§ 9-322. Priorities Among Conflicting Security
Interests in ... Same Collateral.
Assignment 10: Priority
Secured Party v. Secured Party
Reference: Understanding Secured
Transactions §§ 10.01 through 10.04
(a) [General priority rules.] Except as otherwise
provided in this section, priority among conflicting security
interests ... in the same collateral is determined according
to the following rules:
(1) Conflicting perfected security interests ... rank
according to priority in time of filing or perfection.
Priority dates from the earlier of the time a filing covering
the collateral is first made or the security interest ... is first
perfected, if there is no period thereafter when there is
neither filing nor perfection.
(2) A perfected security interest ... has priority over a
conflicting unperfected security interest ....
• Conflicting perfected security interests in the same
collateral are governed by “first to file or perfect” rule
[§ 9-322(a)(1)]
• Later perfected SI has priority over prior unperfected
SI [§ 9-322(a)(2)], even if later secured party knew of
prior unperfected SI
– § 9-322 cmt 4, example 2 (“[i]t makes no difference
whether [the first to file or perfect] knows of the other
security interest at the time it perfects its own”)
– This allows resolution of priority disputes to occur by
reference only to record
Real Estate Law Compared
• Under real estate law and the recording acts, in most
states a subsequent purchaser is protected from a
prior unrecorded claim only if the purchaser lacks
knowledge/notice of that claim
– Most states have either “race-notice” or “pure notice”
statutes
• § 9-322(a)(1) establishes “pure race” rule [Comment
3: “The rules may be regarded as adaptations of the
idea, deeply rooted at common law, of a race of
diligence among creditors.”]
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Problem 1
“Due Diligence” and § 9-210 Statements
• Under § 9-210, Debtor can obtain from Secured
Party (w/in 14 days of an authenticated request):
– A “statement of account” (a statement confirming the
balance of the debt)
– A “list of collateral” (a statement confirming the
collateral that secures the debt)
• Secured Party that fails to timely respond is liable
for statutory damages of $500 [§ 9-625(f)]
• No! In the future, Wells Fargo could loan Pants,
Inc. additional money, secured by “inventory”
– Wells Fargo’s existing security agreement may
cover future advances [§ 9-204(c)]
– Or, it could require Pants, Inc. to grant another SI
in the inventory at the time of the additional loan
• If so, as the first secured party to file/perfect,
Wells Fargo would have priority to the full
extent of any later loans! [§ 9-322(a)(1)]
• Pants, Inc. seeks $200K line of credit from First
Bank, to be secured by inventory/accounts
– There’s a UCC-1 on file in favor of Wells Fargo vs.
“Pants, Inc.,” covering “Debtor’s inventory”
• Wells Fargo: Pants, Inc. only owes us $25,000
– Agrees to execute a § 9-210 statement confirming the
$25,000 balance due
• Pants, Inc. has $200,000 in inventory
• Is it safe for First Bank to loan against Pants,
Inc.’s equity in the inventory?
• Question: If Wells Fargo
issued a § 9-210 statement
of account that the debt was
only $25,000, why wouldn’t
Wells Fargo be estopped by
virtue of having made that
statement?
Problem 1
– Later loans could effectively “consume” the
equity that Pants, Inc. has in the inventory
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§ 9-210 Statement of Account
• Statement of account under § 9-210(a) is “static,”
i.e., it only confirms the balance of the debt on
the specific date that the statement was issued
• In other words, it is a “payoff” statement
– It is NOT a representation by Wells Fargo not to
make future secured loans to Pants, Inc.
– Estoppel not appropriate unless Wells Fargo made
such a representation that it would make no future
loans
• So what’s the point of getting a
§ 9-210 statement from Wells
Fargo? What good is it?
Problem 1
– It’s of use when Debtor wants
to pay off the debt in full (and
thus terminate the UCC-1)
– I.e., if First Bank’s loan is
going to “take-out” Wells
Fargo (i.e., pay off its loan)
– I.e., if a buyer of the collateral
wanted to pay off the SI so as
to acquire title “free and clear”
Solution 1: Termination
Solution 2: Subordination
• First Bank could loan Pants, Inc. an extra $25,000 to
“take out” Wells Fargo (pay off the debt)
• First Bank can then require Wells Fargo to file a
termination statement [§ 9-513]
• Once termination statement is filed, First Bank
(assuming it files its UCC-1 properly) would have
“first-in-time” priority over any later secured loans
that Wells Fargo might make to Pants, Inc.
