Report on Legal Opinions in Personal Property Secured Transactions

6. Priority Opinions.

6.1 Priority Opinions Generally.

By requesting a priority opinion with respect to a security interest in collateral (a "Priority Opinion"), an opinion recipient is seeking an opinion that the security interest has priority over other potentially competing security interests308 in the collateral covered by the opinion.309 A Priority Opinion not limited to competing security interests granted under Division 9 or Division 8 is not customary, because it would require the opinion giver to identify all possible competing security interests or liens in the collateral under all federal and California laws, and then to determine the relative priority of those liens and the security interests covered by the opinion.310 Such a task would be difficult (if not impossible) and extremely expensive, and, in virtually all cases, the cost would not be justified.311 It would also result in an opinion of questionable utility given the long list of qualifications that would be required.312 Accordingly, an opinion recipient should generally not request a broad Priority Opinion.313

As noted earlier in this Report,314 the parties to a transaction and their counsel have an obligation to act reasonably in assessing whether any Security Interest Opinion should be provided in the transaction. This is especially true in assessing whether there is justification for requesting even a limited form of a Priority Opinion, particularly in light of the greater uniformity in personal property secured transactions law engendered by the widespread adoption of revised Article 9.315 Even where a Priority Opinion is limited to the rules contained in Division 9 by a UCC Scope Limitation (a "UCC Priority Opinion"), it will ordinarily be qualified by a lengthy recitation of the priority rules contained in Division 9 (and other applicable Divisions), thus limiting the utility of the opinion to the opinion recipient and increasing the costs of the transaction. In those rare instances316 where this type of opinion is appropriate, it should ordinarily be further confined to specific and limited types or items of collateral and to specific types of competing interests.

In light of the limited coverage that Priority Opinions of all kinds, including UCC Priority Opinions, provide to opinion recipients and the fact that these opinions rarely justify the additional cost to the parties of their preparation, review and negotiation, the Committee believes that UCC Priority Opinions should generally not be requested in secured transactions involving personal property.317

6.2 Types of Limited UCC Priority Opinions.

If4 a limited UCC Priority Opinion is given, that opinion will usually take one of four forms:

6.2.1 Filing Priority Opinions.

An opinion regarding the priority of a filed financing statement is limited to priority of a security interest perfected by a secured party only by the filing of a financing statement under Division 9 over other security interests perfected only by the filing of a financing statement under Division 9 in the same filing office.318 While the scope of this type of opinion varies considerably, it is generally limited to a statement that as of a certain date a review of a search report from the applicable filing office identifies no person who has a still-effective319 financing statement with respect to the collateral covered by the opinion that was filed prior to the filing of the financing statement covered by the opinion. This type of opinion is sometimes referred to as a "Filing Priority Opinion."320

6.2.2 Division 9 UCC Priority Opinions Involving Possessions or Control.

Requests for UCC Priority Opinions sometimes arise in the context of collateral that may be perfected only by possession or control321 or where a security interest perfected by possession or control would have priority over a security interest perfected by filing.322 UCC Priority Opinions regarding collateral perfected by possession or control,323 if given, are limited to priority over other security interests arising solely under Division 9. In general, these opinions cover collateral in two categories: (1) collateral such as goods, where the priority rules are otherwise so extensive and diverse that the number of assumptions necessary to give an opinion would be so great as to render the opinion of little use to the opinion recipient;324 and (2) collateral such as deposit accounts, investment property, chattel paper and instruments, where, although the qualifications are often more limited, they often concern facts that are uniquely within the knowledge of, or can easily be verified by, the opinion recipient (thus further reducing the utility of the opinion).325

It is important to note that a UCC Priority Opinion covering security interests in security entitlements326 or certificated securities327 does not address "adverse claims"328 against the collateral but only competing security interests arising under Division 9.329

6.2.3 Division 8 "Protected Purchaser" Opinions Involving Certificated Securities.

This variant of Priority Opinion,330 which is an alternative to a UCC Priority Opinion under Division 9 based upon control (or possession, if possession gives rise to control),331 provides that the secured party, as a "protected purchaser"332 of a certificated security, takes free of any adverse claim333 to that collateral.334

6.2.4 Division 8 "No Adverse Claim" Opinions Involving Security Entitlements.

This variant of Priority Opinion335 states that a purchaser (which includes a secured party) of a security entitlement who becomes an entitlement holder with respect to the security entitlement has protection against the assertion of adverse claims336 against the security entitlement if certain specified conditions are met.

