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Welcome back to the Deep Dive. 
Today we are just looking at, 

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you know, a set of rules. 
We are really getting into the 

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central nervous system of the 
entire credit economy. 

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That's a good way to put it. 
We are tackling Chapter 4 of 

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secured transactions, priority 
rules and competing claims. 

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Yeah, this is the topic that 
keeps bank general counsel's 

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awake at night, and it's the one
that makes or breaks a secured 

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transactions exam. 
It really is. 

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You know, in our previous 
conversations when we were 

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talking about attachment or 
perfection, we were living in 

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relatively small world, right? 
It was almost binary. 

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It was just debtor versus 
creditor. 

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Did we sign the paper? 
Did we file the form? 

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Exactly. 
A1 on one dispute, but Chapter 

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4. 
This is where the camera pulls 

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back. 
We're suddenly seeing the whole 

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battlefield. 
That is the perfect analogy 

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because in the real world, when 
a business fails, it rarely 

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defaults on just one loan. 
Oh, it never. 

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It's never that clean. 
When the shit goes down, 

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everyone is scrambling for the 
lifeboats. 

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And who's on the ship? 
You've got the bank with the 

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main line of credit. 
You've got the equipment 

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supplier, maybe the credit card 
company. 

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The bankruptcy trustee suddenly 
appears out of nowhere. 

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And maybe some guy who just 
bought a forklift from the 

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debtor on Craigslist last week. 
Exactly. 

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And Chapter 4 answers the brutal
question, who gets a seat on the

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lifeboat and who, well, who 
drowns? 

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And the answer is definitely not
everyone shares nicely, is it? 

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Absolutely not. 
This is a cold, hard 

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hierarchical system. 
There is no participation trophy

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in article mount. 
So we're moving away from these 

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sort of equitable feelings. 
Oh, completely. 

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That's the biggest mental shift 
students have to make. 

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You have to get rid of the idea 
that I lent the money so I ought

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to get paid. 
That feels fair though it. 

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Feels fair, but it's not the 
law. 

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We are moving into the coal 
mechanical Gears of statutory 

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priority. 
It's about diligence, notice and

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strict compliance with the 
statute. 

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Which is why this is probably 
the make or break section for 

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law students and, you know, 
anyone prepping for the bar. 

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It is. 
I feel like this is where the 

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confusion between attachment and
priority really bites people. 

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Talk about that, what's the 
error you see? 

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It's. 
The number one error, year after

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year, students think I have a 
security agreement, the debtor 

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signed it, I gave value, I have 
rights, and I mean, they're not 

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wrong. 
They do have rights. 

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They do. 
They have rights against the 

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debtor. 
That's attachment. 

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You can sue your debtor and get 
a judgement. 

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But that's not the whole story. 
Not even close. 

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Priority is your right against 
the rest of the world. 

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It's your place in line. 
You can have a perfectly valid 

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attached security interest, but 
if someone else has priority, 

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the pot of money is empty before
you even get your spoon out. 

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So our mission today is to map 
out that hierarchy, that entire 

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system. 
We have to, we're going to be 

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using Chapter 4 priority rules 
and competing claims as our 

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primary road map. 
We'll start with the baseline 

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rules, then get into the 
terrified struggle against the 

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bankruptcy trustee, always 
terrified, then the Super 

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priority of PMSI, and then, and 
I know you love this one, 

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circular leans. 
Help us. 

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But yeah, we have to cover it. 
And we should probably weave in 

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some of the deeper scholarship 
too. 

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Well, professors like Planck, 
Harris and Mooney have done some

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fascinating work on why these 
rules exist. 

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They really dig into the tension
with the old Nemo Dat principle 

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from property law. 
You can't give what you don't 

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have. 
Exactly, and understanding that 

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tension helps explain the logic 
behind what seems like madness 

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sometimes. 
OK, let's do it. 

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Let's start right at the 
bedrock. 

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The general rule? 
UCC section 9322A1 If a listener

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remembers nothing else from this
hour, what is the mantra? 

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1st to file or perfect. 
Just that First to file or 

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perfect. 
Say it in your sleep. 

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It sounds deceptively simple. 
It does, but it drives the 

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entire behavior of the 
commercial lending market. 

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The statute says priority ranks 
according to whichever happened 

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earliest, filing a financing 
statement or perfection. 

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So usually you file in order to 
perfect. 

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So in what 90% of cases isn't it
just first to file wins? 

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In practice, yeah, that's often 
even how it shakes out. 

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It creates A literal race to the
Secretary of State's office or 

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to the online filing portal. 
But the rule includes or perfect

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for a reason. 
It does. 

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It has to account for those 
times when you perfect by other 

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means, like taking possession of
the collateral or establishing 

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control over a bank account. 
But the real nuance, the thing 

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that trips up even the smart 
students, is how that first to 

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file prong interacts with the 
timing of the deal itself. 

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This is what creates the pre 
filing phenomenon. 

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I really want to push on this 
because it feels so counter 

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intuitive. 
We established in previous deep 

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dives that you cannot have a 
security interest until it 

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attaches correct? 
And it can't attach until you 

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give value, until you actually 
lend the money. 

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Right value rights in the 
collateral and an agreement, the

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three pillars of attachment. 
But you're telling me I can file

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the financing statement before 
I've lent a single penny? 

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Before I even have a deal. 
Yes. 

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In fact, if you are a diligent 
lawyer for a lender, you must 

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file before the money moves. 
Article 9 explicitly allows you 

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to file a financing statement 
before the security agreement is

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even signed and long before 
value is given. 

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OK, let's run a scenario here to
see if I truly get the 

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implications of this. 
Yeah, it's wild. 

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I'm lender A. 
On January 1st, I file a 

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financing statement against the 
debtor. 

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We're still negotiating the long
terms. 

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I haven't lent them a dime. 
OK, so on January 1st, you have 

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no security interest. 
You just have, let's call it a 

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placeholder, a spot on the 
public list. 

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Right then on February 1st, 
Lender B comes along. 

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They're faster, more aggressive,
They lend money to the debtor. 

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The debtor signs their security 
agreement and they filed their 

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financing statement that very 
same day. 

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So Lender B is fully perfected 
on February 1st. 

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Correct. 
Lender B has real skin in the 

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game. 
They have attached and perfected

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their interest. 
They have a real enforceable 

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security interest. 
And me, Lender A, I'm still just

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sitting there with my filing 
from January. 

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Just a piece of paper in the 
system. 

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Then on March 1st, my deal 
finally comes together. 

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We sign the papers, I wire the 
money. 

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I become perfected on March 1st,
but my filing was back in 

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January. 
The debtor defaults. 

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Who wins? 
You do Lender A wins. 

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Wait, really? 
Even though Lender B was the 

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first one to actually perfect 
the first one to lend money. 

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Yes, under 9322, your priority 
date relates back to your filing

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date of January 1st. 
Even though you had no security 

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interest at that time, your 
place in line was reserved. 

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That feels incredible unfair to 
lender be from their 

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perspective, they were the first
real perfected creditor. 

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When they lent the money, I 
didn't even have a deal. 

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And you have just hit on the 
exact tension that Professors 

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Plank, Harris and Mooney write 
about. 

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It is a direct conflict between 
the ancient property law concept

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of Nemo that could non have it. 
You cannot give what you do not 

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have and what they called the 
filing priority principle. 

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Because normally property law 
says if I don't have a right in 

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something, I can't grant a claim
against it. 

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On January 1st, the debtor 
hadn't given me any rights at 

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all. 
Exactly. 

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So how can they grant me 
priority? 

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Article 9 makes a conscious 
choice to override that ancient 

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property concept, and the reason
is pure policy, which is 

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certainty. 
It's all about the certainty of 

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the filing system. 
The drafters wanted a system 

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where a potential lender can 
look at one public record and 

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know exactly where they will 
stand in the hierarchy. 

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So when Lender B went to check 
the records on February 1st 

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before they lent their money. 
They would have seen your 

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January 1st filing. 
I see they were on notice. 

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They knew, or they should have 
known that if they went ahead 

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and lent money, they would be 
sitting behind you effectively 

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waiting to see if your deal went
through. 

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The filing system is a 
scoreboard. 

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You check the score before you 
step onto the field. 

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So it prevents secret liens. 
It forces everyone to show their

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cards publicly, even if the hand
hasn't been fully dealt yet. 

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That's the perfect way to 
describe it. 

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It turns the filing office into 
the sole source of truth. 

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If we relied on a rule like who 
lent the money first, that's a 

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private fact. 
Lender B would have no way of 

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knowing about your quiet 
negotiations with the debtor 

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just by checking the public 
record. 

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That would create uncertainty, 
and uncertainty kills the 

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availability of credit. 
OK, so that's the battle between

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two perfected parties. 
The first to file or perfect 

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rule governs. 
What about the other 

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combinations? 
What if it's a perfected party 

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versus an unperfected 1? 
That's what I call the Super 

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status role. 
It's an absolute knockout. 

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A perfected interest always 
beats an unperfected one, no 

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matter what. 
Doesn't matter if the 

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unperfected party attached 
first. 

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Doesn't matter if the 
unperfected party lent 10 times 

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more money. 
If you filed and perfected and I

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just stuck the signed contract 
in my desk drawer and forgot 

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about it, you win every time. 
No mercy for the lazy or the 

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careless. 
None. 

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Now you know there is that tiny 
garage sale exception for 

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certain consumer goods, but 
that's a niche rule we can leave

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for another day. 
For commercial purposes, 

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perfection is everything. 
OK. 

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So what about the most 
interesting scenario and what 

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you said is a classic exam trap,
unperfected versus unperfected? 

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Yes, the tiebreaker. 
This is a great fact pattern for

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an exam. 
Neither of us filed, neither of 

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us perfected by taking 
possession. 

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We both just have signed 
security agreements from the 

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debtor. 
Maybe we're both tricked, or 

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maybe we're both just 
incompetent. 

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The debtor defaults. 
Who wins? 

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What does students usually 
guess? 

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Their first instinct is to look 
for who filed first, but of 

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course nobody filed then. 
They often guess it should be 

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pro rata. 
You know we share the pain. 

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Both are wrong. 
Under section 9 Death 302-A3. 

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If neither party is perfected, 
priority goes to the first to 

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attach. 
So the system reverts to the 

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private timeline. 
Exactly because there is no 

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public notice for anyone to rely
on, the law falls back to the 

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old common law idea of first in 
time, 1st and right, but applies

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it to the creation of the 
interest itself. 

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When did you give value? 
When did the debtor sign the 

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agreement? 
That's what matters. 

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But really, if you're a 
commercial lawyer and you find 

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yourself in a priority dispute 
where nobody has perfected. 

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You should probably be calling 
your malpractice carrier. 

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You've already lost, even if you
technically win the dispute. 

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Pretty much much you've exposed 
your client to a massive 

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unnecessary risk. 
All right, let's shift gears. 

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Section 2, we're moving to the 
collision that is probably the 

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most terrifying for any lender. 
It's not with another bank, it's

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with the lean creditor and 
specifically the bankruptcy 

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trustee. 
The ultimate predator in the 

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Article 9 ecosystem. 
First, let's just define a lean 

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creditor in the classic sense. 
OK. 

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So a lean creditor is someone 
who acquired a lean on the 

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property through the judicial 
process. 

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They sued the debtor, they 
wanted judgement and then they 

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got the sheriff to go out and 
levy on the debtors assets. 

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They physically seized the 
property to satisfy the 

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judgement. 
But as you said, in law school 

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00:10:49,680 --> 00:10:54,400
exams and frankly in most real 
world scenarios, the most common

234
00:10:54,400 --> 00:10:58,360
and powerful Lynn creditor isn't
some guy who won a lawsuit, it's

235
00:10:58,360 --> 00:11:00,760
the trustee in bankruptcy. 
Right. 

