Priority Rules and PMSI Super-Priority in Secured Transactions: Bar Exam Deep Dive

Priority: The Ultimate Secured Transactions Question

Priority disputes are the most heavily tested topic in secured transactions -- roughly 35% of exam questions. The good news: priority follows clear rules. Once you memorize the hierarchy, these become pattern-recognition problems.

This guide is part of our Secured Transactions complete framework.

The Priority Hierarchy

From highest to lowest priority:

1. Buyer in ordinary course of business (BIOC): Takes free of ALL security interests in inventory, even perfected ones
2. Perfected PMSI (with super-priority): Beats an earlier-filed perfected security interest
3. Perfected security interest: First to file or perfect wins among perfected interests
4. Lien creditor / Bankruptcy trustee: Beats unperfected security interests
5. Unperfected security interest: Beats only the debtor and other unperfected interests (first to attach wins)

Rule 1: Perfected Beats Unperfected (UCC 9-317)

A perfected security interest always beats an unperfected one, regardless of which attached first.

Exam Trap: "Bank A's interest attached on January 1 but was never perfected. Bank B's interest attached on March 1 and was perfected the same day." Bank B wins. Perfected always beats unperfected.

Rule 2: First to File or Perfect (UCC 9-322)

Among two perfected security interests, the one that first filed or perfected has priority.

Key insight: You can file before attachment. A creditor who files a financing statement on Day 1 but does not lend money until Day 30 gets priority from Day 1 -- even if another creditor filed and perfected on Day 15.

Scenario	Timeline	Winner
Bank A files Jan 1, lends Feb 1. Bank B files Jan 15, lends Jan 15.	A filed first (Jan 1)	Bank A (first to file)
Bank A perfects by possession Jan 1. Bank B files Jan 15.	A perfected first (Jan 1)	Bank A (first to perfect)
Bank A files Jan 1, lends Mar 1. Bank B files Feb 1, lends Feb 1.	A filed first (Jan 1)	Bank A (filing date counts even before attachment)

Rule 3: PMSI Super-Priority (UCC 9-324)

A Purchase Money Security Interest gets "super-priority" over earlier-filed security interests. But the rules differ for goods vs. inventory:

PMSI in Goods (Non-Inventory)

A PMSI in goods (equipment, consumer goods, farm products) has super-priority if perfected within 20 days of the debtor receiving possession.

Example: Bank has a blanket security interest in "all equipment" filed on Jan 1. On Mar 15, Seller sells a new machine to Debtor on credit, retaining a PMSI. Seller files on Apr 1 (within 20 days of delivery). Seller's PMSI has priority over Bank's earlier-filed interest in that specific machine.

PMSI in Inventory

A PMSI in inventory has super-priority only if the secured party:

1. Perfects before the debtor receives possession of the inventory
2. Sends authenticated notification to all holders of conflicting security interests in the same type of inventory
3. The notification is received within 5 years before the debtor receives possession

Exam Trap: Inventory PMSI is HARDER to get super-priority than goods PMSI. For inventory, you must perfect BEFORE delivery AND notify. For non-inventory goods, you just need to perfect within 20 days AFTER delivery. Know the difference.

Rule 4: Buyer in Ordinary Course (UCC 9-320(a))

A buyer in ordinary course of business (BIOC) takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.

Requirements:

• Buyer purchases goods in good faith
• From a person in the business of selling goods of that kind
• In the ordinary course of that business
• The security interest was created by the seller

Example: Bank has a perfected security interest in Car Dealer's inventory. Customer buys a car from Car Dealer. Customer takes free of Bank's security interest -- Bank must look to Car Dealer (or the proceeds from the sale) for satisfaction.

Exam Trap: BIOC only cuts off security interests created by the seller. If the security interest was created by someone else in the chain, BIOC does not apply.

Rule 5: Lien Creditors (UCC 9-317(a))

A lien creditor (including a bankruptcy trustee) beats an unperfected security interest. A lien creditor does NOT beat a perfected security interest (unless it's a PMSI that was perfected within the 20-day grace period -- the PMSI relates back).

This is why perfection matters so much -- an unperfected creditor loses to the bankruptcy trustee and gets nothing.

Special Priority Rules

Situation	Rule
Instruments: possession vs. filing	Possession beats filing (a holder in due course beats a filed security interest)
Deposit accounts: control vs. filing	Control beats everything (and among control holders, the depository bank wins)
Future advances	Priority dates back to original filing date, not the date of the future advance
Proceeds	Same priority as the original collateral (if properly perfected in the proceed type)

Practice Questions

Question 1

"Bank A files a financing statement against Debtor's equipment on January 1 and lends on February 1. On January 15, Seller sells a machine to Debtor on credit and files a PMSI financing statement on January 20. Debtor receives the machine on January 16."

Analysis: Seller has a PMSI in equipment. Seller filed on January 20, which is within 20 days of Debtor receiving possession (January 16). Seller has PMSI super-priority. Seller wins over Bank A's earlier-filed interest for that specific machine.

Question 2

"Bank has a perfected security interest in Retailer's inventory. Wholesaler sells new inventory to Retailer on credit with a PMSI but does not notify Bank before delivery."

Analysis: PMSI in inventory requires perfection before delivery AND notification to existing secured parties. Wholesaler failed to notify Bank. Wholesaler does NOT get super-priority. Bank A wins under the first-to-file-or-perfect rule.

Key Takeaways

• Perfected beats unperfected -- always
• First to file or perfect wins among perfected interests (filing date can precede attachment)
• PMSI in goods: 20 days after delivery to perfect and get super-priority
• PMSI in inventory: Must perfect before delivery AND notify existing creditors
• BIOC: Takes free of security interests in inventory created by the seller
• Lien creditors: Beat unperfected interests; lose to perfected interests

Continue with Default & Remedies or return to the Secured Transactions complete framework.

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