Cal's Contracting (Company) is a company located in Iowa. Bank holds a perfected security interest in all of Company’s equipment and after acquired equipment as of July 1. On July 15 of the same year, Equipment Dealer, Inc. (Dealer) sold and delivered a backhoe to Company for use in its construction business. To pay for the backhoe, Company used funds it had borrowed from the Credit Union (Credit Union) for that purpose. Company made its purchase of the backhoe on the same day it received the loan proceeds from the Credit Union. Credit Union also retained a security interest in the backhoe Company purchased with the loan proceeds. Credit Union’s security interest attached to the backhoe. At the time Credit Union’s security interest in the backhoe arose, Credit Union knew of the Bank’s prior interest. On July 25, Credit Union filed a financing statement to perfect its security interest in the backhoe. Does the Bank or Credit Union or Company have priority over the backhoe if Company defaults on its loans?

Question

Cal's Contracting (Company) is a company located in Iowa. Bank holds a perfected security interest in all of Company’s equipment and after acquired equipment as of July 1. On July 15 of the same year, Equipment Dealer, Inc. (Dealer) sold and delivered a backhoe to Company for use in its construction business. To pay for the backhoe, Company used funds it had borrowed from the Credit Union (Credit Union) for that purpose. Company made its purchase of the backhoe on the same day it received the loan proceeds from the Credit Union. Credit Union also retained a security interest in the backhoe Company purchased with the loan proceeds. Credit Union’s security interest attached to the backhoe. At the time Credit Union’s security interest in the backhoe arose, Credit Union knew of the Bank’s prior interest. On July 25, Credit Union filed a financing statement to perfect its security interest in the backhoe. Does the Bank or Credit Union or Company have priority over the backhoe if Company defaults on its loans?

BlackTom AI · Accepted Answer

First, let’s restate the scenario and the choices to ensure clarity. The Bank holds a perfected security interest in all of Cal’s Equipment (including after-acquired) as of July 1. On July 15, Equipment Dealer, Inc. delivers a backhoe to Cal, which Cal purchases with funds borrowed from the Credit Union. The Credit Union also gains a security interest in the backhoe and, at the time this interest arose, knew of the Bank’s prior lien. The Credit Union files a financing statement on July 25 to perfect its interest. The core question is: who has priority over the backhoe if Cal defaults?

Option A: Credit Union has priority over the backhoe because it was an attached creditor and filed a financing statement to perfect its interest in the backhoe 10 days after the debtor, Company, received the backhoe.
Option B: Company has priority over the backhoe because it purchased the backhoe.
Option C: Bank and Credit Union share priority over the backhoe.
Option D: Bank has priority over the backhoe because the Bank perfected its security interest first.

Now, let’s examine each option in turn.

Option A analysis: This option asserts that the Credit Union has priority because it attached to the backhoe and then timely filed a financing statement 10 days after possession. The critical elements are (1) PMSI status in the backhoe arising from financing the purchase, and (2) timely perfection relative to existing interests. A loan from the Credit Union to acquire the backhoe can create a purchase-money security interest (PMSI) in the backhoe. For a PMSI in equipment, priority over conflicting security interests is obtained if the PMSI is perfected — and, in many jurisdictions, timely filing within 20 days after the debtor receives possession is required or, more broadly, perfection is achieved upon attachment and continued perfection by filing where required. Here, the Credit Union filed on July 25, within 20 days of July 15 possession, thereby perfecting its interest within the window. Since the Bank had a prior perfected interest in all equipment, the PMSI rules usually give the PMSI holder priority in the described scenario, provided the filing is timely. Therefore, under typical UCC PMSI rules for equipment, Option A’s reasoning aligns with the proper prioritization: the Credit Union’s PMSI, properly perfected within the permitted window, outranks the Bank’s preexisting security interest in the specific collateral (the backhoe).

Option B analysis: This claims that Company has priority because it purchased the backhoe. While a debtor purchasing a financed asset creates a security interest in favor of the lender (and priority sometimes hinges on the financing arrangement), ownership alone does not determine priority against a perfected security interest in the same collateral. A prior perfected security interest (like the Bank’s in the equipment) generally takes precedence over a later unperfected claim and, depending on PMSI timing, can outrank even a later purchase. Here, the Bank already had a perfected interest and the Credit Union later perfected a PMSI. Simply being the buyer does not trump a perfected security interest; the security interests govern priority. Thus, Option B is flawed because it ignores the established priority framework for secured transactions with prior perfected interests and a later PMSI.

Option C analysis: This suggests that Bank and Credit Union share priority over the backhoe. Sharing priority is unusual in secured transactions unless there are co-equal security interests in the same collateral under certain rules (e.g., both perfected without a clear PMSI advantage and no timely filing disputes). However, here the Credit Union obtained a PMSI and perfected within the allowed 20-day window, which typically gives it priority over a prior perfected interest held by the Bank in the same collateral. Therefore, a simple "share" arrangement is not consistent with the standard PMSI superiority rule when timely perfection occurs.

Option D analysis: This asserts Bank has priority because it perfected first. While the Bank’s security interest was indeed perfected earlier, the existence of a timely PMSI by the Credit Union alters the hierarchy. The key nuance is that a properly perfected PMSI in equipment has priority over a prior perfected lien in the same collateral if perfected within the allowed PMSI window and if the PMSI attaches to the collateral the secured party financed. In this fact pattern, the Credit Union filed within 20 days after the debtor received the backhoe, establishing a priority edge over the Bank in the backhoe specifically. Hence, Option D’s blanket statement that the Bank has priority because it perfected first is inconsistent with the PMSI priority rule.

In summary, Option A provides the analysis most consistent with the UCC’s treatment of purchase-money security interests in equipment and timely perfection, given that the Credit Union’s PMSI was created when it financed the purchase and perfected within the 20-day window. The other options misstate or overlook the PMSI priority framework or the interaction between prior perfected interests and a timely PMSI filing.

ACCT:4300:0001 Fall25 Examination #2 - Accounting Ethics and Law- Requires Respondus LockDown Browser

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