Endnotes

308 The opinion recipient might also request that the Priority Opinion extend to conflicting liens in and other charges on the collateral. Back

309 Sections 9317 through 9342 govern the relative priority of security interests created under Division 9 and, in certain instances, the priority of security interests created under Division 9 as against non-Code liens. See, e.g., Cal. Com. Code §§ 9317(a)(2) (providing for the subordination of security interests and agricultural liens to the liens of certain lien creditors), 9322(g) (providing for the subordination of security interests and agricultural liens in collateral to an agricultural lien on the same collateral if the statute creating the agricultural lien so provides), 9333(b) (providing that a possessory lien (other than a security interest or agricultural lien) on goods has priority over a security interest in the same goods unless the lien is created by a statute that expressly provides otherwise), 9334 (dealing with the priority of, among other things, security interests in fixtures over an encumbrancer or owner of the real property on which such fixtures are located). Non-Code California law or federal law generally governs the relative priority of liens created pursuant to or arising under such other law. See, e.g., Cal. Civil Code § 2897 (providing that liens have priority according to their time of creation, "other things being equal" and other than bottomry and respondentia). Back

310 Some lawyers refuse to provide any form of Priority Opinion. Others provide such opinions, although they are significantly qualified as to the types of collateral and competing interests covered. As noted in the 1989 Report,

When an opinion becomes so qualified as not to be understandable to most readers, the motivating purpose of the opinion (i.e., to provide assurance to the secured party) is often lost. On the other hand, once the lawyer begins to list all of the qualifications and assumptions to an opinion, the possibility of missing one or more possible issues is present. Consequently, priority opinions may be, on the one hand, uninformative because they tell the reader nothing or very little or, on the other hand, wrong or misleading because they fail to describe all of the exceptions.

1989 Report, supra note 2, at 825. Back

311 1989 Report, supra note 2, at 819. Back

312 For an example of possible qualifications, see 1989 Report, supra note 2, at 820-822, nn.157-58. Back

313 1989 Report, supra note 2, at 819-825. Accord, TriBar Report, supra note 1, § 5.2(a), at 1478, n.162 (discussing both "Title Opinions" and "All Laws Priority Opinions"). Back

314 See supra discussion at Section 2.1. Back

315 Based upon the revisions to Article 9 and the limited scope of priority opinions, one rating agency now relies, in most structured financings, on the debtor's representations about the attachment, perfection, and priority of a security interest under Article 9, rather than on legal opinions: "While some of these standard representations and warranties are 'legal' in nature, most relate to factual matters. When viewed in their entirety, they will provide sufficient legal comfort to Standard & Poor's that the trustee or collateral agent has a valid, perfected, first-priority security interest in the assets supporting the transaction." See Standard & Poor's, a division of The McGraw-Hill Companies, Inc., STRUCTURED FINANCE LEGAL CRITERIA FOR U.S. STRUCTURED FINANCE TRANSACTIONS, APPENDIX IV: REVISED UCC ARTICLE 9 CRITERIA, at 210 (April, 2004) (the most recent version of this publication is available at http://www.standardandpoors.com/ratings/structuredfinance). Back

316 This Report does not specifically address the circumstances in which a limited form of Priority Opinion may be appropriate. Back

317 For these reasons, the coverage of Priority Opinions in this Report is much less extensive than was the case in the 1989 Report. See 1989 Report, supra note 2, at 818-832. The TriBar Report acknowledges that priority opinions "have long been the subject of intense debate." TriBar Report, supra note 1, § 5.1, at 1477. For a further discussion of UCC Priority Opinions, see TriBar Report, supra note 1, §§ 5, 8. Back

318 The Filing Priority Opinion does not cover priority over interests of a person who is not a secured party of the debtor. Accord, TriBar Report, supra note 1, § 5.4(b). Back

