Assignment 12 Priority: Secured Party v. Lien Creditor. Review Problem. SP v. Lien Creditor: General Rules

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1 Assignment 12 Priority: Secured Party v. Lien Creditor Reference: Understanding Secured Transactions 14.01, (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 (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 Bank has an unperfected SI in Jackson s car (assume that the Bank failed to comply with the state s certificate of title act) This morning, in the case of Darwin v. Jackson, the jury awarded Darwin a judgment against Jackson for $500,000 Q: once the jury enters its verdict, who has a higher priority vs. Jackson s car: Bank, or Darwin? Review Problem 1

2 Lien Creditor Status Lien creditor = one who acquires an interest in the debtor s property by attachment, levy, or the like [ 9-102(a)(52)(A)] In most states, mere judgment alone does not give π a lien against debtor s personal property To become a lien creditor as to item of personalty, π must get either (a) pre-judgment attachment vs. that item, or (b) post-judgment levy on that item Until Darwin has the sheriff levy on the car, either in a pre-judgment attachment or in a post-judgment levy, Darwin has no property right (lien) on the car Thus, after verdict but before levy, Bank s SI is still effective vs. Darwin (even though it is unperfected) 9-201(a): unless Art. 9 provides otherwise, SI is effective against purchasers and creditors Problem 1 (Review) Bank has a judgment vs. Foster in the amount of $75,000 Bank has levied on Foster 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? 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? 2

3 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 Foster s hands, and in your hands, and you d have to buy and take possession w/out knowledge of prior SI Problem 2 Friday: Supreme Electronics sold a flat-screen TV to Crouch on an installment contract Supreme took SI in TV, which it later assigned to Atlantic Commercial Finance (ACF) Later on Friday: Litton (who has judgment vs. Crouch) has sheriff levy on the TV as it is being delivered to Crouch ACF asks: For our SI in the TV, do we have, or can we get, priority over Litton s judgment lien? 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 3

4 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)] 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? Problem 4 Bank has perfected SI in all equipment, inventory, accounts of Abrams s Plumbing (incl. after-acquired) Two months ago, Litton (who has $100K judgment vs. Abrams s) levied on 4 of Abrams s stepvans At time of levy, Abrams s owed Bank = $80,000 Today, Abrams s owes Bank = $130,000 Bank clearly had priority over Litton in the vans to the extent of $80,000 (the balance due at time Litton became a lien creditor ) Does Bank also have priority for the additional $50,000 in future advances? Future Advances (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. 4

5 Future Advances: 9-323(b) Where secured party has priority over lien creditor (LC) for its original loan [ 9-201(a), 9-317(a)], and SI also secures future advances, SI also has priority to 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 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 Problem 4: Example Problem 4 Bank has priority to extent of any loans made before 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 (unknown) Bank will have priority for advances made after Day 45, only if it didn t know of Litton s levy at time of those advances Problem: Here, Litton notified Bank, so it had knowledge (even if specific loan officer didn t) 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) 5

6 Problem 4: Split Priority 1 st Priority (Top cookie) ($110,000) to Bank 2d Priority (Filling) ($100,000) to Litton 3d Priority (Bottom cookie) ($15,000) to Bank Assume the 4 stepvans sell for $225,000 total. How are proceeds distributed? Problem 4: Split Priority 1 st 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 total. How are proceeds distributed? 6