236
00:11:00,800 --> 00:11:03,800
And this brings us to the strong
ARM clause of the Bankruptcy 

237
00:11:03,800 --> 00:11:08,120
Code, Section 5, four to four a.
This is a legal fiction, but it 

238
00:11:08,120 --> 00:11:10,960
is an incredibly powerful one. 
Explain the fission. 

239
00:11:11,080 --> 00:11:15,160
The moment a debtor files a 
bankruptcy petition that exact 

240
00:11:15,160 --> 00:11:17,920
second the trustee puts on a 
mask, they are legally 

241
00:11:17,920 --> 00:11:19,680
transformed. 
They step into the shoes of a 

242
00:11:19,680 --> 00:11:22,960
hypothetical in creditor who has
just levied on all of the 

243
00:11:22,960 --> 00:11:24,960
debtors assets at that exact 
moment. 

244
00:11:24,960 --> 00:11:26,680
Hypothetical is the keyword 
there. 

245
00:11:26,720 --> 00:11:29,080
They don't actually have to go 
to court and get a rid of 

246
00:11:29,080 --> 00:11:30,320
execution. 
Correct. 

247
00:11:30,520 --> 00:11:33,000
They get that status 
automatically by statute. 

248
00:11:33,000 --> 00:11:36,360
They just raise their hand and 
say as of the petition date, I 

249
00:11:36,360 --> 00:11:39,360
am now a creditor who has seized
everything and they use that 

250
00:11:39,360 --> 00:11:42,560
powerful status to try to kill 
off any security interests that 

251
00:11:42,560 --> 00:11:45,360
isn't absolutely perfect. 
So what's the rule of engagement

252
00:11:45,360 --> 00:11:48,960
here? 
Section 9317 lays it out secured

253
00:11:48,960 --> 00:11:52,200
party versus this super powered 
lien creditor. 

254
00:11:52,560 --> 00:11:55,160
It is a brutally simple timeline
test. 

255
00:11:55,200 --> 00:11:58,200
If the secured party is 
perfected before the lien 

256
00:11:58,200 --> 00:12:01,720
arises, so before the bankruptcy
petition is filed, the secured 

257
00:12:01,720 --> 00:12:04,560
party wins. 
And what does winning mean in 

258
00:12:04,560 --> 00:12:06,560
bankruptcy? 
It means your security interest 

259
00:12:06,560 --> 00:12:09,480
survives the bankruptcy. 
You are a secured creditor in 

260
00:12:09,480 --> 00:12:11,920
the bankruptcy case, which is a 
very, very good place to be. 

261
00:12:11,920 --> 00:12:13,760
You get paid first from your 
collateral. 

262
00:12:13,960 --> 00:12:17,800
But if the lien arises first. 
Then the trustee wins, and this 

263
00:12:17,800 --> 00:12:20,080
is what we call the EA Danger 
Uose. 

264
00:12:20,080 --> 00:12:22,600
You, as a lender, have attached 
your interest. 

265
00:12:22,600 --> 00:12:24,680
You've lent the money. 
The debtor has signed the 

266
00:12:24,680 --> 00:12:27,400
security agreement, but you 
haven't filed the financing 

267
00:12:27,400 --> 00:12:29,600
statement yet. 
Maybe you're waiting for a 

268
00:12:29,600 --> 00:12:32,800
signature to be notarized, or 
the Courier is slow, or your 

269
00:12:32,800 --> 00:12:36,200
paralegal is out sick. 
And in that gap, that little 

270
00:12:36,200 --> 00:12:38,880
window of time, the debtor files
for bankruptcy. 

271
00:12:39,080 --> 00:12:41,640
At the moment of the petition 
you are unperfected. 

272
00:12:41,880 --> 00:12:46,240
You are unperfected, which means
the trustee who has the status 

273
00:12:46,240 --> 00:12:48,880
of a Lynn creditor as of that 
moment beats you. 

274
00:12:49,480 --> 00:12:52,520
They use the strong ARM clause 
to avoid your security 

275
00:12:52,520 --> 00:12:54,440
interests. 
What does that mean to avoid it?

276
00:12:54,440 --> 00:12:56,640
It means your security interest 
is erased. 

277
00:12:56,640 --> 00:12:58,440
It's nullified. 
You are stripped of your 

278
00:12:58,440 --> 00:13:00,520
collateral. 
You go from being a secured 

279
00:13:00,520 --> 00:13:04,040
lender at the front of the line 
to being just another general 

280
00:13:04,040 --> 00:13:07,240
unsecured creditor at the very 
back of the line fighting for 

281
00:13:07,240 --> 00:13:08,840
pennies on the dollar with 
everyone else. 

282
00:13:09,040 --> 00:13:12,680
That transition from secured to 
unsecured in a bankruptcy is 

283
00:13:13,080 --> 00:13:15,120
basically a death sentence for 
the loan. 

284
00:13:15,280 --> 00:13:18,000
It absolutely is. 
You're lucky to get anything 

285
00:13:18,000 --> 00:13:21,320
back, and this brings us to a 
case that I think illustrates 

286
00:13:21,320 --> 00:13:24,880
the sheer brutality of this rule
better than any other in re 

287
00:13:24,880 --> 00:13:26,880
General Coffee Corps. 
I love this case. 

288
00:13:27,120 --> 00:13:29,840
It reads like a crime novel. 
It involves a massive 

289
00:13:29,840 --> 00:13:32,040
international fraud or a. 
Classic. 

290
00:13:32,320 --> 00:13:35,640
So the short version is this 
General Coffee Corporation 

291
00:13:35,640 --> 00:13:38,480
wanted to buy the assets of 
another company, Chase and 

292
00:13:38,480 --> 00:13:41,680
Sanborn. 
To get the cash to do it, they 

293
00:13:41,680 --> 00:13:45,280
ran a very complex scam 
involving a certificate of 

294
00:13:45,280 --> 00:13:48,640
deposit and a bank in Panama. 
We don't need to get into the 

295
00:13:48,640 --> 00:13:51,360
weeds of the wire transfers. 
Bottom line is they got money 

296
00:13:51,360 --> 00:13:53,200
they shouldn't have. 
Yes, they essentially 

297
00:13:53,200 --> 00:13:56,120
misappropriated stole money from
a place called City National 

298
00:13:56,120 --> 00:13:57,840
Bank. 
So City National Bank is the 

299
00:13:57,840 --> 00:14:00,320
victim here. 
Their money was stolen and then 

300
00:14:00,320 --> 00:14:03,800
used by General Coffee to buy 
inventory, in this case coffee 

301
00:14:03,800 --> 00:14:04,560
beans. 
Right. 

302
00:14:04,560 --> 00:14:08,000
So eventually the whole scheme 
collapses and General Coffee 

303
00:14:08,000 --> 00:14:10,880
files for bankruptcy. 
City National Bank shows up in 

304
00:14:10,880 --> 00:14:13,960
the bankruptcy court and says, 
hey, huge pile of coffee 

305
00:14:13,960 --> 00:14:16,560
inventory sitting in the 
warehouse that was bought with 

306
00:14:16,560 --> 00:14:19,440
our stolen money. 
We demand a constructive trust. 

307
00:14:19,600 --> 00:14:22,800
OK, let's define. 
That a constructive trust is an 

308
00:14:22,880 --> 00:14:26,200
equitable remedy. 
It's a tool a court can use to 

309
00:14:26,200 --> 00:14:28,800
prevent unjust enrichment. 
It's basically. 

310
00:14:28,800 --> 00:14:32,200
The court saying, look, fairness
demands that we treat this 

311
00:14:32,200 --> 00:14:35,720
property as belonging to the 
victim, not the thief. 

312
00:14:36,080 --> 00:14:38,640
So the. 
Bank is arguing this isn't 

313
00:14:38,640 --> 00:14:41,520
really the debtors property to 
begin with, they're just holding

314
00:14:41,520 --> 00:14:44,120
it in trust for us because they 
stole the funds to buy it. 

315
00:14:44,280 --> 00:14:47,160
It's an argument based on pure 
fairness and morality. 

316
00:14:47,160 --> 00:14:48,560
A very. 
Compelling argument. 

317
00:14:48,560 --> 00:14:50,400
So you have city. 
National Bank, on one side 

318
00:14:50,400 --> 00:14:53,640
arguing equity and fairness and 
on the other side you have the 

319
00:14:53,640 --> 00:14:55,440
bankruptcy trustee who is 
arguing. 

320
00:14:55,440 --> 00:14:58,920
Statutory rigor. 
The trustee pulls out the strong

321
00:14:58,920 --> 00:15:02,560
arm clause and they looked at 
Florida law, which was the 

322
00:15:02,560 --> 00:15:05,200
controlling state law in the 
case, and what did? 

323
00:15:05,200 --> 00:15:09,160
Florida law say Florida law. 
Like the law in many states said

324
00:15:09,160 --> 00:15:12,560
that a constructive trust isn't 
a pre-existing property right. 

325
00:15:12,640 --> 00:15:15,960
It doesn't actually exist until 
a court declares that it exists.

326
00:15:16,160 --> 00:15:19,560
It's a remedial device that a 
court imposes after the fact, 

327
00:15:19,640 --> 00:15:21,600
and since the. 
Bank court sue was filed before 

328
00:15:21,600 --> 00:15:23,840
any court had declared this 
trust the trustee. 

329
00:15:23,840 --> 00:15:27,080
Made the killer argument. 
They said at the exact moment of

330
00:15:27,080 --> 00:15:30,920
the bankruptcy filing, I, the 
trustee, became a hypothetical 

331
00:15:30,920 --> 00:15:34,840
lien creditor on all assets. 
At that moment, no trust had 

332
00:15:34,840 --> 00:15:37,600
been declared yet. 
Therefore my lien attaches to 

333
00:15:37,600 --> 00:15:40,840
the coffee beans free and clear 
of the bank's later asserted 

334
00:15:40,920 --> 00:15:42,720
equitable claim. 
And the court agreed. 

335
00:15:42,720 --> 00:15:46,400
With that, the court agreed. 
The trustee won the strong arm 

336
00:15:46,400 --> 00:15:49,080
of the statute out muscled the 
equitable claim of the 

337
00:15:49,080 --> 00:15:51,840
constructive trust that is. 
Incredibly harsh. 

338
00:15:52,200 --> 00:15:54,640
The bank was the victim of 
actual fraud. 

339
00:15:54,800 --> 00:15:57,400
They could trace their stolen 
money directly to the Coffee, 

340
00:15:57,880 --> 00:16:00,960
but because the trustee had the 
statutory status of a perfect 

341
00:16:00,960 --> 00:16:05,320
lien creditor as of the petition
date, the fairness argument lost

342
00:16:05,320 --> 00:16:07,280
to the priority timeline. 
It is the. 

343
00:16:07,320 --> 00:16:10,560
Ultimate exam take away from 
this whole area of law. 

344
00:16:10,880 --> 00:16:14,800
Do not rely on fairness or 
equitable principles to save an 

345
00:16:14,800 --> 00:16:17,800
unperfected or otherwise flawed 
security interest against a 

346
00:16:17,800 --> 00:16:19,440
trustee. 
It's a strict liability. 

347
00:16:19,440 --> 00:16:20,520
System. 
It's a strict. 

348
00:16:20,520 --> 00:16:22,720
Liability statute regarding 
perfection. 

