First Bank loans Lila $1,500 so that she may purchase a computer for her office secretary. Lila signs a financing statement, which First Bank duly files within twenty days. After Lila purchases the computer, she takes out a loan at Valley Bank, gives

Question

the computer as collateral, and signs a financing statement, which Valley Bank then duly files. Her secretary never uses the computer, so Lila puts an ad in the paper and sells the computer to Angie. If Lila defaults on the loans, whose interest in the computer has priority? Explain, using correct terminology.

Answer 1

First Bank has priority, because it was the first to perfect its security interest. The computer is classified as equipment and First Bank has a purchase money security interest, which it has perfected by filing. Valley Bank also has a perfected security interest in the computer, but its interest is subordinate to that of First Bank, because First Bank's security interest was on record before Valley Bank's interest came into existence (i.e., attached) and became perfected. Angie's interest in the computer is subordinated to those of both First Bank and Valley Bank, because Lila is not a merchant with respect to computers and, thus, Angie cannot be a buyer in the ordinary course of business.