MODULE 26 SECURED TRANSACTIONS 225

E. Priorities
1. If more than one party claims a security interest in same collateral, rules of priority should be
exam-
ined

1. Although the rules on priorities are complex with many exceptions, the following will give
the
general, important rules to prepare you for the exam

2. General rules of priorities

a. If both parties have perfected, then first to either file or perfect generally has priority
(1) This is true even if filing takes place before attachment
EXAMPLE: K obtains a written security agreement on day one on collateral that D owns and possesses. On
day two, Kfiles a financing statement but does not loan the money (value) until day ten. L obtains a written
security agreement on the same collateral on day three and gives value on day four and files on day six. K
has priority because hefiledfirst even though attachment and perfection did not occur until later (day ten).
To test your understanding, note that for L, attachment took place on day four and perfection on day six.

EXAMPLE: C obtains a security agreementfrom D on somejewelry that Downs. C loans D $1,000 and
takes possession of the jewelry. The day before, D had signed a security agreement granting E a security
interest in the same jewelry. E gives D $900 as a loan and files a financing statement one week later on the
jewelry. C has priority over E since C perfected before E perfected and filed.

b. Perfected security interests win over unperfected ones

b. If neither is perfected, then the first to attach prevails although at least one party will be motivated
to perfect

c. General creditors (unsecured creditors) lose to secured creditors (perfected or unperfected)

4. Other principles on priorities
a. Buyers in the ordinary course of business take free of any security interest whether perfected or
not (be sure to know this one)

(1) In general, buying in the ordinary course of business means buying from inventory of a person
or company that normally deals in those goods

(2) Buyer has priority even if s/he knows that security agreement exists but buyer must have pos-
session
(3) Purpose is to allow purchasers to buy from merchants without fear of security agreements be-
tween merchants and other parties
EXAMPLE: S, a dealer in stereos, obtained financing from L by securing the loan with her inventory in
stereos. B purchases one of the stereos from that inventory. B takes free of the security interest that L has in'
the inventory of S whether it is perfected or not.

b. Distinguish between buyers in the ordinary course of business and the subsequent bona fide pur-
chaser from consumers

(1) The latter defeats only a purchase money security interest in consumer goods (perfection on
attachment) unless filing takes place-applies to sale by consumer to consumer

(2) The former applies whether buyer is consumer or not but seller is dealer in those goods
EXAMPLE: See previous example. The result is the same whether or not B was a consumer when he bought
in the ordinary course of business from S.

EXAMPLE: Refer again to the same example using S, L, and B. Now let's add on one more security interest
in that B is buying the stereo on credit from S andfor his own personal use. Attachment has occurred. There
is perfection by attachment because between Band S, it is a purchase money security interest in consumer
goods. If B sells the stereo to N, his neighbor, for consumer use, then N takes free of the perfected security
interest (unless S had filed or N had notice of the security interest).

c. In the case of a purchase money security interest, if the secured party files within 20 days after the
debtor receives the collateral, then this defeats other security interests by use of a 20-day grace
period
(1) Note that this purchase money security interest (PMSI) does not require consumer goods
EXAMPLE: On August 1, B purchased some equipment from S on credit. All elements of attachment are
satisfied on this date. On August 3, B borrows money from a bank using equipment purchasedfrom S as
collateral. Attachment is accomplished and a financing statement is correctly filed by the bank on August 3.
On August 7, S then files afinancing statement. Because of the 20-day grace period, S has priority over the
bank.