349
00:16:23,200 --> 00:16:25,920
If you aren't perfected when the
gavel drops on the bankruptcy 

350
00:16:25,920 --> 00:16:29,760
petition, you lose the court in 
general, Coffee essentially 

351
00:16:29,760 --> 00:16:33,000
said, We feel bad for you, City 
National Bank, you were clearly 

352
00:16:33,000 --> 00:16:35,320
wronged. 
But the statue is the statue, 

353
00:16:35,640 --> 00:16:37,520
so. 
Diligence is everything. 

354
00:16:37,520 --> 00:16:40,880
You cannot sleep on your rights 
for a single second, not for a. 

355
00:16:40,880 --> 00:16:43,120
2nd but. 
Surely there have to be some 

356
00:16:43,120 --> 00:16:45,800
exceptions. 
What if I'm not just some 

357
00:16:45,800 --> 00:16:47,840
general lender? 
What if I'm a lender who is 

358
00:16:47,840 --> 00:16:50,960
coming in specifically to help 
the debtor by the very 

359
00:16:50,960 --> 00:16:53,480
collateral in question, I'm the 
one making the purchase 

360
00:16:53,480 --> 00:16:55,840
possible. 
Now we are entering the realm of

361
00:16:55,840 --> 00:16:59,240
the Super priority. 
This is Section 3, the purchase 

362
00:16:59,240 --> 00:17:02,800
money security interest or as 
everyone calls it, the PMSI. 

363
00:17:02,800 --> 00:17:04,400
OK, let's. 
Start with the policy. 

364
00:17:04,480 --> 00:17:07,640
Why does this exist? 
If first to file is the golden 

365
00:17:07,640 --> 00:17:11,040
rule, why does the law let 
certain people cut the line? 

366
00:17:11,200 --> 00:17:13,960
It's all about. 
Preventing what economists call 

367
00:17:13,960 --> 00:17:16,440
situational monopolies. 
Break that down. 

368
00:17:16,440 --> 00:17:17,359
For us. 
OK, imagine. 

369
00:17:17,359 --> 00:17:20,960
Lender A has a standard blanket 
line on a debtor's assets. 

370
00:17:21,240 --> 00:17:24,319
The security agreement says it 
covers all equipment now owned 

371
00:17:24,319 --> 00:17:26,599
and hereafter acquired. 
Very standard. 

372
00:17:26,599 --> 00:17:29,840
Clause right after acquired 
property clause right now. 

373
00:17:29,840 --> 00:17:33,240
If that Lin was absolutely 
unbreakable, the debtor could 

374
00:17:33,240 --> 00:17:36,720
never get financing from anyone 
else to buy a new piece of 

375
00:17:36,720 --> 00:17:39,560
equipment. 
The second that new machine hit 

376
00:17:39,560 --> 00:17:42,560
the debtor's factory floor, 
Lender A's lien would 

377
00:17:42,560 --> 00:17:45,200
automatically attach and they'd 
have first priority. 

378
00:17:45,240 --> 00:17:48,160
So Lender. 
A would just swallow up every 

379
00:17:48,160 --> 00:17:50,400
new asset the debtor ever 
acquired. 

380
00:17:50,400 --> 00:17:53,160
Exactly. 
Lender A would have the debtor 

381
00:17:53,160 --> 00:17:55,680
in a chokehold. 
They could charge whatever 

382
00:17:55,680 --> 00:17:58,280
interest rate they wanted on 
future loans because no other 

383
00:17:58,280 --> 00:18:00,880
lender would ever touch the 
debtor, knowing they'd always be

384
00:18:00,880 --> 00:18:02,120
second in line. 
So the. 

385
00:18:02,120 --> 00:18:06,440
PMSI acts as a kind of monopoly 
busting mechanism. 

386
00:18:06,840 --> 00:18:09,880
It allows a new lender, Lender 
B, to come in, finance a 

387
00:18:09,880 --> 00:18:12,960
specific new piece of equipment 
and take first priority just on 

388
00:18:12,960 --> 00:18:15,240
that new piece of equipment, 
jumping ahead of lender A's 

389
00:18:15,240 --> 00:18:16,960
prior blanket lane. 
Exactly. 

390
00:18:16,960 --> 00:18:19,640
It promotes commerce and keeps 
the credit market competitive. 

391
00:18:19,640 --> 00:18:24,160
But, and this is a huge but for 
any exam because you are jumping

392
00:18:24,160 --> 00:18:27,560
the line, you have to follow the
rules absolutely perfectly when 

393
00:18:27,560 --> 00:18:28,920
rules are different. 
Depending on the type of 

394
00:18:28,920 --> 00:18:30,600
collateral, drastically. 
Different. 

395
00:18:30,600 --> 00:18:32,120
And that's where students get 
into trouble. 

396
00:18:32,120 --> 00:18:36,040
OK, let's start. 
With the easy rule then a PMSI 

397
00:18:36,120 --> 00:18:39,720
in goods but non inventory 
goods. 

398
00:18:39,880 --> 00:18:42,400
So think equipment or consumer 
goods. 

399
00:18:42,880 --> 00:18:45,600
I'm a lender financing the 
debtors purchase of a new 

400
00:18:45,600 --> 00:18:47,440
printing press. 
If you are. 

401
00:18:47,440 --> 00:18:51,000
Financing a piece of equipment? 
Article 9 gives you a bit of a 

402
00:18:51,000 --> 00:18:52,480
break. 
It's a practical rule. 

403
00:18:52,560 --> 00:18:55,800
You get a 20 day grace period, a
20 day window. 

404
00:18:55,800 --> 00:18:58,440
To do what you must. 
Perfect your interest, which 

405
00:18:58,440 --> 00:19:01,520
usually means filing your 
financing statement within 20 

406
00:19:01,520 --> 00:19:04,320
days after the debtor receives 
possession of the collateral. 

407
00:19:04,440 --> 00:19:06,440
Wait, wait, say. 
That again, 20 days after 

408
00:19:06,440 --> 00:19:09,480
possession, not 20 days after 
the loan is signed or the 

409
00:19:09,480 --> 00:19:11,240
purchase order is issued, 
correct? 

410
00:19:11,760 --> 00:19:14,280
Possession is the trigger. 
The clock starts ticking the 

411
00:19:14,280 --> 00:19:17,160
moment the delivery truck drops 
off that printing press at the 

412
00:19:17,160 --> 00:19:20,160
debtors factory, not a day 
before and if you file. 

413
00:19:20,160 --> 00:19:22,160
Within that 20 day window if you
file within. 

414
00:19:22,160 --> 00:19:25,640
That 20 day window, your 
priority relates back to the day

415
00:19:25,640 --> 00:19:28,600
the debtor got the machine. 
You magically jump ahead of 

416
00:19:28,600 --> 00:19:31,880
lender A's pre-existing blanket 
land, but only with respect to 

417
00:19:31,880 --> 00:19:33,640
that new printing press. 
OK. 

418
00:19:33,800 --> 00:19:36,840
That seems manageable. 
It acknowledges that sometimes 

419
00:19:37,000 --> 00:19:40,120
paperwork lags behind the 
physical delivery of goods. 

420
00:19:40,240 --> 00:19:42,720
It's a common. 
Sense rule for equipment, but 

421
00:19:42,720 --> 00:19:45,080
now let's talk about inventory. 
This is. 

422
00:19:45,080 --> 00:19:48,280
The hard rule APMSI in 
inventory. 

423
00:19:48,680 --> 00:19:50,520
What are we talking about here? 
Think of a. 

424
00:19:50,520 --> 00:19:54,720
Car dealership financing its 
floor plan of new cars, or a 

425
00:19:54,720 --> 00:19:58,760
Best Buy stocking its shelves 
with TV's from Sony, or a 

426
00:19:58,760 --> 00:20:02,480
clothing store buying its spring
collection it's goods held for 

427
00:20:02,480 --> 00:20:03,720
sale. 
Why is this so much? 

428
00:20:03,720 --> 00:20:06,480
Harder Why does the law treat 
inventory differently? 

429
00:20:06,760 --> 00:20:07,960
Because inventory. 
Is different. 

430
00:20:07,960 --> 00:20:10,480
It's not supposed to sit there 
for 10 years like a printing 

431
00:20:10,480 --> 00:20:12,280
press. 
It's meant to turn over to be 

432
00:20:12,280 --> 00:20:13,560
sold. 
It's liquid. 

433
00:20:13,680 --> 00:20:17,360
Existing lenders, like lender A 
with the blanket lien, are often

434
00:20:17,360 --> 00:20:19,600
lending against the value of 
that inventory. 

435
00:20:19,720 --> 00:20:21,720
They rely on it for their cash 
flow models. 

436
00:20:21,800 --> 00:20:24,520
They need to know immediately if
someone else is claiming a first

437
00:20:24,520 --> 00:20:27,720
priority right to the new cars 
that just showed up on the lot. 

438
00:20:27,760 --> 00:20:28,920
They can't wait. 
Base to find out their 

439
00:20:28,920 --> 00:20:31,320
collateral base just changed 
precisely the risk is much. 

440
00:20:31,320 --> 00:20:33,080
Higher so the rules are much 
stricter. 

441
00:20:33,080 --> 00:20:34,520
So no 20 day grace. 
Period. 

442
00:20:34,760 --> 00:20:36,440
None. 
Zero. 

443
00:20:37,000 --> 00:20:41,120
To get PMSI super priority and 
inventory you must complete 2 

444
00:20:41,120 --> 00:20:44,840
critical steps and both must be 
done before the debtor receives 

445
00:20:44,840 --> 00:20:47,320
possession of the inventory. 
OK, what's step one? 

446
00:20:47,400 --> 00:20:49,760
First you. 
Must be perfected. 

447
00:20:49,840 --> 00:20:52,600
That means your financing 
statement must already be on 

448
00:20:52,600 --> 00:20:55,240
file before those widgets arrive
at the warehouse. 

449
00:20:55,240 --> 00:20:57,440
And Step 2. 
This sounds like the important 

450
00:20:57,440 --> 00:20:58,640
one. 
This is where people fail. 

451
00:20:58,640 --> 00:21:02,640
On exams, all the time you must 
send an authenticated 

452
00:21:02,640 --> 00:21:05,400
notification to the other 
conflicting security interest 

453
00:21:05,400 --> 00:21:06,720
holders. 
You have to send a letter. 

454
00:21:07,040 --> 00:21:07,640
To who? 
Yes. 

455
00:21:07,880 --> 00:21:10,840
You have to. 
Actively search the UCC records,

456
00:21:10,840 --> 00:21:14,400
find lender A, the one with the 
blanket leaner, and send them a 

457
00:21:14,400 --> 00:21:17,680
formal written notice. 
And what does this notice say? 

458
00:21:18,080 --> 00:21:21,480
It essentially says. 
Dear Lender A Just so you know I

459
00:21:21,480 --> 00:21:24,480
am acquiring or expect to 
acquire a purchase money 

460
00:21:24,480 --> 00:21:28,080
security interest in the debtors
upcoming inventory of widgets 

461
00:21:28,360 --> 00:21:30,280
and this notice has to. 
Arrive before the widgets 

462
00:21:30,280 --> 00:21:32,480
arrive, yes. 
That's the key. 

463
00:21:32,840 --> 00:21:35,480
The other lender has to receive 
it before the debtor receives 

464
00:21:35,480 --> 00:21:39,320
possession of the inventory. 
If you fail to send that notice,

465
00:21:39,320 --> 00:21:42,120
or if you send it but it arrives
one day after the inventory is 

466
00:21:42,120 --> 00:21:44,400
delivered, you lose your super 
priority. 

467
00:21:44,800 --> 00:21:46,440
And what happens then? 
You just lose. 

468
00:21:46,480 --> 00:21:49,040
You fall back into. 
The general priority rules you 

469
00:21:49,040 --> 00:21:52,560
fall back to first to file or 
perfect, which means the. 

