A secured creditor takes a security interest in a debtor's inventory. The security agreement includes an after-acquired property clause. The creditor properly files a financing statement on January 15, 2023. On March 1, 2023, the debtor acquires new inventory. On April 1, 2023, another creditor obtains a judgment lien against the debtor and levies on the new inventory. Which creditor has priority over the new inventory?
- AThe secured creditor, because their security interest attached and perfected when the debtor acquired the new inventory.
- BThe secured creditor, but only if they refiled the financing statement after the new inventory was acquired.
- CBoth creditors share priority equally, as their interests arose at different times.
- DThe judgment lien creditor, because they levied on the inventory first.
Show answer & explanationAnswer & explanation
Correct answer: A. The secured creditor, because their security interest attached and perfected when the debtor acquired the new inventory.
Under the UCC, a security interest in after-acquired property attaches when the debtor acquires the collateral. However, if a financing statement covering 'inventory' was already filed, the security interest is considered perfected *at the time of the initial filing* for after-acquired inventory. Thus, the secured creditor's interest was perfected as of January 15, 2023, giving it priority over the later judgment lien.
Why the other options are wrong
- B. Refiling is not necessary for after-acquired inventory if the initial financing statement broadly covers the collateral type.
- C. Priority rules dictate one creditor usually has superior rights; equal sharing is not the standard outcome here.
- D. A perfected security interest generally has priority over a subsequent judgment lien, even if the levy occurs first.
After-Acquired Property Clause (UCC)
A provision in a security agreement that grants a security interest in collateral the debtor obtains after the agreement is made.
- Commonly used for inventory and accounts receivable.
- Security interest attaches when debtor acquires the property.
- Perfection generally relates back to the original filing date for future advances and after-acquired property.
Memory trick: A-A-P: Always Automatically Perfected (if filed early).