Navigating UCC Article 9: Understanding Security Interest Priority

In the complex world of secured transactions, determining who has the best claim to collateral when a debtor defaults is paramount. This is where UCC Article 9, governing security interests in personal property, steps in. For businesses, lenders, and financial experts, grasping the rules of priority—especially the fundamental ‘First to File or Perfect’ rule—isn’t just a technicality; it’s the bedrock of risk management and asset protection.

This post breaks down the core concepts of security interests, attachment, perfection, and the crucial priority rules under Article 9 of the Uniform Commercial Code (UCC).

What is a Security Interest and UCC Article 9?

A security interest is a legal right granted by a debtor to a creditor over the debtor’s property (the collateral). It ensures that if the debtor fails to repay the loan (defaults), the creditor can take the collateral and sell it to satisfy the debt.

The Three Steps to Enforceability: Attachment, Perfection, and Priority

Before any priority battle begins, a security interest must first attach, then be perfected.

1. Attachment: Making the Interest Enforceable Against the Debtor

Attachment is the process that makes the security interest legally enforceable against the debtor. Three requirements must generally be met for attachment:

Requirement	Description
Value Given	The creditor must give value (e.g., loan money) to the debtor.
Debtor’s Rights in Collateral	The debtor must have rights in the collateral (they own it or have a legal claim to it).
Security Agreement	There must be an authenticated (usually signed) security agreement describing the collateral.

2. Perfection: Making the Interest Enforceable Against the World

Perfection is the key to priority. It is the process of giving public notice of the security interest, making it effective against most third parties, including other creditors and a bankruptcy trustee. The most common methods of perfection are:

• Filing a Financing Statement (UCC-1): This is the most common method, usually filed with a state’s Secretary of State office.
• Taking Possession: For some types of collateral (like goods or instruments), physical possession by the creditor perfects the interest.
• Automatic Perfection: Certain types of security interests, most notably Purchase Money Security Interests (PMSIs) in consumer goods, are automatically perfected upon attachment.

The Golden Rule of Priority: First to File or Perfect

The central priority rule under UCC Article 9, Section 9-322, dictates the hierarchy of claims among competing creditors. Once two or more security interests have attached to the same collateral, the rule is:

This rule establishes a “race to the courthouse” dynamic. A creditor can file a UCC-1 financing statement before they even loan the money, establishing their priority date early, provided the security interest eventually attaches.

Case Scenario: Understanding Priority

Exceptions to the ‘First to File or Perfect’ Rule

While the ‘First to File or Perfect’ rule is the standard, crucial exceptions exist, designed to protect specific types of transactions or creditors:

1. Purchase Money Security Interests (PMSIs):

A PMSI arises when a creditor loans money specifically to enable the debtor to acquire the collateral, and the money is actually used for that purpose. PMSIs are given “superpriority” status because they finance the specific asset being used as collateral.

Example: A bank lends a company money to buy a new machine, and the bank takes a security interest in that machine. The PMSI holder often takes priority over a prior creditor with a general “all assets” security interest, provided strict notice requirements are followed (especially for inventory).

2. Buyers in the Ordinary Course of Business (BIOC):

A buyer who purchases goods from a merchant in the normal course of their business takes the goods free of a security interest created by the seller, even if the interest is perfected and the buyer knows of its existence. This protects everyday commerce.

Summary of Priority Rules

Key Takeaways on UCC-9 Priority

1. Attachment is Entry: The security interest must attach to be enforceable against the debtor.
2. Perfection is Public Notice: Perfection (usually filing a UCC-1) makes the interest enforceable against third parties.
3. The Race is on: Priority is generally determined by the first party to file or perfect, whichever happens first.
4. PMSI Superpriority: A Purchase Money Security Interest is a powerful exception that can trump an earlier, perfected security interest, particularly if timely notice is given.
5. Always File Early: Financial experts recommend filing the UCC-1 financing statement as early as possible—ideally before closing the loan—to lock in the priority date.

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Frequently Asked Questions (FAQ)

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