Legal Definitions - race of diligence

The term race of diligence refers to a principle, particularly relevant in bankruptcy or insolvency situations, where multiple creditors or claimants are attempting to secure payment from a debtor's limited assets. It describes a "first-come, first-served" scenario where those who act most quickly and effectively to establish or enforce their claim against specific assets may gain priority over others who are slower to act.

Here are some examples illustrating the concept of a race of diligence:

• Pre-Bankruptcy Asset Seizure: Imagine a small business that is struggling financially and owes money to several suppliers. One supplier, anticipating the business's imminent bankruptcy, quickly obtains a court judgment and a writ of execution to seize a shipment of finished goods from the business's warehouse. If this supplier successfully takes possession of the goods before the business officially files for bankruptcy, they might be able to sell those goods to recover their debt. This action represents a "race of diligence" because the swift action of one creditor allowed them to secure assets ahead of other creditors who waited, who would then be subject to the more structured, often less favorable, distribution rules of bankruptcy.

• Perfecting Security Interests: A company takes out two separate loans from two different banks, offering the same valuable piece of heavy machinery as collateral for both loans. To establish their priority over the collateral, lenders must "perfect" their security interest, typically by filing a public record (like a UCC-1 financing statement). If the company defaults on its loans and subsequently files for bankruptcy, the bank that filed its perfection paperwork with the appropriate government office first will generally have a superior claim to that machinery. This scenario demonstrates a "race of diligence" where the speed of filing determines which creditor has the primary right to the asset.

• Judgment Liens on Real Estate: Consider an individual who owes significant debts to multiple parties and owns an unencumbered vacation cabin. Two different creditors, both holding court judgments against the individual, decide to place a lien on this cabin to secure their debts. The creditor who successfully records their judgment lien with the county recorder's office first will establish a superior claim to that specific property. If the individual then files for bankruptcy, that first creditor's lien might be honored before the second creditor's, illustrating how prompt action in recording a lien can win the "race of diligence" for a particular asset.