319 Cal. Com. Code § 9515; see also Cal. Com. Code §§ 9510, 9516. Back

320 The Filing Priority Opinion approach is described in detail in the TriBar Report. See TriBar Report, supra note 1, §§ 5.2(b), 5.4. A Filing Priority Opinion only provides the opinion recipient with limited coverage with respect to the priority of its security interest in any collateral. For example:

  1. The UCC search report is only current through a certain date and time prior to the date and time of the UCC search report itself. As a result, the UCC search report does not reflect, and the Filing Priority Opinion does not cover, any financing statement filed after that date and time; however, the security interest perfected by that later-filed financing statement might have priority over the security interest the subject of the Filing Priority Opinion.
  2. Where the Filing Priority Opinion covers collateral that can be perfected by possession or control, a Filing Priority Opinion concerning that collateral indicates that the security interest is prior to other security interests perfected by filing, but any security interest in that collateral that is perfected by possession or control might have priority. See, e.g., Cal. Com. Code §§ 9313, 9314, 9322, 9330(d) (perfection by possession or control as an alternative method of perfection for certain types of collateral).
  3. Some consensual security interests may be perfected without filing, possession or control. See Cal. Com. Code § 9309. For example, temporarily perfected security interests might be effective without filing or possession from twenty days to one year. See, e.g., Cal. Com. Code §§ 9315(c)-(d) (perfected security interest in original collateral remains a continuously perfected security interest in proceeds for at least twenty days), 9324(a) (in certain circumstances, purchase money security interest remains perfected without filing for twenty days after debtor receives possession of collateral), 9312(e) (a security interest in certificated securities, instruments or negotiable documents may be perfected without filing or possession for up to twenty days), and 9316(a)(3) (a security interest in collateral transferred to another person that thereby becomes a debtor and is located in another jurisdiction will remain perfected without filing for one year).
  4. Some financing statements filed to perfect a security interest might not be filed under the name of the debtor. For example, a search report under the name of the debtor will not necessarily reveal security interests of creditors of previous owners of the collateral, Cal. Com. Code § 9507(a), financing statements filed under a previous name of the debtor, Cal. Com. Code § 9507(b), financing statements filed against an original debtor, Cal. Com. Code §§ 9507(c), 9508(b), or financing statements filed against other debtors who have the power to grant a security interest in the debtor's collateral. (For example, a partnership of which the debtor is a partner or a spouse of the debtor who also has rights in the collateral may grant a security interest in the collateral.)

The transition rules specified in Chapter 7 of Division 9 could also have an effect on the priority of an opinion recipient's security interest. See TriBar Report, supra note 1, § 9. Back

321 E.g., deposit accounts, letter-of-credit rights and money. Cal. Com. Code §§ 9312(b)(1), 9312(b)(2), 9312(b)(3). Back

322 Cal. Com. Code §§ 3303 (instruments), 5118 (documents presented under a letter of credit), 7502 (negotiable documents of title), 8303 (certificated and uncertificated securities), 8502 (security entitlements), 8510 (financial assets and security entitlements), 9328(1) (investment property), 9328(5) (certificated securities), 9329(1) (letter-of-credit rights), 9330(a) and (b) (chattel paper), 9330(d) (instruments) and 9331 (negotiable instruments and securities). Back

323 For a more extensive discussion of these opinions, see TriBar Report, supra note 1, §§ 5.3-5.4. Back

324 In the case of goods, perfection by possession does not give the secured party priority over security interests in goods perfected by filing unless perfection by possession occurs before the filing is made. Cal. Com. Code § 9322(a)(1). A security interest in goods perfected by possession also may not have priority over other interests (for example, a purchase-money security interest, Cal. Com. Code § 9324, the interest of a consignor, Cal. Com. Code § 9103(d), or the rights of a buyer in ordinary course, Cal. Com. Code § 9320(a)). Back

