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Priority of
Security Interests

Learn how to determine which creditor gets paid first when multiple parties claim the same collateral under UCC Article 9.

CPA Regulation (REG)

What Is a Security Interest?

A security interest is a legal right granted by a debtor to a creditor over the debtor's property (called collateral). If the debtor defaults, the creditor can seize the collateral to satisfy the debt.

Secured Party
The creditor who holds the security interest in the collateral.
Debtor
The person or entity that owes the obligation and grants the security interest.
Collateral
The property subject to the security interest (inventory, equipment, accounts, etc.).

Attachment vs. Perfection

Attachment creates the security interest between the debtor and creditor. Perfection protects the creditor's interest against third parties. Both are required, but only perfection determines priority.

Attachment (3 Requirements)
1. Value given by creditor
2. Debtor has rights in collateral
3. Security agreement (authenticated)
Perfection (Methods)
1. Filing a financing statement (UCC-1)
2. Possession of collateral
3. Automatic perfection (PMSI in consumer goods)

Why Does Priority Matter?

When a debtor defaults and multiple creditors claim the same collateral, the creditor with the highest priority gets paid first from the proceeds. If the collateral is worth less than the total debt, lower-priority creditors may receive nothing.

Collateral 1st Priority: Perfected PMSI 2nd Priority: First to File/Perfect 3rd Priority: Unperfected SI Paid first Paid second May get nothing

The Core Priority Rules

1
Buyer in the Ordinary Course of Business (BIOC) takes free of a security interest created by the seller, even if perfected.
2
Perfected PMSI in inventory (with notice) > earlier perfected SI in the same collateral.
3
Perfected PMSI in non-inventory (filed within 20 days of delivery) > earlier perfected SI.
4
Perfected vs. Perfected: First to file or perfect wins (whichever is earlier).
5
Perfected vs. Unperfected: Perfected always wins.
6
Unperfected vs. Unperfected: First to attach wins.

PMSI Super-Priority

A Purchase Money Security Interest (PMSI) arises when a creditor finances the debtor's acquisition of specific collateral. UCC Article 9 grants PMSIs special "super-priority" over other security interests in the same collateral.

PMSI in Inventory
Must be perfected before delivery AND the PMSI holder must send written notice to all earlier-filed secured parties.
PMSI in Non-Inventory
Must be perfected within 20 days after the debtor receives possession. No notice to other creditors is required.

First to File or Perfect

When two or more non-PMSI perfected security interests exist in the same collateral, priority goes to whichever creditor was first to either file a financing statement or perfect — whichever event occurred earlier.

Jan 1 Bank A Files UCC-1 Mar 15 Bank B Lends + Perfects Jun 1 Bank A Lends (Attaches) Bank A Wins!

Inventory vs. Non-Inventory PMSI

PMSI in Inventory PMSI in Non-Inventory
Filing Deadline Before delivery Within 20 days after delivery
Notice Required? Yes — must notify all earlier secured parties No
Example Collateral Store merchandise, raw materials Equipment, machinery, vehicles
Why Different? Inventory turns over rapidly — earlier creditors need warning Equipment is stable — less risk to prior creditors

Buyer in the Ordinary Course

A Buyer in the Ordinary Course of Business (BIOC) purchases goods from a seller who deals in goods of that kind, in good faith, without knowledge that the sale violates another party's security interest.

✓ Protected
Customer buys a TV from Best Buy. Best Buy's bank has a perfected SI in Best Buy's inventory — the customer takes free.
✕ Not Protected
Buyer purchases a forklift from a car dealership. The dealership doesn't deal in forklifts — this is not an ordinary course purchase.

How to Determine Priority

1
Check for BIOC: Is any party a buyer in the ordinary course? If yes, they take free of the seller's security interest.
2
Check for PMSI: Does any creditor hold a purchase money security interest? If properly perfected (with notice for inventory), the PMSI gets super-priority.
3
Compare perfected vs. perfected: Among remaining perfected creditors, apply the first to file or perfect rule.
4
Perfected vs. unperfected: Any perfected interest beats any unperfected interest.
5
Unperfected vs. unperfected: The first security interest to attach wins.

Example 1: Equipment PMSI

Facts: On March 1, First Bank perfects a security interest in all of Debtor's equipment. On April 10, Debtor buys a new machine from Supplier on credit. Supplier files a financing statement on April 25 (15 days after delivery).

Mar 1 First Bank Perfects SI Apr 10 Debtor Gets Machine Apr 25 Supplier Files (Day 15) Supplier Wins!

Example 2: Inventory PMSI

Facts: Big Bank has a perfected SI in Retailer's inventory (filed Jan 5). Wholesaler ships new inventory to Retailer on credit (Feb 20). Wholesaler perfects on Feb 18 and sends written notice to Big Bank on Feb 15.

Example 3: Three Creditors

Facts: Debtor owns equipment worth $100,000. Three creditors claim it:

Alpha Bank
Filed UCC-1 on Jan 10. Loan made on Mar 5. Owed: $60,000.
Beta Credit
Loan made + perfected on Feb 1. Owed: $50,000.
Gamma Finance
Loan made on Dec 1. Never filed. Owed: $30,000.

Common Mistakes

✕ Confusing Filing with Perfection
Filing a UCC-1 is just one method of perfection. Possession and automatic perfection also work. The rule is "first to file or perfect."
✕ Forgetting the PMSI Notice Rule
A PMSI in inventory requires written notice to prior secured parties. Without it, the PMSI loses its super-priority.
✕ Mixing Up the 20-Day Window
The 20-day grace period applies only to non-inventory PMSIs. Inventory PMSIs must be perfected before delivery — there is no grace period.

Priority Summary

Competing Interests Rule Winner
BIOC vs. Perfected SI BIOC takes free BIOC
PMSI vs. Earlier Perfected SI PMSI super-priority (if requirements met) PMSI Holder
Perfected vs. Perfected First to file or perfect Earlier filer/perfecter
Perfected vs. Unperfected Perfected always wins Perfected party
Unperfected vs. Unperfected First to attach Earlier attacher
Lien Creditor vs. Unperfected SI Lien creditor wins Lien creditor

Question 1 of 5

Bank A files a financing statement on Debtor's equipment on February 1. Bank B files on March 1 and immediately lends money. Bank A lends money on April 1. Neither holds a PMSI. Who has priority?

Question 2 of 5

Supplier sells inventory to Retailer on credit and wants PMSI super-priority. First National Bank already has a perfected SI in Retailer's inventory. What must Supplier do?

Question 3 of 5

Consumer walks into a furniture store and buys a sofa. The store's bank has a perfected security interest in all of the store's inventory. Does the bank's security interest follow the sofa to the consumer?

Question 4 of 5

Creditor X has an unperfected security interest that attached on January 15. Creditor Y has an unperfected security interest that attached on March 1. Who has priority?

Question 5 of 5

Equipment Supplier delivers a machine to Debtor on June 1 on credit. Supplier files a UCC-1 on June 25. Does Supplier's PMSI get super-priority over an earlier perfected SI?