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Legal Memorandum: Priority of Secured Debt over Unsecured Debts

Issue: Under the common law of any state, do secured debts have priority over unsecured debts?

Area of Law: UCC & Secured Transactions
Keywords: Priority of secured debt; Secured creditor has priority over an unsecured creditor
Jurisdiction: Florida, Hawai, New Jersey, Tennessee
Cited Cases: 334 A.2d 357; 696 So.2d 776; 992 P.2d 42
Cited Statutes: The Uniform Commercial Code Section 9-201, 9-301 through 9-339; Uniform Commercial Code § 33-2 (5th ed. 2002); Uniform Commercial Code § 23-5
Date: 01/01/2006

  Section 9-201 of the Uniform Commercial Code (“UCC”), which states the basic right of secured creditors, provides as follows: “Except as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.”  Many sections of Article 9 of the UCC, especially sections 9-301 through 9-339, address the priority of security interests.  Also, although common law regarding security interests in real property is fairly common, little common law addresses the priority of secured versus unsecured debts since the UCC was adopted. The general priority theory under Article 9 is summarized as follows:

The secured creditor, even an unperfected secured creditor, has greater rights in its collateral than any other creditor, unless the Code provides otherwise.  A creditor without a security interest or a lien has no claim to any specific collateral, and 9-201 gives an unperfected but secured creditor rights superior to the rights of that unsecured creditor.

 

4 James J. White & Robert S. Summers, Uniform Commercial Code § 33-2 (5th ed. 2002).

Research located no recent cases discussing the priority of secured debt on personal property without referring to priority statutes.  The following is a typical analysis, which refers to Article 9 concepts:

ADVANCE d4Absent a statutory or common law exception, a secured creditor with a perfected security interest in collateral is entitled to priority over a subsequent lien creditor seeking to claim […]