470
00:21:52,560 --> 00:21:57,120
Existing blanket lender Lender A
wins because they filed years 

471
00:21:57,120 --> 00:21:58,480
ago. 
Exactly you. 

472
00:21:58,480 --> 00:22:02,640
Just financed a lovely donation 
of inventory to Lender A's 

473
00:22:02,640 --> 00:22:05,760
collateral pool. 
Your client will not be happy. 

474
00:22:05,880 --> 00:22:09,320
This feels like a major. 
Exam strategy point If the fact 

475
00:22:09,320 --> 00:22:13,120
pattern on my screen mentions 
inventory or car dealership or 

476
00:22:13,120 --> 00:22:16,960
floor plan, I should immediately
be looking for that notice step.

477
00:22:17,000 --> 00:22:18,840
Your antenna should go. 
Up instantly. 

478
00:22:18,840 --> 00:22:21,440
The moment you read the word 
inventory in a priority dispute,

479
00:22:21,440 --> 00:22:24,840
your brain should be screaming. 
Notice, notice, notice. 

480
00:22:25,200 --> 00:22:27,360
Did they send the letter? 
When did they send it? 

481
00:22:27,720 --> 00:22:31,000
The Dykema guide on PMSI points 
out this common misconception 

482
00:22:31,000 --> 00:22:33,760
among business owners. 
I paid for it so I should be 

483
00:22:33,760 --> 00:22:35,680
first, but that's not the rule. 
False. 

484
00:22:36,120 --> 00:22:38,680
You paid for it, but if you 
didn't send the notice for the 

485
00:22:38,680 --> 00:22:42,040
inventory, you are second 
Article 9 rewards process and 

486
00:22:42,040 --> 00:22:44,760
public notice, not just the fact
that you provided the purchase 

487
00:22:44,760 --> 00:22:46,400
money. 
It's a procedural minefield. 

488
00:22:46,560 --> 00:22:48,880
It is, but it's. 
A necessary one to protect the 

489
00:22:48,880 --> 00:22:50,760
stability of inventory 
financing. 

490
00:22:50,760 --> 00:22:53,000
OK, that makes sense. 
Let's move on to Section 4. 

491
00:22:53,440 --> 00:22:56,800
The collateral has been sold. 
The car is driven off the lot. 

492
00:22:56,880 --> 00:22:58,600
The TV is in someone's living 
room. 

493
00:22:58,920 --> 00:23:02,400
Now we have a pile of cash or a 
check or maybe a trade in 

494
00:23:02,400 --> 00:23:04,800
vehicle. 
We're talking about proceeds 

495
00:23:05,040 --> 00:23:09,120
right section. 9315 The general 
rule here is continuity. 

496
00:23:09,240 --> 00:23:12,520
It's a sensible rule. 
If you had a perfected security 

497
00:23:12,520 --> 00:23:15,800
interest in the original 
collateral, say the inventory, 

498
00:23:16,160 --> 00:23:18,440
you automatically have a 
perfected security interest in 

499
00:23:18,440 --> 00:23:21,760
the identifiable proceeds. 
When that inventory is sold, the

500
00:23:21,760 --> 00:23:24,400
cash, the. 
Checks the accounts receivable 

501
00:23:24,480 --> 00:23:26,520
as long as you can trace. 
It back to your original 

502
00:23:26,520 --> 00:23:30,080
collateral, your security 
interest continues in it, and 

503
00:23:30,080 --> 00:23:33,480
crucially, the priority date for
the proceeds relates back to the

504
00:23:33,480 --> 00:23:35,800
priority date you had in the 
original collateral. 

505
00:23:35,880 --> 00:23:38,200
That makes perfect sense. 
You don't lose your place in 

506
00:23:38,200 --> 00:23:41,200
line just because the form of 
the collateral changed from a 

507
00:23:41,200 --> 00:23:42,800
car to a check. 
Exactly. 

508
00:23:43,000 --> 00:23:46,280
Otherwise, a security interest 
in inventory would be worthless.

509
00:23:46,480 --> 00:23:48,800
OK, but let's talk. 
About a trickier concept in this

510
00:23:48,800 --> 00:23:51,080
section. 
Future advances. 

511
00:23:51,720 --> 00:23:54,720
This is where you see a lot of 
issues with lines of credit. 

512
00:23:54,920 --> 00:23:57,480
This is the standard. 
Revolving credit scenario. 

513
00:23:57,480 --> 00:23:59,440
It comes up every day in 
business. 

514
00:23:59,640 --> 00:24:03,960
Let's paint the picture. 
Lender A lends $10,000 on day 

515
00:24:03,960 --> 00:24:06,200
one and files a financing 
statement. 

516
00:24:06,800 --> 00:24:10,080
The security agreement has a 
standard dragnet clause, meaning

517
00:24:10,080 --> 00:24:12,080
it says. 
This collateral secures this 

518
00:24:12,080 --> 00:24:15,520
loan and any and all future 
loans or advances made to the 

519
00:24:15,520 --> 00:24:16,920
debtor, right? 
It's a forward. 

520
00:24:16,920 --> 00:24:19,480
Looking clause. 
Then lender B comes in on day 

521
00:24:19,480 --> 00:24:21,320
five. 
They do a lien search, they see 

522
00:24:21,320 --> 00:24:24,160
lender A's filing. 
They lend $10,000 and file their

523
00:24:24,160 --> 00:24:25,640
own statement. 
They know they're in second 

524
00:24:25,640 --> 00:24:27,080
place. 
OK, so far so. 

525
00:24:27,080 --> 00:24:29,880
Good A is first, B is second, 
but then on. 

526
00:24:29,880 --> 00:24:31,680
Day 10, the debtor needs more 
money. 

527
00:24:32,120 --> 00:24:35,520
They go back to lender A and 
draw down another $50,000 under 

528
00:24:35,520 --> 00:24:36,960
that original line of credit 
agreement. 

529
00:24:37,160 --> 00:24:41,040
So now the question. 
Is who has priority on that new 

530
00:24:41,040 --> 00:24:44,280
$50,000? 
Is it lender A who made the 

531
00:24:44,280 --> 00:24:47,760
loan, or lender B who was 
already on file before that new 

532
00:24:47,760 --> 00:24:49,760
money was handed over? 
Logic might tell. 

533
00:24:49,760 --> 00:24:51,160
You it should be Lender B, 
right? 

534
00:24:51,160 --> 00:24:53,360
Because Lender B was on the 
record on day five. 

535
00:24:53,360 --> 00:24:56,320
That new money from lender A 
didn't even appear until day 10.

536
00:24:56,880 --> 00:25:00,560
From B's perspective, they were 
there first with respect to that

537
00:25:00,560 --> 00:25:02,080
new advance. 
But Article 9. 

538
00:25:02,080 --> 00:25:04,320
Says Article 9 Says. 
Lender A wins. 

539
00:25:04,320 --> 00:25:06,920
The priority for the future 
advance relates back to the 

540
00:25:06,920 --> 00:25:10,560
original filing on day one. 
Lender A beats Lender B for 

541
00:25:10,560 --> 00:25:13,480
priority on all amounts 
advanced, even the money lent 

542
00:25:13,520 --> 00:25:15,520
after Lender B arrived on the 
scene. 

543
00:25:15,640 --> 00:25:18,520
Why does the law allow? 
This it seems to put Lender B in

544
00:25:18,520 --> 00:25:21,280
a very precarious position. 
They can't be sure how much debt

545
00:25:21,280 --> 00:25:23,640
is actually senior to them. 
It's about commercial. 

546
00:25:23,640 --> 00:25:26,080
Efficiency. 
Imagine if Lender A had to do a 

547
00:25:26,080 --> 00:25:29,840
brand new UCC search and file a 
new financing statement every 

548
00:25:29,840 --> 00:25:33,280
single time the debtor drew 
another $100 on a revolving line

549
00:25:33,280 --> 00:25:34,720
of credit. 
Commerce would grind. 

550
00:25:34,720 --> 00:25:37,680
To a halt it would the. 
Transaction cost would be 

551
00:25:37,680 --> 00:25:40,760
insane. 
So the first to file rule also 

552
00:25:40,760 --> 00:25:43,960
serves as a notice to the world.
It puts lender B on notice and 

553
00:25:43,960 --> 00:25:47,160
says hey lender A is here, they 
filed first. 

554
00:25:47,480 --> 00:25:50,720
Their security agreement might 
cover future advances. 

555
00:25:50,920 --> 00:25:54,760
Be warned if you're going to 
lend you need to talk to lender 

556
00:25:54,880 --> 00:25:57,480
A and figure out the situation. 
Maybe get a subordination 

557
00:25:57,480 --> 00:25:59,000
agreement. 
It puts the burden. 

558
00:25:59,000 --> 00:26:01,760
On the second lender to do their
due diligence exactly. 

559
00:26:02,000 --> 00:26:05,120
However, there is a nasty little
exception here when a lend 

560
00:26:05,120 --> 00:26:07,880
creditor shows up. 
Specifically, think of the IRS 

561
00:26:07,880 --> 00:26:10,880
with a tax lend or a judgment 
creditor who has levied. 

562
00:26:11,240 --> 00:26:13,880
This is the 45 day rule. 
OK, this sounds technical. 

563
00:26:13,880 --> 00:26:16,240
Section 9323 It is. 
It creates. 

564
00:26:16,240 --> 00:26:18,720
A limit on that future advanced 
superpower. 

565
00:26:19,080 --> 00:26:22,400
The rule says that if a person 
becomes a land creditor, say the

566
00:26:22,400 --> 00:26:25,200
sheriff levies on the debtors 
assets on behalf of a judgment 

567
00:26:25,200 --> 00:26:28,320
winner, the secured party is 
protected for future advances 

568
00:26:28,320 --> 00:26:30,280
they make within the next 40-5 
days. 

569
00:26:30,400 --> 00:26:32,920
Why 45? 
Days seems arbitrary. 

570
00:26:33,080 --> 00:26:35,440
It is a bit. 
Arbitrary, but it's designed to 

571
00:26:35,440 --> 00:26:37,920
mirror the federal tax land 
rules to create some 

572
00:26:37,920 --> 00:26:40,600
consistency. 
It gives the bank a reasonable 

573
00:26:40,600 --> 00:26:43,440
window of time. 
The law basically assumes the 

574
00:26:43,440 --> 00:26:46,560
bank can't possibly know about a
judgement loan instantly. 

575
00:26:46,840 --> 00:26:50,320
They need some time to discover 
the lien exists, but after 45. 

576
00:26:50,320 --> 00:26:52,680
Days. 
What happens to advances made on

577
00:26:52,680 --> 00:26:56,640
day 46 after 45? 
Days, any new money you lend is 

578
00:26:56,640 --> 00:26:58,400
subordinate to the lien 
creditor. 

579
00:26:58,960 --> 00:27:01,480
There's a small exception if you
can prove you made the advance 

580
00:27:01,480 --> 00:27:03,360
without any knowledge of the 
lien, but that's a tough 

581
00:27:03,360 --> 00:27:06,000
standard. 
Generally, this rule effectively

582
00:27:06,000 --> 00:27:09,000
caps a revolving line of credit.
So if I'm a bank. 

583
00:27:09,000 --> 00:27:12,640
Loan officer and I get a notice 
that my borrower just got hit 

584
00:27:12,640 --> 00:27:15,240
with a massive judgement lien. 
You have 45. 

585
00:27:15,240 --> 00:27:17,840
Days to cut off their credit 
line or at least stop making 

586
00:27:17,840 --> 00:27:19,440
new. 
Advances or you risk losing. 

