Priority

     The claim of two or more parties to an interest in the same property presents an issue of priority if the liquidated value of the property is insufficient to satisfy each of the claims in full.  Priority is moot if the liquidated value of the property is sufficient to satisfy each of the claims in full. 

     For many students, the first exposure to priority issues comes in the first year property course in which the student may be introduced to the following alternative priority rules established by state recording statutes:  race, notice, or race-notice.  Suppose the owner of Blackacre sells Blackacre first to A and later to B. 

     1.  In a race jurisdiction (there are, apparently, only two, Lousiana and North Carolina), the first to record takes title; knowledge of a prior conveyance is irrelevant.   

     2.  In a notice jurisdiction, the subsequent purchaser with knowledge of a prior unrecorded conveyance does not prevail by recording first but the subsequent purchaser who purchases without knowledge of a prior unrecorded conveyance prevails even without recording.  

     3.  In a race-notice jurisdiction, the subsequent purchaser with knowledge of a prior unrecorded conveyance does not prevail by recording first and the subsequent purchaser without knowledge of a prior unrecorded conveyance prevails only if it records first. 

     In many jurisdictions, the race, notice, or race-notice statute that applies to a sale of real property will also apply to mortgages or deeds of trust.  A few jurisdictions have adopted different systems for different types of conveyances.  In addition, there may also be specialized statutory or common law priorities for particular kinds of transactions, such as purchase money mortgages.   See, e.g. Cal. Civ. Code 2898 and cases decided thereunder.  

     Priority issues in the context of Article 9 security interests are often considerably more complicated.  Although complicated, one starts with the same two basic concepts:  (1) "perfection" of Article 9 security interests (like recording of mortgages or deeds of trust) is generally critical to resolution of a priority issue; and, (2) frequently, first in time is first in right.  Article 9 provides rules in twenty-three separate sections to resolve a variety of priority disputes (U.C.C. 9-317 through U.C.C. 9-339).   In these materials, we explore only a few of these priority disputes with the goal of exposing you to some of the basic policy issues and of continuing to develop skill in the use of the statute. 

     We consider examples where one party holds an Article 9 security interest and the other party is:  (1) an unsecured creditor; (2) a creditor that has obtained a judicial lien on the same property (such as through levy of a writ of execution or a writ of attachment); (3) a trustee in the Chapter 7 bankruptcy proceeding of the debtor, or the debtor-in-possession in a Chapter 11 bankruptcy proceeding of the debtor; (4) another Article 9 secured party; (5) a buyer of the collateral; and, (6) in the case of fixtures, a party with an interest in the related real property.  Your materials may be arranged in a sequence such that you have already considered the first three priority disputes in connection with your study of the role of secured credit in a debtor's bankruptcy case.

     In all of these cases, indeed in all cases governed by Article 9, the starting point is the following language in U.C.C. 9-201(a):   "Except as otherwise provided in [the Uniform Commercial Code], a security interest is effective according to its terms, . . . against purchasers of the collateral, and against creditors."  In other words, one starts with the premise that an Article 9 security interest has priority over other creditors and against purchasers unless something else in the Commercial Code says otherwise.  As we shall see, there is quite a bit that says otherwise. 

     Note that parties with claims to the same property may alter the priority scheme established by statute through a subordination agreement.  See, e.g. U.C.C. 9-339.   In the real property context, subordination is common in the context of a construction loan.  Subordination may also sometimes be ordered by a court exercising its equitable powers (equitable subordination), or may be commanded by statute.  See, e.g.  Cal. Rev. & Tax. Code 2192.1 (liens on real property for non-payment of property taxes or assessments).