• If First Bank isn’t going to “take out” Wells Fargo’s
first lien, then First Bank must negotiate an acceptable
subordination agreement with Wells Fargo
– Article 9 “does not preclude subordination by agreement
by a person entitled to priority.” [§ 9-339]
– First Bank could say to Pants: “we won’t loan you the
money unless Wells Fargo will agree to subordinate its SI
in the inventory, to the extent of any loans that Wells
Fargo makes to Pants in the future”
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§ 9-325. Priority of Security Interests in Transferred
Collateral.
Problem 2
• First Bank has a SI in all equipment of Mitchell
Building, Inc. (MBI), including after-acquired
equipment, perfected by 2011 UCC-1 filing
– Collateral includes a used earthmover bought by MBI
from Crouch Contracting in May 2015
• Second Bank claims first priority as to earthmover
– Crouch had granted Second Bank a SI in it in 2013,
perfected by UCC-1 filing in 2013
• Priority in earthmover: First Bank or Second Bank?
• Under pure “first-to-file-or-perfect” rule, First
Bank was first to file, and would thus have had
priority under § 9-322(a)(1) (if it applied)
• But, Second Bank has priority [§ 9-325(a)]
– First Bank got its SI in the earthmover via its afteracquired property clause with MBI, when MBI
acquired it in 2015
– At that time, it was already subject to Second
Bank’s perfected SI (which had been created by
Crouch Contracting)
– Based on derivative title, First Bank takes its SI
subject to that existing perfected SI
(a) [Subordination of security interest in transferred
collateral.] Except as otherwise provided in subsection (b), a
security interest created by a debtor is subordinate to a security
interest in the same collateral created by another person if:
(1) the debtor acquired the collateral subject to the security
interest created by the other person;
(2) the security interest created by the other person was
perfected when the debtor acquired the collateral; and
(3) there is no period thereafter when the security interest is
unperfected.
(b) [Limitation of subsection (a) subordination.] Subsection
(a) subordinates a security interest only if the security interest ...
otherwise would have priority solely under Section 9-322(a) ….
The “Double Debtor” Problem
• “First-to-file-or-perfect” rule only makes sense
as applied to conflicting SIs created by the
same debtor
• In Problem 2, Second Bank (in dealing with
Crouch) can’t anticipate/expect that Crouch
might later sell its collateral to MBI!
– Thus, First Bank’s 2011 filing against MBI can’t
really give effective notice to Second Bank
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Problem 3
• First Bank has perfected SI in all equipment of
McCann Contracting (incl. after-acquired)
– Perfected by proper UCC-1 filing in 2010
• Oct. 3, 2012: McCann buys bulldozer using
$80,000 loan from Regions Bank, to which it
granted SI in the bulldozer
– As of Oct. 1, First Bank now also has a perfected
SI in the bulldozer (under after-acquired clause)
– Regions Bank perfects by filing Oct. 20, 2012
• If McCann defaults, who has priority in the
bulldozer: First Bank, or Regions Bank?
Problem 3
• Regions Bank has a PMSI in the bulldozer (as long
as Regions Bank can prove McCann used the loan
proceeds to buy the bulldozer)
• Regions Bank perfected that PMSI within 20 days
after McCann took possession of the bulldozer
• Thus, Regions Bank’s PMSI has priority over First
Bank’s SI in the bulldozer, even though First Bank
would otherwise have had first priority based on
first-to-file-or-perfect [§ 9-324(a)]
§ 9-324(a). [General rule: purchase-money
priority.] Except as otherwise provided in
subsection (g), a perfected purchase-money
security interest in goods other than inventory or
livestock has priority over a conflicting security
interest in the same goods ... if the purchasemoney security interest is perfected when the
debtor receives possession of the collateral or
within 20 days thereafter.
• Rationale for 20-day grace
period?
– In purchase money
transaction, “pre-filing” a
UCC-1 is unrealistic
– Point-of-purchase buyer
expects to take immediate
possession of goods, before
PM secured party could file
a UCC-1
– 20 days provides reasonable
period for “paperwork”
Purchase
Money Priority
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• Rationale: “First to file”
rule can impact a debtor’s
ability to obtain credit to
purchase needed assets
(first-to-file creditor may
not cooperate or consent)
• Article 9 addresses this
concern by allowing a
debtor to grant a PMSI that
can receive priority over a
prior-perfected SI in afteracquired property
Purchase
Money Priority
§ 9-324(a). [General rule: purchase-money
priority.] Except as otherwise provided in
subsection (g), a perfected purchase-money
security interest in goods other than inventory or
livestock has priority over a conflicting security
interest in the same goods ... if the purchasemoney security interest is perfected when the
debtor receives possession of the collateral or
within 20 days thereafter.