587
00:27:19,440 --> 00:27:22,280
Priority on any new cash you 
hand out after that window 

588
00:27:22,280 --> 00:27:24,760
closes, you're throwing good 
money after bad and you're 

589
00:27:24,760 --> 00:27:26,280
throwing it behind the lien 
creditor. 

590
00:27:26,520 --> 00:27:29,600
All right, let's get even. 
Deeper into the weeds, Section 

591
00:27:29,600 --> 00:27:33,160
5, we've been talking a lot 
about filing versus filing first

592
00:27:33,160 --> 00:27:36,640
in time, but the Picker article 
from the Chicago Kent Law Review

593
00:27:36,640 --> 00:27:39,840
that you mentioned introduces a 
different idea of perfection 

594
00:27:39,840 --> 00:27:42,600
hierarchy. 
He talks about control versus 

595
00:27:42,600 --> 00:27:44,200
filing. 
This is where we move. 

596
00:27:44,200 --> 00:27:47,360
Away from a purely temporal 
system, who was first in time? 

597
00:27:47,360 --> 00:27:49,160
And we look at the method of 
perfection. 

598
00:27:49,520 --> 00:27:53,120
Picker argues, and I think he's 
right, that Article 9 implicitly

599
00:27:53,120 --> 00:27:56,080
creates classes or tiers of 
perfection. 

600
00:27:56,480 --> 00:27:58,400
Filing is good, it's the 
standard. 

601
00:27:58,400 --> 00:28:01,520
Possession is better, and 
control is best. 

602
00:28:01,720 --> 00:28:04,480
Control is best. 
How does that actually play out 

603
00:28:04,480 --> 00:28:06,760
in a priority dispute? 
Let's take the classic. 

604
00:28:06,760 --> 00:28:10,320
Example, a deposit account, a 
business's bank account, Now you

605
00:28:10,320 --> 00:28:13,600
can perfect a security interest 
in a gross con if it constitutes

606
00:28:13,680 --> 00:28:16,520
proceeds of your other 
collateral like inventory. 

607
00:28:16,840 --> 00:28:19,840
And you do that just by having a
financing statement on file that

608
00:28:19,840 --> 00:28:22,720
covers inventory and proceeds. 
So that's the filing method. 

609
00:28:23,000 --> 00:28:25,960
Right, but. 
Someone else, usually the bank 

610
00:28:25,960 --> 00:28:29,480
where the account is actually 
held, can perfect their interest

611
00:28:29,480 --> 00:28:32,000
by control. 
They have control because, well,

612
00:28:32,000 --> 00:28:34,600
they're the bank. 
They can refuse to pay out funds

613
00:28:34,600 --> 00:28:37,040
without your consent. 
So if I have control. 

614
00:28:37,560 --> 00:28:40,480
Because I'm the bank holding the
money and you just have a UCC 

615
00:28:40,640 --> 00:28:44,280
one filing that claims the 
account as proceeds I win a. 

616
00:28:44,280 --> 00:28:47,480
Security interest perfected by 
control has priority over a 

617
00:28:47,480 --> 00:28:50,640
security interest perfected 
merely by filing, even if I 

618
00:28:50,640 --> 00:28:52,400
filed. 
Five years ago and you only got 

619
00:28:52,400 --> 00:28:55,400
control today even then. 
This is what pick a call is, a 

620
00:28:55,400 --> 00:28:58,360
non temporal priority rule. 
Time is irrelevant. 

621
00:28:58,880 --> 00:29:02,080
The method Trump's the timeline.
And what's the policy? 

622
00:29:02,080 --> 00:29:04,760
Behind that, why reward control 
so heavily? 

623
00:29:04,760 --> 00:29:07,160
Because control is a more. 
Robust form of perfection. 

624
00:29:07,160 --> 00:29:09,920
It actually prevents the debtor 
from dissipating the collateral.

625
00:29:09,920 --> 00:29:12,040
If you have control over the 
bank account, the debtor can't 

626
00:29:12,040 --> 00:29:13,400
just write a check and spend the
money. 

627
00:29:13,760 --> 00:29:16,360
A financing statement on the 
other hand, is just a piece of 

628
00:29:16,360 --> 00:29:18,800
paper. 
It gives public notice, but it 

629
00:29:18,800 --> 00:29:20,880
doesn't stop the debtor from 
draining the account. 

630
00:29:21,400 --> 00:29:24,640
The law rewards the method that 
best reduces risk and provides 

631
00:29:24,640 --> 00:29:27,360
the most tangible real world 
grasp on the asset. 

632
00:29:27,640 --> 00:29:30,080
The fist beats the. 
Claim ticket the fist beats. 

633
00:29:30,080 --> 00:29:33,160
The ticket every time. 
Speaking of complex. 

634
00:29:33,160 --> 00:29:34,640
Puzzles that make your head 
hurt. 

635
00:29:34,960 --> 00:29:37,640
We absolutely have to talk about
the circularly. 

636
00:29:37,640 --> 00:29:40,840
And I remember reading the 
Caterpillar case, Caterpillar 

637
00:29:40,840 --> 00:29:44,680
Financial Services versus 
People's National Bank, and 

638
00:29:44,680 --> 00:29:46,280
feeling like my brain was 
melting. 

639
00:29:46,880 --> 00:29:48,640
It is the stuff. 
Of law school nightmares, but 

640
00:29:48,640 --> 00:29:51,360
it's actually a beautiful little
logic puzzle once you see how 

641
00:29:51,360 --> 00:29:53,800
it's solved, it's very elegant. 
Okay layout. 

642
00:29:53,800 --> 00:29:56,360
The setup for us, the paradox. 
The setup is this. 

643
00:29:56,360 --> 00:30:00,040
You have 3 creditors, AB and C, 
and based on the normal filing 

644
00:30:00,040 --> 00:30:03,440
rules, A has priority over B, A 
filed first. 

645
00:30:03,440 --> 00:30:05,520
OK, AB. 
And B has priority. 

646
00:30:05,520 --> 00:30:08,920
Over C because B filed before C,
so ABC. 

647
00:30:09,000 --> 00:30:11,840
It's a simple straight line. 
First come first served right, 

648
00:30:12,040 --> 00:30:14,200
but then. 
A and C get together for a side 

649
00:30:14,200 --> 00:30:15,960
deal. 
A signs a subordination 

650
00:30:15,960 --> 00:30:19,280
agreement, a contract in which A
agrees to let C have priority 

651
00:30:19,280 --> 00:30:21,000
over A. 
So now A beats. 

652
00:30:21,000 --> 00:30:25,600
BB beats C, but C beats A. 
It's rock, paper, scissors. 

653
00:30:25,600 --> 00:30:27,840
It's a circle. 
If the debtor goes bankrupt and 

654
00:30:27,840 --> 00:30:30,480
there's not enough money to go 
around, who gets paid first? 

655
00:30:30,720 --> 00:30:32,480
You can't just go in circles. 
Forever. 

656
00:30:32,480 --> 00:30:34,560
The court has to cut the knot 
somehow. 

657
00:30:34,920 --> 00:30:38,040
And the majority rule, the one 
used in the Caterpillar case, is

658
00:30:38,040 --> 00:30:40,280
the partial subordination rule. 
OK, walk us through the. 

659
00:30:40,280 --> 00:30:41,760
Math. 
Let's use a hypothetical. 

660
00:30:42,080 --> 00:30:46,520
There's a pot of money, say 
$100,000, and AB and C are each 

661
00:30:46,520 --> 00:30:48,400
owed $40,000. 
Perfect. 

662
00:30:48,480 --> 00:30:49,600
So. 
Step 1. 

663
00:30:50,200 --> 00:30:52,360
You ignore the subordination 
agreement for a moment. 

664
00:30:52,440 --> 00:30:54,320
You look at a. 
A has the first priority 

665
00:30:54,320 --> 00:30:57,200
position under the statute. 
So you set aside the amount of 

666
00:30:57,320 --> 00:31:00,400
A's claim from the pot. 
We take $40,000 out of the 

667
00:31:00,400 --> 00:31:02,440
$100,000 and we put it in a 
separate pile. 

668
00:31:02,440 --> 00:31:04,440
We can call that A's slot. 
OK, so we have A's. 

669
00:31:04,440 --> 00:31:08,200
Slot with $40,000 and a 
remaining general pot of 

670
00:31:08,360 --> 00:31:10,440
$50,000. 
Step 2. 

671
00:31:10,600 --> 00:31:12,160
Now we look at the subordination
agreement. 

672
00:31:12,400 --> 00:31:15,400
Because A subordinated its 
position to C we take that 

673
00:31:15,400 --> 00:31:19,360
$40,000 that we set aside in a 
slot and we pay C first from 

674
00:31:19,360 --> 00:31:20,920
that money. 
So C gets paid. 

675
00:31:20,920 --> 00:31:24,000
With A's money, correct C. 
Essentially gets to jump into 

676
00:31:24,040 --> 00:31:26,400
A's shoes, but only up to the 
amount of A's claim. 

677
00:31:26,640 --> 00:31:29,840
C is owed $40,000. 
There's $40,000 in a slot, so C 

678
00:31:29,840 --> 00:31:31,520
gets paid in full. 
OK, C is happy. 

679
00:31:32,080 --> 00:31:34,320
A gets nothing from that slot 
because C took it all. 

680
00:31:34,480 --> 00:31:37,320
What about B? 
B wasn't part of this side deal 

681
00:31:37,320 --> 00:31:41,080
between A and C and that is the.
Absolute key B is the innocent 

682
00:31:41,080 --> 00:31:45,160
bystander, so B's rights cannot 
be helped or hurt by a deal they

683
00:31:45,160 --> 00:31:49,640
weren't a party to. 
So step 3B gets paid from the 

684
00:31:49,640 --> 00:31:52,560
remaining general pot, the 
$60,000 that's leftover. 

685
00:31:53,120 --> 00:31:59,160
B is owed $40,000, B takes their
$40,000, so B gets paid. 

686
00:31:59,160 --> 00:32:02,480
In full, just as they would have
if the subordination never 

687
00:32:02,480 --> 00:32:03,960
happened. 
Ghee. 

688
00:32:03,960 --> 00:32:07,040
Is totally unaffected. 
B gets exactly what B would have

689
00:32:07,040 --> 00:32:10,240
gotten if A had simply kept its 
priority, so C is paid. 

690
00:32:10,240 --> 00:32:12,400
B is paid. 
That's $80,000 out of the pot. 

691
00:32:12,400 --> 00:32:15,160
There's $20,000 left. 
What happens to A? 

692
00:32:15,160 --> 00:32:16,600
A gets whatever. 
Is leftover. 

693
00:32:16,600 --> 00:32:19,440
In this case, A gets the 
remaining $20,000. 

694
00:32:19,840 --> 00:32:21,920
A started at the front of the 
line, but because they 

695
00:32:21,920 --> 00:32:24,920
voluntarily subordinated their 
claim to C, they effectively 

696
00:32:24,920 --> 00:32:26,080
gave away their seat at the 
table. 

697
00:32:26,160 --> 00:32:29,240
That's brilliant, actually. 
It resolves the logical paradox 

698
00:32:29,240 --> 00:32:31,400
by essentially treating the 
subordination as a private 

699
00:32:31,400 --> 00:32:34,800
transfer of A's priority rights 
to C, but only to the extent of 

700
00:32:34,880 --> 00:32:37,480
A's claim and without harming 
the rights of the non consenting

701
00:32:37,480 --> 00:32:39,360
creditor B. 
Exactly it. 

702
00:32:39,360 --> 00:32:42,160
Prevents C from leapfrogging 
over B just because A was nice 

703
00:32:42,160 --> 00:32:44,080
to see. 
B's position in the hierarchy is

704
00:32:44,080 --> 00:32:46,320
absolutely preserved. 
One last technical. 

