CPA Exam — REG (Regulation)Business LawMedium
A small manufacturing company, MicroTech Inc., is seeking to expand its operations and obtains a loan from First Bank. To secure the loan, MicroTech grants First Bank a security interest in all of its current and after-acquired equipment. First Bank promptly files a financing statement with the appropriate state office. MicroTech later obtains a second loan from Capital Credit, which also takes a security interest in MicroTech's equipment and files a financing statement. If MicroTech defaults on both loans, which lender has priority over the equipment?
- AThe lender that physically possesses the equipment, regardless of filing.
- BCapital Credit, because it was the second to lend money.
- CFirst Bank, because it perfected its security interest first.
- DBoth lenders share priority equally due to simultaneous perfection.
Show answer & explanationAnswer & explanation
Correct answer: C. First Bank, because it perfected its security interest first.
Under Article 9 of the UCC, the general rule for priority between two perfected security interests in the same collateral is 'first to file or perfect.' Since First Bank filed its financing statement first, it has priority.
Why the other options are wrong
- A. Possession can perfect a security interest, but a filed financing statement perfects without possession and priority is determined by the earlier of filing or perfection.
- B. The order of lending does not determine priority; the order of perfection (filing or possession) does.
- D. Priority is determined by the first to file or perfect, not simultaneous perfection, unless they filed at the exact same moment.
UCC Article 9 Priority Rule
The legal principle under UCC Article 9 that determines the order in which multiple creditors with security interests in the same collateral will be paid upon debtor's default.
- General rule: 'first to file or perfect' takes priority.
- Perfection can occur by filing, possession, or control.
- Special rules apply for purchase money security interests (PMSIs).
Memory trick: F-I-P-S: First In Perfection, Secures.