Priority Battles in Tennessee: How Banks and Lenders Can Protect Their Position Against Competing Creditors

As a Tennessee lender, you know that priority is everything. Should a borrower default on a loan, the order in which creditors are paid determines whether you recover everything you’re owed, some of what you’re owed, or nothing at all. Priority disputes are often the result of missed filing requirements or lapsed perfection. Banks and lenders working in Tennessee must be extremely vigilant to protect their position and recover as much as possible after default.

At Crawford & von Keller, PLLC, we solely represent creditors, lenders, and property owners. Protect your rights by calling our Tennessee office at 615-807-0939 and scheduling a consultation with our Tennessee collections attorneys.

How Creditor Priority Works in Tennessee

Tennessee has adopted the Uniform Commercial Code, which governs how certain business transactions are executed. However, real property is excluded—real property liens are governed by Tennessee recording statutes. Tennessee follows the first to file or first to perfect rule for most Article 9 security interests. This generally means that the creditor that properly perfects its interest first takes priority over creditors who file later. A lender with a valid security agreement could lose priority if its interest isn’t properly perfected. Perfection typically controls priority—not execution.

Competing Creditors That Create Priority Risk

Banks may compete with several other creditors after a default. In addition to competing with other lenders, they may compete with judgment creditors, tax agencies, contractors, and bankruptcy trustees. Each type of competing creditor has its own risks; federal and state tax liens are a significant risk for creditors, as they often directly challenge other creditors’ interests. Mechanics’ liens may gain priority by statute and judgment liens can attach unexpectedly once recorded. Bankruptcy trustees can often upend liens that were not correctly perfected.

UCC Filings

Proper UCC filing is crucial for personal property collateral. A handful of common mistakes cause significant issues for creditors. These issues include using an incorrect debtor’s name, filing in the wrong jurisdiction, or being too vague with the collateral description. These errors may leave your filing ineffective against third parties.

Continuation statements create another risk for creditors. A missed renewal leading to a lapsed financing statement can allow other creditors to take priority status.

Real Property Liens and Recording Issues

Mortgages and deeds of trust must be properly recorded to protect their priority position in Tennessee. The state follows a race-notice recording statute that means a later creditor can take priority if they record first and are not aware of an earlier, unrecorded interest. Ensuring that mortgages and deeds of trust are properly recorded is essential.

Priority Risks in Bankruptcy

Bankruptcy throws a spotlight on every perfection mistake. Trustees have significant power to avoid unperfected or imperfectly perfected liens. Additionally, preferential transfer rules can result in certain payments or lien grants being clawed back. After bankruptcy is filed, it’s often too late to fix priority defects.

Protection Strategies

In all of these scenarios, there’s one common factor—preventing priority issues is easier and more effective than attempting to fix them after the fact. Pre-closing lien searches, accurate and complete filings, and ongoing monitoring can all help creditors safeguard their position. Internal audits are also valuable for finding vulnerabilities and correcting them before they lead to losses in bankruptcy. If a creditor is already facing priority position issues and it’s too late to preemptively correct issues, bringing in legal counsel at the earliest possible opportunity is critical.

Safeguard Your Interests With Crawford & von Keller, PLLC

At Crawford & von Keller, we help creditors across various industries protect their financial interests. Schedule a consultation with our team now by calling us at 615-807-0939 or contacting us online.