CHAPTER 11.05. Priority

• Jurisdiction: United States

11.05. Priority

As with the priority of a Delaware mortgage lien, the general rule of priority of perfected security interests in personal property is the first to file or perfect takes priority over subsequently filed or perfected security interests.⁹¹ Two important exceptions to this rule in the real estate financing context deal with instruments and certificated securities. With respect to instruments collateral, a secured party who has possession of the instrument for value and in good faith takes priority over any other secured party perfected by a method other than possession, such as filing, even if the filing of the financing statement is prior in time to the taking of possession.⁹²

A similar rule applies to investment property. A secured party having control of investment property takes priority over another secured party who perfected its security interest in another manner, for example, by filing.⁹³ Further, a secured party who is perfected by delivery of a certificated security in registered form (i.e., mere possession), although there are missing endorsements, still takes priority over all other secured parties who are not perfected by control.⁹⁴ This distinction is important in mezzanine financing in real estate transactions. A mezzanine lender's principal security is the parent's interest in the entity that owns the real estate, often a special purpose entity. If the mezzanine lender has control of the shares or certificates evidencing ownership interests in the issuer, the mezzanine lender's security interest will take priority over the security interest of any other secured party perfected by filing.

When the special purpose entity is a corporation, obtaining control usually is easy, particularly if the shares are certificated. However, as discussed above, an equity interest in a limited liability company or a limited partnership is most likely a general intangible, not a security. Where such an entity is the property owner, a mezzanine lender will usually require that the debtor opt in to Article 8 of the Delaware U.C.C. so that the equity interest becomes a security in which a security interest can be perfected by control and therefore takes priority over any other perfection method.⁹⁵ A mezzanine lender will usually also require the interest to be made a "certificated security" so that control can be obtained by delivery to the secured party with any necessary endorsement.⁹⁶

An important additional consideration regarding priority for...