Assignment 12
Priority: Secured Party v.
Lien Creditor
Reference: Understanding Secured
Transactions §§ 14.01, 14.02
§ 9-201. (a) [General effectiveness.] Except as otherwise
provided in [the UCC], a security agreement is effective
according to its terms between the parties, against
purchasers of the collateral, and against creditors.
§ 9-317. (a) [Conflicting security interests and rights of
lien creditors.] A security interest or agricultural lien is
subordinate to the rights of:
(1) a person entitled to priority under § 9-322; and
(2) except as otherwise provided in subsection (e), a person
that becomes a lien creditor before the earlier of the time:
(A) the security interest or agricultural lien is perfected; or
(B) one of the conditions specified in § 9-203(b)(3) is met
and a financing statement covering the collateral is filed.
SP v. Lien Creditor: General Rules
• § 9-201(a): secured party >> other creditor,
unless another Article 9 provision
subordinates the secured party’s SI
• § 9-317(a)(2)(A): SI is subordinate to the
interest of a person who becomes a lien
creditor before the SI is perfected
Problem 1 (Review)
• Bank has a judgment vs. Myers in
the amount of $75,000
• Bank has levied on Myers’s Rolex,
to be sold at sheriff’s sale
• You’d be willing to pay up to
$25,000 to acquire such a Rolex
• Should you buy at the sheriff’s
sale? What should you bid?
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• If the watch is subject to a perfected SI, then
as buyer at sheriff’s sale, you would take it
subject to that SI [§§ 9-201(a), 9-315(a)(1)]
– Thus, you should “discount” your bid by an
amount => balance due on senior debt (which
you’d have to pay off to get clear title to Rolex)
• What if you search the UCC filing system,
and you find no UCC-1 filings vs. the debtor
that cover the watch?
Problem 1
• Risk: there could be an auto-perfected PMSI in the
watch, if it was “consumer goods” in the hands of
the debtor [§ 9-309(1)]
• If you buy the watch, you would take it subject to
that perfected PMSI [§§ 9-201(a), 9-315(a)(1)],
unless you could qualify for the protection of the
“garage sale” rule [§ 9-320(b)]
– The watch would have to have been consumer goods in
Myers’s hands, and in your hands, and you’d have to
buy and take possession w/out knowledge of prior SI
SP v. Lien Creditor: General Rules
• § 9-201(a): secured party >> other creditor,
unless another Article 9 provision
subordinates the secured party’s SI
• § 9-317(a)(2)(A): SI is subordinate to the
interest of a person who becomes a lien
creditor before the SI is perfected
Problem 2
• Friday: Supreme Electronics sold a 110” flatscreen TV to Crouch on an installment contract
– Supreme took SI in TV, and later assigned it to
ACF (which purchased the contract)
• Later on Friday: Litton (who has judgment vs.
Crouch) has sheriff levy on the TV just before it
is being delivered to Crouch
• ACF asks: Do we have, or can we get, priority
over Litton’s judgment lien in the TV?
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Problem 2: Can ACF Get Priority
over Litton’s Judgment Lien?
A. Yes, but only if the TV is “consumer goods”
B. Yes, regardless of whether TV is “consumer
goods” or “equipment” in Crouch’s hands
C. Yes, but only if the TV is “equipment” in the
hands of Crouch
D. No, regardless of whether the TV is
consumer goods or equipment
Problem 2
• If TV is “consumer goods,” Supreme took a PMSI
that was automatically perfected [§ 9-309(1)]
before Litton became a lien creditor by levy
– If so, ACF (as assignee of Supreme) has priority [§
9-317(a)(2)(A)]
• If Crouch is in default, ACF can repossess the TV
[§ 9-609] (usually, security agreements make levy
by another creditor = event of default)
• If PM secured party files
a UCC-1 covering PM
collateral w/in 20 days
after debtor takes
delivery of collateral,
PMSI takes priority over
the interest of a lien
creditor that arose after
attachment and before
filing [§ 9-317(e)]
PMSI v. Lien
Creditor
Problem 2
• If TV is “equipment” in Crouch’s hands, then
ACF’s PMSI is not perfected now (no indication
that Supreme or ACF has filed a UCC-1 yet)
• Thus, ACF’s PMSI does not currently have
priority over Litton under § 9-317(a)(2)(A)
• But, ACF still has 19 more days to file and get
“relation-back” priority over Litton’s judgment
lien [§§ 9-201(a), 9-317(e)]
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Problem 3
• Bank planned to loan Abrams $3,500 to buy mower
• Bank filed UCC-1 vs. Abrams’s “equipment”
(w/Abrams’s written consent)
• After Abrams identified the mower he “planned to
buy,” he borrowed $3,500 from PCB and signed
security agreement granting PCB a SI in the mower
– Problem 1: At that time, Abrams had already
bought the mower on account from a local retailer,
the previous day, unknown to Bank
– Problem 2: Worse yet, a judgment creditor had
already levied on the mower!
