(Oct. 26, 2000, D.C. Law 13-201, § 101, 47 DCR 7576 ; May 1, 2013, D.C. Law 19-302, § 2(h), 60 DCR 2688 .)
Effect of Amendments
The 2013 amendment by D.C. Law 19-302 rewrote (a); and substituted “described in subsection (a) of this section” for “that are effective solely under § 28:9-508 ” in (b).
Uniform Commercial Code Comment
1. Source. New.
2. Subordination of Security Interests Created by New Debtor. This section addresses the priority contests that may arise when a new debtor becomes bound by the security agreement of an original debtor and each debtor has a secured creditor.
Subsection (a) subordinates the original debtor’s secured party’s security interest perfected against the new debtor solely under Section 9-508. The security interest is subordinated to security interests in the same collateral perfected by another method, e.g., by filing against the new debtor. As used in this section, “a filed financing statement that is effective solely under Section 9-508“ refers to a financing statement filed against the original debtor that continues to be effective under Section 9-508. It does not encompass a new initial financing statement providing the name of the new debtor, even if the initial financing statement is filed to maintain the effectiveness of a financing statement under the circumstances described in Section 9-508(b). Nor does it encompass a financing statement filed against the original debtor which remains effective against collateral transferred by the original debtor to the new debtor. See Section 9-508(c). Concerning priority contests involving transferred collateral, see Sections 9-325 and 9-507.
Example 1: SP-X holds a perfected-by-filing security interest in X Corp’s existing and after-acquired inventory, and SP-Z holds a perfected-by-possession security interest in an item of Z Corp’s inventory. Z Corp becomes bound as debtor by X Corp’s security agreement (e.g., Z Corp buys X Corp’s assets and assumes its security agreement). See Section 9-203(d). Under Section 9-508, SP-X’s financing statement is effective to perfect a security interest in the item of inventory in which Z Corp has rights. However, subsection (a) provides that SP-X’s security interest is subordinate to SP-Z’s, regardless of whether SP-X’s financing statement was filed before SP-Z perfected its security interest.
Example 2: SP-X holds a perfected-by-filing security interest in X Corp’s existing and after-acquired inventory, and SP-Z holds a perfected-by-filing security interest in Z Corp’s existing and after-acquired inventory. Z Corp becomes bound as debtor by X Corp’s security agreement. Subsequently, Z Corp acquires a new item of inventory. Under Section 9-508, SP-X’s financing statement is effective to perfect a security interest in the new item of inventory in which Z Corp has rights. However, because SP-Z’s security interest was perfected by another method, subsection (a) provides that SP-X’s security interest is subordinate to SP-Z’s, regardless of which financing statement was filed first. This would be the case even if SP-Z filed after Z Corp became bound by X Corp’s security agreement.
3. Other Priority Rules. Subsection (b) addresses the priority among security interests created by the original debtor (X Corp).
By invoking the other priority rules of this subpart, as applicable, subsection (b) preserves the relative priority of security interests created by the original debtor.
Example 3: Under the facts of Example 2, SP-Y also holds a perfected-by-filing security interest in X Corp’s existing and after-acquired inventory. SP-Y filed after SP-X. Inasmuch as both SP-X’s and SP-Y’s security interests in inventory acquired by Z Corp after it became bound are perfected solely under Section 9-508, the normal priority rules determine their relative priorities.
Under the “first-to-file-or-perfect” rule of Section 9-322(a)(1), SP-X has priority over SP-Y.
Example 4: Under the facts of Example 3, after Z Corp became bound by X Corp’s security agreement, SP-Y promptly filed a new initial financing statement against Z Corp. At that time, SP-X’s security interest was perfected only by virtue of its original filing against X Corp which was “effective solely under Section 9-508.” Because SP-Y’s security interest no longer is perfected by a financing statement that is “effective solely under Section 9-508,” this section does not apply to the priority contest. Rather, the normal priority rules apply. Under Section 9-322, because SP-Y’s financing statement was filed against Z Corp, the new debtor, before SP-X’s, SP-Y’s security interest is senior to that of SP-X. Similarly, the normal priority rules would govern priority between SP-Y and SP-Z.
The second sentence of subsection (b) effectively limits the applicability of the first sentence to situations in which a new debtor has become bound by more than one security agreement entered into by the same original debtor. When the new debtor has become bound by security agreements entered into by different original debtors, the second sentence provides that priority is based on priority in time of the new debtor’s becoming bound.
Example 5: Under the facts of Example 2, SP-W holds a perfected-by-filing security interest in W Corp’s existing and after-acquired inventory. After Z Corp became bound by X Corp’s security agreement in favor of SP-X, Z Corp became bound by W Corp’s security agreement. Under subsection (b), SP-W’s security interest in inventory acquired by Z Corp is subordinate to that of SP-X, because Z Corp became bound under SP-X’s security agreement before it became bound under SP-W’s security agreement. This is the result regardless of which financing statement (SP-X’s or SP-W’s) was filed first.
The second sentence of subsection (b) reflects the generally accepted view that priority based on the first-to-file rule is inappropriate for resolving priority disputes when the filings were made against different debtors. Like subsection (a) and the first sentence of subsection (b), however, the second sentence of subsection (b) relates only to priority conflicts among security interests perfected by filed financing statements that are “effective solely under Section 9-508.”
Example 6: Under the facts of Example 5, after Z Corp became bound by W Corp’s security agreement, SP-W promptly filed a new initial financing statement against Z Corp. At that time, SP-X’s security interest was perfected only pursuant to its original filing against X Corp which was “effective solely under Section 9-508.” Because SP-W’s security interest is not perfected by a financing statement that is “effective solely under Section 9-508,” this section does not apply to the priority contest. Rather, the normal priority rules apply. Under Section 9-322, because SP-W’s financing statement was the first to be filed against Z Corp, the new debtor, SP-W’s security interest is senior to that of SP-X. Similarly, the normal priority rules would govern priority between SP-W and SP-Z.
