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, securing the loan with all of its current and after-acquired inventory. First Bank properly perfects its security interest on January 15. On February 1, MicroTech Inc. obtains a second loan from Second Bank, securing it with the same inventory. Second Bank also properly perfects its security interest on February 1. MicroTech Inc. defaults on both loans. Assuming no purchase money security interest (PMSI) is involved, which bank has priority over the inventory?
- ABoth banks share priority equally, pro rata to their loan amounts.
- BSecond Bank, because it is the most recent lender.
- CNeither bank has priority until a court determines the order.
- DFirst Bank, because it perfected its security interest first.
Show answer & explanationAnswer & explanation
Correct answer: D. First Bank, because it perfected its security interest first.
Under UCC Article 9, the general rule for determining priority among perfected security interests in the same collateral is 'first to file or perfect.' Since First Bank perfected its security interest on January 15, before Second Bank perfected on February 1, First Bank has priority.
Why the other options are wrong
- A. Equal sharing of priority is not the default rule; there is a hierarchy based on perfection/filing dates.
- B. Priority is generally determined by the time of perfection or filing, not by the recency of the loan.
- C. The UCC provides clear rules for priority, meaning a court would apply these rules rather than determining an arbitrary order.
UCC Article 9 Priority Rule (General)
The general rule for determining which secured party has priority over collateral when there are multiple perfected security interests is 'first to file or perfect'.
- Applies when there are conflicting perfected security interests.
- Date of filing a financing statement or perfection, whichever is earlier, governs.
- Exceptions exist, such as for Purchase Money Security Interests (PMSIs).
Memory trick: First in line, First in right: Perfection wins.