ExpertHard1 markMultiple Choice
CPA · Question 15 · Area II: Business Law
On May 1, Vendor A sold a machine to Debtor on credit and retained a security interest. Vendor A delivered the machine on May 5. Vendor A filed a financing statement on May 12. On May 8, Lender B loaned money to Debtor, took a security interest in the same machine, and filed a financing statement immediately. Who has priority?
On May 1, Vendor A sold a machine to Debtor on credit and retained a security interest. Vendor A delivered the machine on May 5. Vendor A filed a financing statement on May 12. On May 8, Lender B loaned money to Debtor, took a security interest in the same machine, and filed a financing statement immediately. Who has priority?
Answer options:
A.
Vendor A, because it had a Purchase Money Security Interest (PMSI) and filed within the 20-day grace period.
B.
Lender B, because it filed first.
C.
Lender B, because Vendor A did not file before Lender B's loan.
D.
Vendor A, because it attached its interest before Lender B.
How to approach this question
Identify the PMSI (Vendor selling on credit). Check if it's inventory or equipment. Equipment has a 20-day grace period. If filed within 20 days, it jumps to the front of the line.
Full Answer
A.Vendor A, because it had a Purchase Money Security Interest (PMSI) and filed within the 20-day grace period.✓ Correct
Vendor A has a Purchase Money Security Interest (PMSI) in equipment (the machine). Under UCC §9-324, a PMSI in goods other than inventory has priority over conflicting security interests if the PMSI is perfected (filed) within 20 days after the debtor receives possession. Vendor A filed on May 12 (7 days after delivery), so it has priority over Lender B.
Common mistakes
Applying the general 'First to File' rule and ignoring the PMSI exception.
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