• Bank’s priority vs. judgment creditor?
• Bank does not have a PMSI (b/c its loan did not
enable Abrams to acquire the mower; he had
already acquired it), so § 9-317(e) does not apply
• Gely became a lien creditor before Bank’s SI in
the mower was perfected
• Bank thus does not have priority under § 9317(a)(2)(B)
– Bank had filed a UCC-1 covering the saw, but
Abrams had not yet signed a security agreement!
• Thus, Bank’s SI in the saw is subordinate to
Gely’s judgment lien [§ 9-317(a)(2)(A)]
§ 9-317. Interests That Take Priority Over or Take Free
of Security Interest or Agricultural Lien
(a) A security interest or agricultural lien is subordinate
to the rights of:
(1) a person entitled to priority under § 9-322; and
(2) except as otherwise provided in subsection (e), a
person that becomes a lien creditor before the earlier of the
time:
(A) the security interest or agricultural lien is
perfected; or
(B) one of the conditions specified in § 9203(b)(3) is met [e.g., debtor has authenticated a security
agreement covering the collateral] and a financing
statement covering the collateral is filed.
Lien Creditors and Future Advances
• If secured party’s SI is properly perfected at the
time a judgment lien arises, the secured party has
priority generally [§§ 9-201(a), 9-317(a)(2)(A)]
• But now suppose the secured party’s SI also
secures future advances
• Does the secured party get the same priority for
future advances made after the conflicting
judgment lien arises?
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Problem 4
• Bank has perfected SI in all present and after-acquired
equipment, inventory, accounts of Hawley Electric
• Two months ago, Litton (who has $100K judgment vs.
Hawley) levied on 4 of Hawley’s stepvans
– At time of levy, Hawley owed Bank = $80,000
– Today, Hawley owes Bank = $130,000
• Bank’s prior-perfected SI in the vans has priority over
Litton’s judgment lien, to the extent of $80,000 (the
balance due at time Litton became a “lien creditor”)
• Does Bank’s SI also have priority for the additional
$50,000 in future advances after Litton’s levy?
§ 9-323. Future Advances
(a) [Omitted]
(b) [Lien creditor.] Except as otherwise
provided in subsection (c), Bank’s security interest
in the vans is subordinate to the rights of Litton to
the extent that Bank’s security interest secures an
advance made more than 45 days after Litton levied
on the vans unless the advance is made:
(1) without knowledge of Litton’s levy; or
(2) pursuant to a commitment entered into
without knowledge of Litton’s levy.
§ 9-323. Future Advances
Future Advances: § 9-323(b)
(a) [Omitted]
(b) [Lien creditor.] Except as otherwise
provided in subsection (c), a security interest is
subordinate to the rights of a person that becomes a
lien creditor to the extent that the security interest
secures an advance made more than 45 days after
the person becomes a lien creditor unless the
advance is made:
(1) without knowledge of the lien; or
(2) pursuant to a commitment entered into
without knowledge of the lien.
• Where secured party has priority over lien creditor
(LC) for its original loan [§§ 9-201(a), 9-317(a)], and
the SI also secures future advances, the SI also has
priority to the extent of four types of advances:
– (1) Advances made before LC acquired its lien
– (2) Advances made << 45 days after LC acquired lien
– (3) Advances made >> 45 days after LC acquired lien,
if made w/out knowledge of LC’s lien
– (4) Advances made >> 45 days after LC acquired its
lien, but pursuant to a commitment made by secured
party prior to or w/out knowledge of LC’s lien
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Problem 4: “Split Priority”
Problem 4
• Bank’s SI has priority to extent of amount of debt
due at time of Litton’s levy (i.e., $80,000)
• Also, Bank has priority to the extent of the balance
due to Bank at end of Day 45 after Litton’s levy
(which is unknown on the facts)
• Bank will also have priority for advances made after
Day 45, but only if it didn’t know of Litton’s levy at
time of those advances
1st Priority (Top cookie)
($110,000) to Bank
2d Priority (Filling)
($100,000) to Litton
3d Priority (Bottom
cookie) ($15,000) to
Bank
– Problem: Here, Litton had notified Bank, so it had
knowledge (even if the specific loan officer didn’t)
Assume 4 stepvans sell for $225,000. How would sale
proceeds be distributed?