705
00:32:46,320 --> 00:32:52,000
Area before we shift to pure 
strategy Fixtures section 9334 

706
00:32:52,240 --> 00:32:54,840
the great clash of. 
The Titans real estate law 

707
00:32:54,840 --> 00:32:58,520
versus the UCC A fixture is 
something that starts as goods, 

708
00:32:58,840 --> 00:33:03,080
as chattel, but becomes a fix to
real estate like a commercial. 

709
00:33:03,080 --> 00:33:06,360
Oven bolted to the floor of a 
restaurant or an HVAC system 

710
00:33:06,360 --> 00:33:08,320
installed in an office building?
Exactly. 

711
00:33:08,480 --> 00:33:11,240
It's goods, but it's also now 
sort of part of the building. 

712
00:33:11,400 --> 00:33:14,880
So who wins A? 
Priority Dispute the bank with 

713
00:33:14,880 --> 00:33:17,920
the mortgage on the building or 
the equipment lender who 

714
00:33:17,920 --> 00:33:20,080
financed the oven. 
This is all about. 

715
00:33:20,080 --> 00:33:23,040
Where you give notice, it's a 
filing rule to beat the mortgage

716
00:33:23,040 --> 00:33:25,360
holder. 
The Article 9 creditor usually 

717
00:33:25,360 --> 00:33:28,080
needs to make a fixture filing, 
and that's different from a. 

718
00:33:28,080 --> 00:33:30,760
Standard UCC one filing. 
It is a standard. 

719
00:33:30,760 --> 00:33:33,240
UCC one is filed essentially 
with the Secretary of State. 

720
00:33:33,440 --> 00:33:36,320
A fixture filing has to be filed
in the real property records of 

721
00:33:36,320 --> 00:33:38,040
the county where the building is
located. 

722
00:33:38,200 --> 00:33:41,120
The same office where you'd file
a deed or a mortgage, you have 

723
00:33:41,120 --> 00:33:43,080
to file it in the. 
Chain of title for the land 

724
00:33:43,080 --> 00:33:46,280
itself, yes. 
Because a mortgage lender is 

725
00:33:46,280 --> 00:33:49,400
only expected to search the land
records, they're not going to be

726
00:33:49,400 --> 00:33:52,920
searching the statewide UCC 
database for chattel filings. 

727
00:33:53,320 --> 00:33:56,400
So if you file in the wrong 
office, if you just send a 

728
00:33:56,400 --> 00:33:59,880
standard UCC one to the capital,
the mortgage lender wins. 

729
00:33:59,960 --> 00:34:02,520
You have to shout in the room 
where the person you're trying 

730
00:34:02,520 --> 00:34:05,000
to warn is actually listening. 
OK, we. 

731
00:34:05,000 --> 00:34:06,640
Have covered a massive amount of
ground. 

732
00:34:06,640 --> 00:34:10,159
Let's try to synthesize all of 
this into Section 6 Exam 

733
00:34:10,159 --> 00:34:13,639
strategy. 
If I am a student staring at a 

734
00:34:13,639 --> 00:34:17,719
complex Chapter 4 fact pattern 
on an exam, how do I survive? 

735
00:34:17,880 --> 00:34:19,320
OK, first and most. 
Important rule. 

736
00:34:19,320 --> 00:34:21,600
I cannot stress this enough. 
Draw a timeline. 

737
00:34:21,600 --> 00:34:23,920
Do not try to do it in your. 
Head never you will fail. 

738
00:34:23,920 --> 00:34:26,679
I promise you, you will fail. 
Priority is almost entirely A 

739
00:34:26,679 --> 00:34:28,800
temporal concept. 
You need to see the sequence of 

740
00:34:28,800 --> 00:34:30,639
events visually laid out in 
front of you. 

741
00:34:30,639 --> 00:34:33,719
What key events or dates? 
Need to go on the timeline for 

742
00:34:33,719 --> 00:34:35,880
every single. 
Party in the dispute you need to

743
00:34:35,880 --> 00:34:41,040
mark 4 potential points in time 
1 the precise state of filing 2 

744
00:34:41,400 --> 00:34:44,600
the precise state of attachment 
and remember 3 things value 

745
00:34:44,679 --> 00:34:49,719
rights and an agreement 3 The 
recise date of erfection, which 

746
00:34:49,719 --> 00:34:53,679
is the later of filing or 
attachment four and the precise 

747
00:34:53,679 --> 00:34:56,440
date of notice, but only if 
you're dealing with an inventory

748
00:34:56,440 --> 00:34:58,040
PMSI. 
OK, I've drawn my. 

749
00:34:58,040 --> 00:35:01,280
Timeline it's beautiful what the
next step in the analysis step 

750
00:35:01,280 --> 00:35:03,000
one is to. 
Identify the status of each 

751
00:35:03,000 --> 00:35:05,160
party before you even start 
applying rules. 

752
00:35:05,160 --> 00:35:07,280
Label everyone. 
Write it next to their name on 

753
00:35:07,280 --> 00:35:10,640
your scratch paper. 
Lender A Perfected SP Lender B 

754
00:35:10,680 --> 00:35:14,080
Unperfected SP Trustee Lynn 
Creditor Frank Buyer. 

755
00:35:14,440 --> 00:35:16,520
Get your cast of character 
straight once everyone has a 

756
00:35:16,520 --> 00:35:17,720
label. 
What's Step 2? 

757
00:35:18,000 --> 00:35:20,400
Step 2 is. 
To check for special rules 

758
00:35:20,920 --> 00:35:23,480
before you jump to the general 
rule, you have to scan for the 

759
00:35:23,480 --> 00:35:26,640
exceptions. 
Ask yourself, is there a PMS I 

760
00:35:26,640 --> 00:35:29,240
involved here? 
Does anyone have control over 

761
00:35:29,240 --> 00:35:31,800
the collateral? 
Is this a fixture dispute? 

762
00:35:32,680 --> 00:35:35,400
Is there a bankruptcy trustee 
triggering the strong arm 

763
00:35:35,400 --> 00:35:37,040
clause? 
And if the answer to all. 

764
00:35:37,040 --> 00:35:41,240
Of those is no, then and. 
Only then do you move to step 

765
00:35:41,240 --> 00:35:43,760
three. 
If no special rule applies, you 

766
00:35:43,760 --> 00:35:47,080
revert to the baseline. 
You go back to section 9322 

767
00:35:47,360 --> 00:35:49,920
first to file or perfect. 
And what are the most? 

768
00:35:49,920 --> 00:35:53,120
Common errors you see students 
make the tramps they fall into 

769
00:35:53,240 --> 00:35:55,640
the biggest 1 is. 
Assuming that new money always 

770
00:35:55,640 --> 00:35:58,120
wins, they see a PMSI fact 
pattern. 

771
00:35:58,120 --> 00:36:00,640
They see that a lender provided 
the money to buy the collateral,

772
00:36:00,640 --> 00:36:02,280
and they just assume that lender
wins. 

773
00:36:02,360 --> 00:36:04,400
But they don't. 
Unless they follow the rules, 

774
00:36:04,400 --> 00:36:06,600
they only win if. 
They meet the strict compliance 

775
00:36:06,600 --> 00:36:10,200
rules for perfection and notice.
Another big one is forgetting 

776
00:36:10,200 --> 00:36:12,040
that filing can happen before 
attachment. 

777
00:36:12,440 --> 00:36:15,560
Students see a filing date of 
January 1st and a loan date of 

778
00:36:15,560 --> 00:36:17,760
February 1st and their brain 
gets confused. 

779
00:36:18,000 --> 00:36:20,720
They try to start the priority 
clock on February 1st. 

780
00:36:21,080 --> 00:36:23,200
No, the priority date is the 
filing date. 

781
00:36:23,200 --> 00:36:25,800
January 1st and the last one. 
Thinking that knowledge. 

782
00:36:25,800 --> 00:36:28,760
Matters but your honor, he. 
Knew about my unperfected linen.

783
00:36:28,840 --> 00:36:31,120
He's acting in bad faith. 
It doesn't matter. 

784
00:36:31,280 --> 00:36:35,080
With very, very few exceptions 
for actual fraud, Article 9 is a

785
00:36:35,120 --> 00:36:38,680
pure race statute. 
Knowledge of a prior unperfected

786
00:36:38,800 --> 00:36:41,960
security interest is irrelevant 
for priority purposes. 

787
00:36:42,280 --> 00:36:45,400
You can know all about my 
unperfected deal, race to the 

788
00:36:45,400 --> 00:36:47,800
filing office, file 1st, and 
beat me. 

789
00:36:48,080 --> 00:36:50,480
It's cold, it's brutal, but it's
the law. 

790
00:36:51,080 --> 00:36:54,400
It rewards diligence above all 
else, Which brings us to our. 

791
00:36:54,400 --> 00:36:57,440
Outro, I think the grand 
philosophy of all this, if 

792
00:36:57,440 --> 00:36:59,840
there's one. 
Theme that runs through every 

793
00:36:59,840 --> 00:37:01,880
rule we've discussed. 
It has to be commercial 

794
00:37:01,880 --> 00:37:03,720
certainty, certainty over 
everything. 

795
00:37:03,720 --> 00:37:06,040
Else over fairness, over 
knowledge, over everything. 

796
00:37:06,040 --> 00:37:08,360
It is the. 
Entire system is designed to 

797
00:37:08,360 --> 00:37:11,960
reward those who use the public 
notice system and to penalize 

798
00:37:11,960 --> 00:37:14,240
secret liens. 
It's constructed so that a 

799
00:37:14,240 --> 00:37:16,240
lender in New York can feel 
comfortable lending to a 

800
00:37:16,240 --> 00:37:19,560
borrower in California-based 
solely on checking a public 

801
00:37:19,560 --> 00:37:21,760
database and then filing their 
own notice. 

802
00:37:22,200 --> 00:37:24,280
That's what oils the Gears of 
the economy. 

803
00:37:24,520 --> 00:37:26,760
But here's a provocative. 
Thought to leave you with as we 

804
00:37:26,760 --> 00:37:29,720
wrap up. 
We rely on this first, a file 

805
00:37:29,720 --> 00:37:31,600
system. 
But the system itself is kind of

806
00:37:33,400 --> 00:37:35,560
blind, isn't it? 
What do you mean by blind? 

807
00:37:35,760 --> 00:37:39,200
The financing statement. 
On file the UCC one, it doesn't 

808
00:37:39,200 --> 00:37:41,680
tell you how much money is owed,
it doesn't tell you the interest

809
00:37:41,680 --> 00:37:44,520
rate. 
It just says a lien might exist 

810
00:37:44,520 --> 00:37:47,400
on these types of assets. 
You still have to pick up the 

811
00:37:47,400 --> 00:37:49,760
phone and call the other lender 
to get the details. 

812
00:37:49,760 --> 00:37:52,120
All right, it's a. 
Notice filing system, not a 

813
00:37:52,120 --> 00:37:54,520
transactional one. 
It's just a red flag that tells 

814
00:37:54,520 --> 00:37:56,920
you to investigate further. 
But we live in a world of. 

815
00:37:56,920 --> 00:38:00,080
Blockchain technology and 
instant Ledger verification. 

816
00:38:00,160 --> 00:38:02,760
Exactly. 
So the question for the future 

817
00:38:02,760 --> 00:38:07,640
is, is this system archaic? 
Could we or should we move to a 

818
00:38:07,640 --> 00:38:11,520
transaction filing system where 
the filing itself contains the 

819
00:38:11,520 --> 00:38:15,440
real time data of the actual 
debt, where priority is absolute

820
00:38:15,440 --> 00:38:17,960
and transparent based on a 
public Ledger that would 

821
00:38:17,960 --> 00:38:20,040
eliminate the PRE? 
Filing ambiguity we talked about

822
00:38:20,040 --> 00:38:22,800
it would eliminate the problem 
of future advances not being out

823
00:38:22,800 --> 00:38:24,840
of the record. 
You know, the exact amount of 

824
00:38:24,840 --> 00:38:26,360
the senior debt at any given 
moment. 