325 For example:

  1. Deposit Accounts. Giving a UCC Priority Opinion based upon control of a deposit account would require, in addition to those qualifications required to give a Perfection Opinion covering deposit accounts, that the opinion giver assume: (A) that there is no other security interest in the deposit account that has been perfected by control prior to perfection of the security interest covered by the opinion, see Cal. Com. Code § 9327(2); and (B) that the bank at which the deposit account is maintained has no security interest in the deposit account and will not obtain any such security interest in the future, see Cal. Com. Code § 9327(3).
  2. Investment Property. Giving a UCC Priority Opinion based upon possession or control of investment property would require, in addition to those qualifications required to give a Perfection Opinion covering investment property, that the opinion giver assume: (A) in the case of a security interest perfected by control, that there is no other security interest in the investment property that has been perfected by control prior to perfection of the security interest covered by the opinion, see Cal. Com. Code § 9328(2); (B) in the case of security entitlements or securities accounts, that the securities intermediary with which the security entitlement or securities account is maintained has no security interest in the security entitlement or securities account and will not obtain any such security interest in the future, see Cal. Com. Code § 9328(3); (C) in the case of commodity contracts or commodity accounts, that the commodity intermediary with which the commodity contract or commodity account is maintained has no security interest in the commodity contract or commodity account and will not obtain any such security interest in the future, see Cal. Com. Code § 9328(4); (D) in the case of a security interest in certificated securities in registered form that is perfected by delivery, that no other security interest in the certificated securities has been perfected by control, see Cal. Com. Code § 9328(5); and (E) in the case of a security interest created by a broker, a securities intermediary or a commodity intermediary that is perfected without control, that no other broker, securities intermediary or commodity intermediary has or will have a security interest in the investment property, see Cal. Com. Code § 9328(6).
  3. Chattel Paper. Giving a UCC Priority Opinion based upon possession or control of chattel paper would require, in addition to those qualifications required to give a Perfection Opinion covering chattel paper, that the opinion giver assume: (A) that the secured party has given new value (as defined in Cal. Com. Code § 9102(a)(57)); and (B) that the secured party takes possession, in the case of tangible chattel paper, or control, in the case of electronic chattel paper, in good faith in ordinary course of the secured party's business and without knowledge that the grant of the security interest violates the rights of any prior secured party. See Cal. Com. Code § 9330(b).
  4. Negotiable Instruments. Giving a UCC Priority Opinion based upon possession of negotiable instruments would require, in addition to those assumptions required to give a Perfection Opinion covering negotiable instruments, that the opinion giver assume that the secured party has taken possession of the instrument in good faith without knowledge that the grant of the security interest violates the rights of any prior secured party. See Cal. Com. Code § 9330(d).

In the examples provided above, the words "in addition to those assumptions required to give a Perfection Opinion" are not meant to imply that the UCC Priority Opinion includes a Perfection Opinion (and a Perfection Opinion does not include a UCC Priority Opinion). If given, however, a UCC Priority Opinion would rarely be given without a separate Perfection Opinion (including all appropriate assumptions). Back

326 For a more extensive discussion of these opinions, see TriBar Report, supra note 1, § 8.4. Back

327 For a more extensive discussion of these opinions, see TriBar Report, supra note 1, § 8.2. Back

328 An "adverse claim" is "a claim that a claimant has a property interest in a financial asset and that it is a violation of the rights of the claimant for another person to hold, transfer, or deal with the financial asset." Cal. Com. Code § 8102(a)(1). Back

329 See TriBar Report, supra note 1, § 8.2, at 1497, n.284 and accompanying text, and § 8.4, at 1502, n.318 and accompanying text. Back

330 For a more extensive discussion of these opinions, see TriBar Report, supra note 1, § 8.1. Such an opinion may also be rendered in connection with a security interest in uncertificated securities. Id.; see Cal. Com. Code § 8303. Back

331 See supra note 202; see also supra Section 6.2.2. Back

332 Cal. Com. Code § 8303(a) defines a "protected purchaser" as a purchaser of a certificated or uncertificated security, or of an interest therein, who gives value, does not have notice of any adverse claim to the security and obtains control of the certificated or uncertificated security. Back

333 See supra note 326. Back

334 See TriBar Report, supra note 1, § 8.1(c), at 1497, n.282. Back

335 For a more extensive discussion of these opinions, see TriBar Report, supra note 1, § 8.3. See Cal. Com. Code § 8502. Back

336 See supra note 329. Back


Section 7. Conclusion. / Table of Contents