Lender B files a financing statement on June 1.
Lender A has priority over Lender B.

Purchase Money Security Interests (PMSIs)

A Purchase Money Security Interest (PMSI) is a special type of security interest that enables a lender, who provides financing to a debtor to purchase goods, to obtain super-priority over other secured creditors if certain conditions are met.

PMSI Priority Rule Diagram

graph TD; P["Purchase Money Lender"] --> Q["Provides Financing for Goods"]; Q --> R["Ensures Proper Filing"]; R --> S["Obtains Super-Priority"];

Control

For certain types of collateral, such as deposit accounts, investment property, and letter-of-credit rights, having control over the collateral can confer priority. Control is often achieved through an agreement with the bank or financial institution that holds the asset.

Control Priority Rule Diagram

graph TD; X["Secured Party"] --> Y["Obtains Control"]; Y --> Z["Has Priority Over Others"];

Conclusion

Understanding the priority of security interests is essential for both debtors and creditors. The UCC provides a clear set of rules, but complexities can arise based on the type of collateral and the specific circumstances of each case.

For further reading, you can check our next lesson on Enforcement of Security Interests.

For a more in-depth understanding, consider reading Uniform Commercial Code in a Nutshell by Bradford Stone.

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