Rationale: PM Priority
• Plus, granting PM priority to Regions Bank did
not harm First Bank (who was first-to-file)
– If not for Regions Bank, McCann would have been
unable to purchase the bulldozer
– McCann’s purchase of the bulldozer potentially
made First Bank even better off (First Bank now
has one more item of collateral, which it otherwise
would not have had)
Problem 3 (Hypthetical #2)
• 1/10/2013: McCann took possession of a
generator on a “no obligation” try-out from IPS
– 1/31/2013: McCann decided to buy it using a loan
from Regions, to which McCann granted a SI
– 2/15/2013: Regions perfected by filing UCC-1
• Priority in the generator: First Bank (based on
the after-acquired clause and prior UCC-1
filing), or Regions Bank (as PM secured party)?
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• Regions filed its UCC-1 on February 15, which was
35 days after McCann first took possession of the
generator on January 10
– Is this outside the 20-day grace period for McCann to
obtain PM priority over First Bank [§ 9-324(a)] (which
would otherwise get priority under first-to-file-or-perfect)?
• Problem: until McCann agreed to buy the generator,
he wasn’t a “debtor,” because he didn’t yet have
“rights in the collateral” under § 9-203(b)
– On this view, 20-day grace period should run from Jan. 31
(the date McCann became a “debtor” and the generator
became “collateral”)
Problem 4
• First Bank has SI in all of McCann’s inventory (incl.
after-acquired), perfected by 2010 UCC-1 filing
• On one job site, McCann has $25,000 worth of
lumber and supplies
• Koch Building Supply claims it has PMSI in the
lumber and supplies, perfected by a filed UCC-1
– First Bank: “This is the first we’ve heard of Koch”
• Who has priority: First Bank or Koch?
Problem 3 [§ 9-324 cmt. 3]
• Regions Bank has PM priority [§ 9-324(a)]
– Until McCann agreed to buy the generator and granted
a SI in it, Article 9 didn’t apply
– Prior to then, McCann was just a “bailee,” not a
debtor, so IPS was just a “bailor”
– 20-day grace period commenced only when the goods
became ‘collateral,’ i.e., when they became subject to
a security interest” [§ 9-324 cmt. 3]
– Regions filed within that 20-day period
PM Priority (Inventory) [§ 9-324(b)]
• Lumber/materials are “inventory”
• To get PM priority, Koch had to:
– (1) File UCC-1 covering lumber/materials before
McCann took possession of them (no 20-day
grace period!) [§ 9-324(b)(1)], and
– (2) Send First Bank an authenticated notice that (a)
describes the collateral and (b) states that Koch
expects to take a PMSI in it [§ 9-324(b)(2), (4)]
• First Bank must receive notice w/in 5 yrs prior to
McCann taking possession [§ 9-324(b)(3)]
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Inventory Lending
• Recall: inventory is typically financed by virtue of a
“floating lien” (SI on all present and after-acquired
inventory)
• Secured Party wants a loan secured by inventory to
remain “in balance” (appropriate loan-to-value ratio)
– If Debtor defaults, Secured Party wants to avoid
being undersecured (deficiency)
– With inventory, foreclosure sale is likely to involve
Secured Party selling the collateral at “wholesale,”
rather than at a “retail” price
– Thus, Secured Party will probably require LTV (loan
to value) ratio of 40-50% or less
Rationale for § 9-324(b)?
• If Debtor has already granted another Koch a PMSI
to acquire certain lumber/materials, First Bank (as
prior secured party) needs to know this!
– Otherwise, First Bank might assume that lumber is
part of Debtor’s regular inventory (as to which First
Bank expects to have first priority), and First Bank
might then permit Debtor to borrow against that
inventory under its line of credit
– Notification requirement allows First Bank to avoid
“double financing” Debtor’s inventory
• To ensure loan remains in balance, Secured Party
will periodically review Debtor’s inventory
– E.g., If Debtor has only $200,000 of inventory on hand,
Secured Party doesn’t want to allow Debtor to increase
the amount outstanding above $100,000 (50% LTV)
• Thus, before allowing Debtor to draw further on its
line of credit, Secured Party wants to be sure Debtor
has enough inventory on hand OR on order so that
total liquidation value of that inventory exceeds the
outstanding loan balance
– To facilitate this periodic review, security agreement will
either (a) oblige Debtor to periodically provide proof of
inventory or (b) allow Secured Party access to
inventory/purchase orders for inspection
Problem 4
• Here, if Koch never sent notice of its intended
PMSI to First Bank, as required by § 9-324(b),
Koch would not qualify for PM priority
• If that’s true, First Bank would have priority
under first-to-file-or-perfect [§ 9-322(a)(1)]
• Similar PMSI priority rule applies for livestock
(analogous to inventory) [§ 9-324(d)]
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