Discount Stores, Inc., borrows $5,000 each from EZ Loan Corporation, First National Bank, and Great Products Corporation. Discount uses its "present inventory and any thereafter acquired" to secure the loans from EZ Loan and First National. EZ Loan perfects its interest on April 1, followed by First National on April 5. Discount buys new inventory on April 10 from Great Products and signs a security agreement, giving Great Products a purchase-money security interest in the new inventory. On the same day, Great Products perfects its interest and notifies EZ Loan and First National. Discount takes possession of the new inventory on April 15. On April 20, Discount defaults on all of the loans. Whose security interest has priority?

Question

What will be an ideal response?

Answer 1

Great Products' security interest has priority. Under the general rule that when two or more secured parties have perfected security interests in the same collateral, the first to perfect its interest has priority (unless a state statute provides otherwise), EZ Loan would have priority. Here, EZ Loan has priority with respect to First National. There are exceptions, however, that involve purchase-money security interests (PMSIs). A PMSI in non-consumer goods has priority, even if it is later in time of perfection when, as in this problem, the PMSI attaches to inventory, the PMSI is perfected, and proper written or authenticated notice of the PMSI is given to other security-interest holders on or before the time that the debtor takes possession of the inventory.