Problem 4: Example
Problem 4: “Split Priority”
• Aug. 1: Litton levies on stepvans (balance
owed to Bank = $80,000)
• Sept. 10: Litton sends notice of levy to Bank
• Sept. 14 (Day 45): Balance = $110,000
• October 1 (after Day 45): Balance = $130,000
• Bank’s SI in the vans has priority over Litton
to extent of $110,000, but not for the
additional $20,000 of advances (made > 45
days after levy, w/ knowledge of the levy)
1st Priority (Top cookie)
($110,000) to First Bank
2d Priority (Filling)
($10,000) to Litton
Nothing left to satisfy the
balance owed to Litton or
First Bank
Assume 4 stepvans sell for only $120,000. How would
sale proceeds be distributed?
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Why 45 Days?
• Consistency with federal tax lien statute
– IRC § 6323: perfected secured party has priority
over subsequent IRS tax lien
– This priority also extends to future advances, but
(a) only for advances made within 45 days after
IRS files a tax lien notice, and (b) only if state law
would also give the secured party priority over a
lien creditor for those future advances
Future Advances Hypo #1
• June 1: Debtor gets line of credit from Bank
– Debtor grants SI in its equipment/inventory
– Bank files UCC-1 vs. equipment, inventory
– Debtor borrows $10,000 on line of credit
• June 5: Creditor levies on Debtor’s equipment
• June 10: Debtor borrows $10,000 more from
Bank under line of credit
Line of Credit and Future Advances
• In Hypo #1, Bank has priority over Creditor to
full extent of $20,000 now outstanding on the
line of credit
– Bank’s SI attached and was perfected on June 1
(before Creditor acquired its judgment lien on the
equipment)
– Bank gets the same priority for June 10 advance
(w/in 45-day window period) [§ 9-323(d)]
Future Advances Hypo #2
• June 1: Debtor gets a line of credit from Bank
– Debtor executes security agreement covering its
equipment/inventory
– Bank files UCC-1 vs. equipment, inventory
– Debtor doesn’t immediately borrow on credit line
• June 5: Creditor levies on Debtor’s equipment
• June 10: Debtor borrows $20,000 from Bank
under the line of credit
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Line of Credit and Future Advances
• Problem: at time Creditor levied and becomes lien
creditor, Bank’s SI may not have attached!
– Bank hasn’t given value unless it had made a “binding
commitment” to make future advances [§ 1-204]
– As of date of levy (June 5), if Bank’s would-be SI in
the equipment hasn’t attached yet, it wouldn’t be
perfected, either [§ 9-308(a)]
– Thus, if only § 9-317(a)(2)(A) applied, Bank’s SI
would be subordinated to Creditor’s lien
§ 9-201. (a) [General effectiveness.] Except as otherwise
provided in [the UCC], a security agreement is effective
according to its terms between the parties, against
purchasers of the collateral, and against creditors.
§ 9-317. (a) [Conflicting security interests and rights of
lien creditors.] A security interest or agricultural lien is
subordinate to the rights of:
(1) a person entitled to priority under § 9-322; and
(2) except as otherwise provided in subsection (e), a person
that becomes a lien creditor before the earlier of the time:
(A) the security interest or agricultural lien is perfected; or
(B) one of the conditions specified in § 9-203(b)(3) is met
and a financing statement covering the collateral is filed.
Hypo #1 vs. Hypo #2
• But it would make no sense to treat these two
situations differently
– In Hypo #1, Bank had done everything it needed to
do to create and perfect its SI; it’s just that Debtor
hadn’t yet drawn on the credit line
– Searchers/3d parties could’ve seen Bank’s UCC-1
– Bank should get same priority in Hypo #2 as it got
in Hypo #1 [§ 9-317 cmt. 4]
– § 9-317(a)(2)(B) accomplishes this result
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