825
00:38:26,480 --> 00:38:29,240
It would. 
But it might also destroy the 

826
00:38:29,240 --> 00:38:32,320
flexibility of the floating, 
lean and revolving lines of 

827
00:38:32,320 --> 00:38:35,240
credit that are the lifeblood of
so many businesses. 

828
00:38:35,560 --> 00:38:38,520
It's a huge debate for the 
future of commercial law, but 

829
00:38:38,520 --> 00:38:40,240
for now, for the. 
Exam you're about to take. 

830
00:38:40,600 --> 00:38:44,000
These are the rules and they are
the traffic lights of a multi 

831
00:38:44,000 --> 00:38:48,120
trillion dollar credit economy. 
Without them, commerce crashes. 

832
00:38:48,120 --> 00:38:50,880
So Dr. Carefully. 
And file early. 

833
00:38:51,080 --> 00:38:52,560
Thanks for listening to this. 
Deep dive. 

834
00:38:52,840 --> 00:38:53,920
We'll see you in the next 
chapter. 

835
00:38:54,240 --> 00:38:56,560
All right, everyone. 
Let's talk about what happens 

836
00:38:56,560 --> 00:38:59,600
when things go South. 
A business defaults and suddenly

837
00:38:59,600 --> 00:39:02,600
you have a pack of creditors all
fighting over the same assets. 

838
00:39:02,880 --> 00:39:06,920
It gets messy fast. 
UCC Article 9's priority rules? 

839
00:39:07,080 --> 00:39:10,240
Well, that's the playbook. 
It's the set of cold, hard rules

840
00:39:10,240 --> 00:39:13,160
that decides who gets paid 1st 
and who gets nothing. 

841
00:39:13,640 --> 00:39:16,160
If you're going to master 
commercial finance, or more 

842
00:39:16,160 --> 00:39:18,760
importantly, ace your secure 
transactions exam, you 

843
00:39:18,840 --> 00:39:21,360
absolutely have to know these 
rules inside and out. 

844
00:39:21,600 --> 00:39:24,520
So let's dive in. 
So here's our game plan. 

845
00:39:24,600 --> 00:39:26,680
We're going to build this 
analysis from the ground up. 

846
00:39:26,840 --> 00:39:29,760
We'll start with a fundamental 
baseline rule, the 1st in time 

847
00:39:29,760 --> 00:39:31,680
principle. 
Then we'll get into the really 

848
00:39:31,680 --> 00:39:34,360
interesting stuff, the powerful 
exceptions that can completely 

849
00:39:34,360 --> 00:39:37,040
flip the outcome, like the 
special super priority for 

850
00:39:37,040 --> 00:39:39,600
purchase money lenders and the 
protections we give to everyday 

851
00:39:39,600 --> 00:39:41,640
buyers. 
We'll also see how the entire 

852
00:39:41,640 --> 00:39:44,440
game changes when a bankruptcy 
trustee walks onto the field. 

853
00:39:44,520 --> 00:39:47,480
And finally, we'll layer in a 
couple of advanced concepts to 

854
00:39:47,480 --> 00:39:49,040
really fine tune your 
understanding. 

855
00:39:49,840 --> 00:39:51,240
OK, let's start at the 
beginning. 

856
00:39:51,320 --> 00:39:53,520
We're talking about the 
foundational principle here. 

857
00:39:53,840 --> 00:39:57,560
This is the rule that's going to
govern, I don't know, 90% of the

858
00:39:57,560 --> 00:39:59,160
priority disputes you'll ever 
see. 

859
00:39:59,400 --> 00:40:01,600
If you get this right, you are 
well on your way. 

860
00:40:02,320 --> 00:40:05,720
Now, before we get into the 
actual rules, let's just be 

861
00:40:05,720 --> 00:40:08,040
crystal clear on what we mean by
priority. 

862
00:40:08,560 --> 00:40:11,440
This isn't about what seems fair
or who deserves it more. 

863
00:40:11,680 --> 00:40:15,160
Article 9 is a system of 
mechanical, almost brutal rules 

864
00:40:15,360 --> 00:40:17,360
that are designed to create 
commercial certainty. 

865
00:40:17,600 --> 00:40:20,720
It answers one simple question. 
When the music stops and there's

866
00:40:20,720 --> 00:40:24,760
not enough money to go around, 
who is first in line and this is

867
00:40:24,760 --> 00:40:26,120
it. 
This is the big one. 

868
00:40:26,320 --> 00:40:29,920
UCC section 9322. 
It's the first to file or 

869
00:40:29,920 --> 00:40:32,440
perfect rule. 
You can think of this as the sun

870
00:40:32,440 --> 00:40:35,560
in the Article 9 solar system. 
Almost every single problem 

871
00:40:35,560 --> 00:40:37,760
starts and often ends right 
here. 

872
00:40:38,040 --> 00:40:40,600
It's your default rule that 
always applies unless you can 

873
00:40:40,600 --> 00:40:43,240
find a specific statutory 
exception that tells you to do 

874
00:40:43,240 --> 00:40:46,200
something else. 
OK, so this table breaks it all 

875
00:40:46,200 --> 00:40:48,520
down into the three basic 
scenarios you're going to face. 

876
00:40:48,840 --> 00:40:51,200
The main event, the one that 
causes the most confusion, is 

877
00:40:51,200 --> 00:40:54,240
the top row, a battle between 
two perfected creditors. 

878
00:40:54,440 --> 00:40:55,840
Who wins? 
It's simple. 

879
00:40:56,360 --> 00:40:59,240
The first one to either file 
their financing statement or 

880
00:40:59,240 --> 00:41:01,440
perfect their interest, 
whichever happened first. 

881
00:41:02,120 --> 00:41:05,040
The next two are easy. 
A perfected creditor will 

882
00:41:05,040 --> 00:41:07,520
always, always beat an 
unperfected creditor. 

883
00:41:07,720 --> 00:41:10,360
No contest. 
And if you have two unperfected 

884
00:41:10,360 --> 00:41:13,080
creditors duking it out, well, 
the tiebreaker is just whose 

885
00:41:13,080 --> 00:41:16,000
interest attached 1st. 
And this little timeline here 

886
00:41:16,000 --> 00:41:18,240
shows you just how powerful this
rule is. 

887
00:41:18,640 --> 00:41:20,040
Let's walk through it. 
Look closely. 

888
00:41:20,200 --> 00:41:23,360
Bank A files way back on day 
one, before they've even lent a 

889
00:41:23,360 --> 00:41:25,720
dime. 
Then Bank B comes along, lends 

890
00:41:25,720 --> 00:41:28,400
money files, and actually 
perfects its interest before 

891
00:41:28,400 --> 00:41:30,680
Bank A does. 
You'd think Bank B would win, 

892
00:41:30,680 --> 00:41:32,080
right? 
But it doesn't matter. 

893
00:41:32,240 --> 00:41:35,040
Because Bank A filed first. 
Its priority relates all the way

894
00:41:35,040 --> 00:41:37,520
back to day one. 
This is what we mean by the race

895
00:41:37,520 --> 00:41:40,280
to the filing office. 
The system rewards whoever gives

896
00:41:40,280 --> 00:41:43,960
public notice first. 
OK, so now that we have that 

897
00:41:43,960 --> 00:41:47,320
baseline rule firmly in our 
minds, let's talk about its most

898
00:41:47,320 --> 00:41:50,160
critical exception. 
This is the purchase money 

899
00:41:50,160 --> 00:41:53,640
security interest, or PMSI as we
call it, and it's a huge deal. 

900
00:41:53,840 --> 00:41:56,840
It's a tool that allows a new 
lender to get what we call super

901
00:41:56,840 --> 00:42:00,400
priority, letting them jump to 
the very front of the line even 

902
00:42:00,400 --> 00:42:02,600
ahead of a bank that filed years
earlier. 

903
00:42:03,360 --> 00:42:07,360
So what exactly is a PMSI? 
It's a special type of security 

904
00:42:07,360 --> 00:42:10,120
interest that happens when the 
loan you're making is used to 

905
00:42:10,120 --> 00:42:12,440
buy the very thing that's going 
to serve as collateral. 

906
00:42:12,840 --> 00:42:14,640
The classic example is a car 
loan. 

907
00:42:14,880 --> 00:42:17,400
The bank gives you money, you 
use that exact money to buy the 

908
00:42:17,400 --> 00:42:18,920
car, and the car is the 
collateral. 

909
00:42:19,400 --> 00:42:22,320
The law loves these because they
help the debtor that new assets,

910
00:42:22,320 --> 00:42:24,840
which in theory makes the whole 
pie bigger for all the 

911
00:42:24,840 --> 00:42:28,120
creditors. 
Now this is a huge exam point 

912
00:42:28,120 --> 00:42:30,280
folks. 
The rules for getting PMS I 

913
00:42:30,280 --> 00:42:33,640
super priority are completely 
different depending on what kind

914
00:42:33,640 --> 00:42:34,880
of collateral we're talking 
about. 

915
00:42:35,280 --> 00:42:37,360
For equipment, the rule is 
pretty generous. 

916
00:42:37,520 --> 00:42:40,960
You get a 20 day grace period to
perfect your interest after the 

917
00:42:40,960 --> 00:42:43,160
debtor gets the stuff. 
But for inventory? 

918
00:42:43,240 --> 00:42:45,600
Whoa. 
The rules are incredibly strict.

919
00:42:45,880 --> 00:42:48,680
You have to perfect before the 
debtor ever touches the goods, 

920
00:42:48,920 --> 00:42:51,680
and you have to go out of your 
way to notify any earlier 

921
00:42:51,680 --> 00:42:53,280
lenders. 
Why the difference? 

922
00:42:53,440 --> 00:42:55,960
We'll think about it. 
A bank with a floating lien on 

923
00:42:55,960 --> 00:42:59,320
all inventory is constantly 
relying on that changing stock 

924
00:42:59,320 --> 00:43:01,400
of goods. 
The law protects them from being

925
00:43:01,400 --> 00:43:05,560
surprised when new PMSI financed
inventory shows up and suddenly 

926
00:43:05,560 --> 00:43:08,760
jumps ahead of them in line. 
Let's be really, really clear 

927
00:43:08,760 --> 00:43:10,960
about this. 
For your exam to get that 

928
00:43:10,960 --> 00:43:15,200
coveted super priority for an 
inventory PMSI, you have to nail

929
00:43:15,200 --> 00:43:18,240
all four of these steps. 
It's a checklist, and you have 

930
00:43:18,240 --> 00:43:21,200
to hit every single item perfect
before possession. 

931
00:43:21,440 --> 00:43:24,200
Send a formal, authenticated 
notice to the other filers. 

932
00:43:24,360 --> 00:43:26,960
Make sure the notice says what 
it's supposed to say, and they 

933
00:43:26,960 --> 00:43:29,040
have to get that notice within 
the right time frame. 

934
00:43:29,320 --> 00:43:32,760
If you miss even one of these 
steps, poof, your super priority

935
00:43:32,760 --> 00:43:34,560
is gone. 
You fall right back to the 

936
00:43:34,560 --> 00:43:37,480
normal first to file rule, and 
you're almost certainly going to

937
00:43:37,480 --> 00:43:39,760
lose to that bank with the 
earlier blanket lien. 

