Legal Definitions - priority claim

A priority claim is a legal right or entitlement that takes precedence over other claims or interests. This means that the holder of a priority claim is legally entitled to be satisfied, paid, or recognized before others with non-priority or lower-priority claims. This concept is particularly relevant in situations where resources are limited, such as in bankruptcy, or when multiple parties have conflicting interests in the same asset. The order of priority is typically established by specific laws, regulations, or the timing of when a claim or interest was created or recorded.

• Example 1: Bankruptcy Proceedings

  Imagine a small business files for bankruptcy, owing money to its employees for unpaid wages, to a supplier for goods delivered, and to a bank for a business loan. Under bankruptcy law, certain types of claims are given priority. For instance, employees often have a priority claim for a limited amount of unpaid wages earned shortly before the bankruptcy filing.

  How it illustrates the term: In this scenario, the employees' claim for unpaid wages is a priority claim. This means that the bankruptcy court will ensure these employees are paid from the company's available assets before many other creditors, such as the supplier or the bank (for an unsecured loan), receive any payment. Their claim takes precedence due to specific legal provisions designed to protect workers.

• Example 2: Secured Car Loan

  A person buys a car and takes out a loan from Bank A, which then properly records a lien on the car's title. A year later, the same person takes out a personal loan from Bank B, using the same car as collateral, but Bank B either fails to record its lien or records it after Bank A. If the car owner defaults on both loans and the car is repossessed and sold.

  How it illustrates the term: Bank A holds a priority claim on the proceeds from the sale of the car. Because Bank A was the first to properly secure and record its interest (lien) in the vehicle, its claim takes precedence. This means Bank A will be paid in full from the sale proceeds before Bank B receives anything, even though Bank B also has a claim against the car. Bank A's claim is satisfied first due to its earlier, properly perfected security interest.

• Example 3: Real Estate Mortgages

  A homeowner obtains a first mortgage from Lender X to purchase their house. Several years later, they take out a second mortgage (often a home equity loan) from Lender Y. If the homeowner defaults on both loans and the house is foreclosed upon and sold at auction.

  How it illustrates the term: Lender X holds a priority claim on the proceeds from the sale of the house because their mortgage was recorded first in the public land records. This means that Lender X must be paid the full amount owed on the first mortgage before Lender Y receives any funds from the sale. Even if the sale proceeds are insufficient to cover both loans, Lender X's claim has legal precedence due to its earlier recording, ensuring they are paid first.