Mr. Potato Head wants to purchase five sheep from Jesse the Cowgirl, thinking that he can sell them each at a significant mark-up when Rex the Green Dinosaur is hungry and desperate for food.  Mr. Potato Head also knows that the best creditor in Andy’s Room—Hamm the Piggy Bank—has objections to eating animals, and wouldn’t give Mr. Potato Head a loan if he knew of the plan.  Instead, Mr. Potato Head tells Hamm the Piggy Bank that he wants to buy 5 sheep as pets.  On Sept. 25, Hamm the Piggy Bank gives Mr. Potato Head a loan, but requires Mr. Potato Head to sign a security agreement in which Potato Head grants Hamm a security interest in the 5 sheep; in the agreement, Mr. Potato Head represents that he is buying the sheep as pets. Hamm completes a financing statement that describes the sheep, but he does not get around to filing the financing statement until Sept. 28.

Mr. Potato Head buys the five sheep from Jesse the Cowgirl on Sept. 25.  On Sept. 26, Mr. Potato Head learns two unfortunate facts: (1) that Rex the Green Dinosaur is a vegetarian and (2) that there would soon be an influx of sheep into Andy’s Room.  Because Mr. Potato Head knows that an increase in supply of sheep will eventually lead to lower prices, he sells all of his sheep to Bo Peep (who runs a sheep farming operation) on Sept. 27 at a significant loss. 

Buzz Lightyear—space ranger turned wealthy investor—had obtained a security interest in all of Bo Peep’s farm products, including after-acquired, the previous week.  Buzz filed a proper financing statement perfecting that security interest on Sept. 19.

Mr. Potato Head later defaults.  Which statement is correct?

1. Buzz Lightyear’s security interest in the 5 sheep will have priority over Hamm's security interest in those sheep.

2. Hamm the Piggy Bank's security interest in the 5 sheep has priority over Buzz Lightyear's security interest because Hamm had a purchase-money security interest and he filed a financing statement within 20 days of Sept. 25.

3. Hamm the Piggy Bank's security interest in the 5 sheep will have priority over Buzz Lightyear's security interest, but only if Hamm had provided proper prior notification to Buzz Lightyear that he expected to acquire a purchase-money security interest in those 5 sheep. 

4. Hamm the Piggy Bank's security interest in the 5 sheep has priority over Buzz Lightyear's security interest because it was properly perfected prior to the transfer to Bo Peep.