938
00:43:40,440 --> 00:43:43,160
And there's one more special 
PMSI rule you need to have in 

939
00:43:43,160 --> 00:43:46,560
your back pocket. 
APMSI in consumer goods. 

940
00:43:46,800 --> 00:43:49,920
Think a sofa bought on store 
credit perfects automatically. 

941
00:43:50,080 --> 00:43:52,160
The second it attaches, it's 
perfected. 

942
00:43:52,320 --> 00:43:54,200
No filing needed, it just 
happens. 

943
00:43:54,720 --> 00:43:57,600
This makes consumer credit a lot
simpler, but be careful, there 

944
00:43:57,600 --> 00:43:59,400
are traps. 
This doesn't work for things 

945
00:43:59,400 --> 00:44:01,560
that have a certificate of 
title, like a car. 

946
00:44:01,800 --> 00:44:03,680
And there's the famous garage 
sale exception. 

947
00:44:03,880 --> 00:44:06,480
If your consumer debtor sells 
that sofa to their neighbor for 

948
00:44:06,480 --> 00:44:09,080
the neighbor's personal use, 
that neighbor actually takes it 

949
00:44:09,080 --> 00:44:12,080
free of your security interest. 
Unless you went ahead and filed 

950
00:44:12,080 --> 00:44:15,640
A financing statement anyway. 
All right, let's shift gears. 

951
00:44:15,880 --> 00:44:18,280
So far we've been talking about 
creditors fighting with other 

952
00:44:18,280 --> 00:44:19,880
creditors. 
Now we're going to look at a 

953
00:44:19,880 --> 00:44:22,280
rule that isn't about protecting
lenders at all. 

954
00:44:22,400 --> 00:44:24,720
It's about protecting the free 
flow of commerce. 

955
00:44:24,960 --> 00:44:27,400
It's the reason you can go to 
Best Buy and not have to worry 

956
00:44:27,400 --> 00:44:29,720
that some bank is going to come 
repossess the TV you just 

957
00:44:29,720 --> 00:44:32,640
bought. 
So a buyer in the ordinary 

958
00:44:32,640 --> 00:44:36,640
course of business or a BIOC 
gets to take goods completely 

959
00:44:36,640 --> 00:44:40,040
free of a security interest that
was created by their seller. 

960
00:44:40,360 --> 00:44:42,920
Even if it's a perfectly 
perfected security interest. 

961
00:44:43,480 --> 00:44:46,160
To get this special protection, 
the buyer has to meet all of 

962
00:44:46,160 --> 00:44:48,440
these criteria. 
And that last one, the one in 

963
00:44:48,440 --> 00:44:50,920
bold, that's the one that gets 
tested all the time. 

964
00:44:51,320 --> 00:44:54,160
The buyer only loses their 
protection if they know the sale

965
00:44:54,160 --> 00:44:56,840
violates the bank's rights. 
Just knowing the store's 

966
00:44:56,840 --> 00:44:59,760
inventory is financed, that's 
not enough, not even close. 

967
00:45:00,520 --> 00:45:01,560
So. 
Let's test that. 

968
00:45:01,680 --> 00:45:04,280
Here's the classic hypo You walk
onto a car lot. 

969
00:45:04,440 --> 00:45:06,080
Of course you know the 
dealership has a loan from a 

970
00:45:06,080 --> 00:45:08,800
bank to finance all those cars. 
Does that mean the bank can come

971
00:45:08,800 --> 00:45:10,680
take your new car? 
Absolutely not. 

972
00:45:11,120 --> 00:45:13,040
The key isn't knowing a lien 
exists. 

973
00:45:13,200 --> 00:45:15,920
The key is knowing the sale 
itself is prohibited by the loan

974
00:45:15,920 --> 00:45:18,000
agreement. 
You, as a customer, have no 

975
00:45:18,000 --> 00:45:20,520
reason to think that selling 
cars is what they do. 

976
00:45:20,800 --> 00:45:23,480
The bank expects them to sell 
the cars, so you take that car 

977
00:45:23,480 --> 00:45:24,840
free and clear of the bank's 
interest. 

978
00:45:24,920 --> 00:45:28,160
End of story. 
OK, now let's turn to a totally 

979
00:45:28,160 --> 00:45:30,880
different kind of competitor, 
the lien creditor. 

980
00:45:31,280 --> 00:45:33,120
This is where things get really 
serious. 

981
00:45:33,520 --> 00:45:36,600
A simple failure to perfect your
security interest can have 

982
00:45:36,600 --> 00:45:39,760
catastrophic consequences, 
especially when the debtor files

983
00:45:39,760 --> 00:45:43,480
for bankruptcy. 
So a lien creditor is just a 

984
00:45:43,480 --> 00:45:46,600
creditor who started out as 
unsecured, but they went to 

985
00:45:46,600 --> 00:45:49,360
court, they got a judgement, and
they had the sheriff seize the 

986
00:45:49,360 --> 00:45:52,560
debtor's property. 
But for exam purposes, the most 

987
00:45:52,560 --> 00:45:55,920
important, the most powerful, 
the most fearsome lien creditor 

988
00:45:55,920 --> 00:45:58,280
in the universe is the 
bankruptcy trustee. 

989
00:45:58,840 --> 00:46:01,520
And here's why the trustee is so
powerful. 

990
00:46:01,960 --> 00:46:05,400
It's right here in the 
Bankruptcy Code, section 544 A. 

991
00:46:06,000 --> 00:46:08,360
We call it the Strong Arm 
clause, and for good reason. 

992
00:46:08,840 --> 00:46:11,520
The law basically says that the 
moment a bankruptcy petition is 

993
00:46:11,520 --> 00:46:14,600
filed, the trustee magically 
gets the rights of a perfect 

994
00:46:14,600 --> 00:46:18,040
hypothetical lien creditor who 
just levied on every single 

995
00:46:18,040 --> 00:46:21,680
piece of the debtor's property. 
So what does this mean for you, 

996
00:46:21,720 --> 00:46:24,600
the secured creditor? 
The take away for your exam is 

997
00:46:24,600 --> 00:46:28,360
brutally, beautifully simple. 
If your security interest is not

998
00:46:28,360 --> 00:46:31,840
perfected when that bankruptcy 
petition hits the clerk's desk, 

999
00:46:32,000 --> 00:46:34,160
you lose to the trustee. 
Period. 

1000
00:46:34,680 --> 00:46:37,520
Your security interest gets 
wiped out, avoided is the 

1001
00:46:37,520 --> 00:46:40,240
technical term, and you get 
knocked down to the level of a 

1002
00:46:40,240 --> 00:46:43,400
general unsecured creditor, 
which means you'll be lucky to 

1003
00:46:43,400 --> 00:46:46,920
see pennies on the dollar. 
Perfection is your only shield 

1004
00:46:46,920 --> 00:46:50,360
against the trustee. 
OK, to wrap this all up, let's 

1005
00:46:50,360 --> 00:46:53,400
hit on two final, more advanced 
topics that add a nice layer of 

1006
00:46:53,400 --> 00:46:57,000
sophistication to your analysis.
We're talking about proceeds and

1007
00:46:57,000 --> 00:46:59,440
future advances. 
These are things that happen all

1008
00:46:59,440 --> 00:47:02,280
the time in the real world. 
So think about this. 

1009
00:47:02,440 --> 00:47:05,280
When a debtor sells a piece of 
collateral, like a piece of 

1010
00:47:05,280 --> 00:47:08,440
equipment, does your security 
interest just vanish into thin 

1011
00:47:08,440 --> 00:47:10,040
air? 
No, of course not. 

1012
00:47:10,280 --> 00:47:12,720
It automatically attaches to 
whatever the debtor got in 

1013
00:47:12,720 --> 00:47:14,640
return. 
We call that proceeds. 

1014
00:47:14,920 --> 00:47:17,360
And what's more, if you are 
perfected in the original 

1015
00:47:17,360 --> 00:47:20,560
collateral, you stay perfected 
in those proceeds, at least for 

1016
00:47:20,560 --> 00:47:22,440
a little while. 20 days to be 
exact. 

1017
00:47:22,880 --> 00:47:25,520
After that, you might have to 
take another step to stay 

1018
00:47:25,520 --> 00:47:28,600
perfected, unless one of the 
special exceptions like the same

1019
00:47:28,600 --> 00:47:32,840
office rule applies. 
Now for a classic future advance

1020
00:47:32,840 --> 00:47:35,160
problem. 
You see this one all the time. 

1021
00:47:35,480 --> 00:47:40,120
Bank A files early on day one, 
then Bank B comes in and 

1022
00:47:40,120 --> 00:47:44,480
perfects on day 30. 
Then way later on day sixty, 

1023
00:47:44,760 --> 00:47:47,560
Bank A makes a second loan to 
the same debtor. 

1024
00:47:48,080 --> 00:47:52,040
The question is, for that second
loan, does Bank A's priority 

1025
00:47:52,040 --> 00:47:55,680
date from day 60 or does it get 
to go all the way back to day 

1026
00:47:55,680 --> 00:47:58,160
one? 
And the answer once again shows 

1027
00:47:58,160 --> 00:48:00,560
you just how powerful that 
initial filing is. 

1028
00:48:00,840 --> 00:48:03,600
Bank A wins. 
The priority for its future 

1029
00:48:03,600 --> 00:48:06,760
advance relates back to its 
original day one filing date. 

1030
00:48:07,280 --> 00:48:09,840
This is the whole point of a 
notice filing system. 

1031
00:48:10,200 --> 00:48:13,480
When Bank B came along and did 
its search on day 30, it saw 

1032
00:48:13,480 --> 00:48:16,200
Bank A's filing. 
That put Bank B on notice that 

1033
00:48:16,200 --> 00:48:19,320
Bank A might make future loans 
that would also be secured by 

1034
00:48:19,320 --> 00:48:22,080
that collateral. 
But, you know, there has to be 

1035
00:48:22,080 --> 00:48:23,840
an exception. 
There's always an exception. 

1036
00:48:24,280 --> 00:48:28,000
A lien creditor can sometimes 
jump in line and beat a secured 

1037
00:48:28,000 --> 00:48:31,800
party's future advance, but it's
a very specific situation. 

1038
00:48:32,280 --> 00:48:35,760
It only happens if the secured 
lender makes the advance more 

1039
00:48:35,760 --> 00:48:40,200
than 45 days after the lien 
attached and the lender knew 

1040
00:48:40,200 --> 00:48:42,320
about the lien when they made 
the advance. 

1041
00:48:42,600 --> 00:48:44,760
It's a technical rule, but it's 
a good one to have in your 

1042
00:48:44,760 --> 00:48:47,160
toolbox. 
And that brings us to our final 

1043
00:48:47,160 --> 00:48:49,040
thought. 
We've gone through all these 

1044
00:48:49,040 --> 00:48:52,880
very specific mechanical rules, 
but they're all built on one big

1045
00:48:52,880 --> 00:48:55,880
idea. 
The UCC filing system is just 

1046
00:48:55,880 --> 00:48:58,960
that, a notice system. 
A financing statement doesn't 

1047
00:48:58,960 --> 00:49:01,600
tell you the whole story. 
It just tells you that someone 

1048
00:49:01,600 --> 00:49:04,120
might have a claim. 
It's a flashing yellow light. 

1049
00:49:04,720 --> 00:49:07,640
So the question I want to leave 
you with is, what does that mean

1050
00:49:07,640 --> 00:49:10,120
for a real world lender? 
What does that tell you about 

1051
00:49:10,120 --> 00:49:13,160
the kind of homework, the kind 
of diligence you need to do 

1052
00:49:13,160 --> 00:49:15,160
before you actually put your 
money on the line? 

1053
00:49:15,800 --> 00:49:18,040
Think about that. 
Good luck on your exams.