First to File Rule: How It Impacts Secured Lending and Bankruptcy

Lenders and creditors rely on clear rules to determine their rights when a borrower defaults. The “first to file” rule plays a key role in establishing priority among secured parties, influencing who gets paid first in cases of insolvency or liquidation. This principle is especially relevant in commercial lending, where multiple creditors may have competing claims over the same assets.

Role in Secured Lending

The “first to file” rule is central to secured lending, shaping how financial institutions and private lenders structure loan agreements. Lenders need assurance that their claims on a borrower’s assets are enforceable and protected against competing interests. This rule provides that protection by prioritizing security interests based on the order in which they are recorded. Under Article 9 of the Uniform Commercial Code (UCC), a lender perfects its security interest by filing a UCC-1 financing statement with the appropriate state office, typically the Secretary of State. The date and time of this filing determine the lender’s standing relative to others with claims on the same collateral.

A delay in filing can expose a lender to subordination if another creditor records a claim first. This is particularly relevant in asset-based lending, where businesses use inventory, accounts receivable, or equipment as collateral. A lender financing a manufacturing company must ensure its UCC-1 filing is completed before suppliers or other creditors attempt to secure interests in the same machinery or raw materials. Failure to do so could result in a lower repayment priority, increasing the lender’s exposure to losses.

Jurisdiction also matters. UCC rules generally require filings to be made in the state where the debtor is incorporated or resides, but exceptions exist. If collateral consists of real property fixtures, filings may need to be recorded in the county where the property is located. Misfiling in the wrong jurisdiction can render a security interest unperfected, leaving the lender vulnerable in the event of borrower default.

Priority Among Multiple Creditors

When multiple creditors assert claims against the same debtor, the order in which they establish their interests determines who gets paid first in the event of default. The “first to file” rule governs this hierarchy, but exceptions exist that can shift priority.

Purchase Money Security Interests (PMSIs) are one such exception. Under UCC 9-324, a creditor that provides financing specifically for the acquisition of collateral—such as a vendor funding a business’s equipment purchase—can gain priority over earlier secured creditors if they meet strict filing and notification requirements. If a supplier finances a company’s purchase of machinery and properly perfects its PMSI within 20 days of the debtor taking possession, it can leapfrog an existing lender with a blanket lien on all assets. This forces general secured lenders to monitor new financing arrangements that could undermine their standing.

Other complications arise when creditors rely on different legal mechanisms to assert claims. A lender with a perfected security interest may find itself competing with a tax lien filed by the IRS or state revenue authorities. Federal tax liens, governed by 26 U.S.C. 6323, generally take effect upon filing but can have retroactive priority in certain circumstances. If a lender extends credit without checking for outstanding tax liens, they may discover too late that the government’s claim supersedes their own, reducing their recovery prospects.

Intercreditor agreements help manage these conflicts by contractually defining the rights of different lenders. In syndicated loans or mezzanine financing structures, senior and junior creditors negotiate subordination arrangements that dictate repayment order regardless of filing dates. These agreements are common in leveraged buyouts, where multiple financing layers exist, and lenders need clarity on their repayment position before committing capital.

Implications for Collateral

The “first to file” rule shapes creditor hierarchy and how collateral is structured, valued, and monitored throughout the life of a loan. Lenders must assess the stability and liquidity of pledged assets to ensure they maintain sufficient value to cover outstanding obligations. This is particularly important when dealing with depreciating assets such as vehicles, machinery, or technology. A lender financing a fleet of trucks must account for annual depreciation rates under IRS guidelines, which in 2024 allow a five-year recovery period for heavy-duty vehicles under MACRS. If depreciation is not factored into loan terms, a lender may find itself under-secured if the borrower defaults.

Collateral substitutions also introduce risks, particularly in industries where assets are frequently bought and sold. In commercial real estate lending, borrowers may seek to replace pledged properties with newly acquired ones, requiring lenders to amend their filings or conduct fresh appraisals. The IRS’s like-kind exchange rules under 1031 can complicate this further, as borrowers defer capital gains taxes by swapping properties, potentially altering the lender’s collateral pool. If a lender fails to track these changes, they may find themselves with a weakened security position, especially if the new property has lower market value or legal encumbrances.

Cross-collateralization provisions add another layer of complexity. These clauses allow a lender to secure multiple loans with a single asset or a pool of assets, but they require careful documentation to avoid priority conflicts. A lender financing both equipment and working capital for a manufacturing firm might cross-collateralize inventory and machinery, ensuring repayment across multiple credit facilities. However, if additional lenders enter the picture, disputes can arise over whether certain assets were intended to secure specific obligations. Courts often scrutinize UCC filings and loan agreements to determine intent, making precise language in security agreements essential to enforcement.

The Concept in Bankruptcy Proceedings

When a debtor enters bankruptcy, the “first to file” rule influences how secured creditors assert their claims, but the process is further shaped by the Bankruptcy Code’s automatic stay, avoidance actions, and reorganization plans. Upon filing for bankruptcy, an automatic stay under 11 U.S.C. 362 halts all collection efforts, temporarily preventing secured creditors from enforcing their rights. While this pause applies universally, creditors with perfected interests retain a stronger position when courts determine repayment priorities. Those who failed to perfect their claims before the bankruptcy filing risk being treated as unsecured creditors, significantly reducing recovery potential.

Trustees and debtors-in-possession have tools to challenge or reorder claims through avoidance provisions. Under 11 U.S.C. 547, preferential transfers occurring within 90 days of bankruptcy filing can be clawed back if they unfairly benefit one creditor over others. This means that even a properly filed security interest might be unwound if the debtor made payments that disrupted equitable distribution. Similarly, fraudulent transfer rules under 11 U.S.C. 548 allow the court to void transactions if assets were moved to evade creditors or sold below market value. Secured lenders must carefully document loan disbursements and collateral valuations to withstand such scrutiny.

In Chapter 11 reorganizations, secured creditors may face cramdowns under 11 U.S.C. 1129(b), where courts approve repayment plans despite creditor objections. If a debtor demonstrates feasibility—often through financial projections and discounted cash flow analyses—secured claims can be restructured, altering interest rates or extending repayment terms. Lenders must evaluate whether reorganization terms preserve sufficient asset value or if liquidation under Chapter 7 provides a better outcome.