Perfection and Priority of a Security Interest - Explained
How Time and Method of Perfection Affect Priority
Written by Jason Gordon
Updated at September 26th, 2021
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Table of Contents
What role does perfection play in establishing the priority of a secured party?Discussion QuestionPractice QuestionAcademic ResearchWhat role does perfection play in establishing the priority of a secured party?
A secured creditor must perfect her security interest to establish the priority of her security interest with relation to all other creditors. The first secure party to perfect a security interest in the collateral generally gives her priority above any other creditors who later attempt to establish a security interest in the collateral. In turn, failing to perfect a security interest allows a later creditor who perfects her security interest in the collateral to receive priority over the unperfected security interest. Most notably, an unperfected security interest is subordinate (lower priority) to certain lien creditors or a trustee in the event of bankruptcy. In short, perfecting a security interest is essential to ensure maintenance of the benefits of the security interest.
Note: There are limited situations that allow a secured creditor to receive priority over an earlier secured creditor. This generally arises in the event of the debtors bankruptcy. When a secured creditor is willing to extend new credit to the debtor in exchange for higher priority of her claim against the debtor.
Next Article: Conflicts in Priority of Security Interests Back to: SECURED TRANSACTIONS
Related Topics
- What is Priority of a security interest?
- What role does perfection play in establishing the Priority of a secured party?
- What are the common conflicts arising as to priority of a security interest?
- What is the priority of parties secured by common law and statutory liens?
- Lien - Definition
- Blanket Lien Definition
- Unperfected Lien
- Possessory Lien
- Non-Possessory Lien
- Tax Lien
- Mechanics Lien Definition
- Construction Lien
- Cloud on Title
- Priority of a buyer of collateral that is subject to a security interest
Discussion Question
How do you feel about the first creditor to perfect a security interest receiving priority in collateral? Is this unfair to earlier secured creditors who failed to appropriately perfect her security interest? Why or why not?
Practice Question
Ester sells a piece of equipment to Sandra. At the time of the sale, Sandra has an outstanding loan to First Bank. The loan agreement with First Bank includes a security agreement covering all of Sandra's property. It also contains an after-acquired property clause. Sandra also has several unsecured loans outstanding. Ester files a financing statement covering the equipment that she sells to Sandra. Who has priority in the equipment? Do things change if Sandra files for bankruptcy?