Bill has an extensive collection of baseball cards.  His friend Frank sees that Bill has every Royals player’s rookie card except for George Brett.  Frank owns a George Brett rookie card and also happens to need money to buy Royals season tickets.  Bill loans $1000 to Frank, who agrees to repay the loan in 10 monthly installments of $100 each, and they enter into a written agreement (signed by Frank) that Bill will hold the card as security until Frank repays him in full. [Bill was, of course, secretly hoping Frank would not repay and Bill could then acquire title to the card.]

Frank made timely payments for five months, but started to become frustrated that his friends no longer believed he owned a George Brett rookie card (since he could no longer produce the card for them to see). Thus, after making 5 payments, Frank manages to convince Bill that he is “good for the rest of the payments” and Bill turns the card back over to Frank on July 1, on the understanding that Frank will timely make the rest of the payments.  Just to be sure, Bill files a UCC-1 financing statement in the appropriate filing office one week later on July 8.

In August, Frank did not make his payment to Bill.  When Bill demanded the card back, Frank indicated that he couldn't, because he had turned over the card to Jim on July 2, as collateral for a $1000 loan from Jim, which was memorialized in a security agreement signed by Frank.

Which of the following statements is correct?

1. Bill's security interest has priority over Jim's, regardless of whether Jim filed a UCC-1, because Bill's was the first to be perfected (when he took possession of the card)

2. Jim's security interest has priority over Bill's, but only if he filed a UCC-1 covering the card within 20 days of receiving possession of the card from Frank

3. Jim's security interest has priority over Bill's, regardless of whether he ever filed a UCC-1 covering the card

4. Bill's security interest has priority over Jim's because it was the first to attach