First Bank made an unsecured loan to Dean Bailey for a home improvement project on January 1, 2006.  About a year later, Bailey ran out of money for the project, so he obtained a secured loan from Second Bank.  Bailey signed a security agreement granting Second Bank a security interest in his Van Gogh paintings and his antique postcard collection.  On January 1, 2007, Second Bank filed a UCC-1 covering the Van Gogh paintings and the postcard collection. 

Later, Bailey defaulted on the loan from First Bank, and First Bank obtained a judgment on January 1, 2011. By the time January 1, 2012 rolled around, Second Bank forgot to file a continuation statement.  Realizing its mistake, Second Bank filed another UCC-1 covering the same collateral on February 15, 2012.  On March 1, 2012, the sheriff levied on Bailey’s paintings to satisfy the judgment obtained by First Bank.  On the same day, Second Bank decided to repossess the paintings from Bailey, who was in default.  Unable to locate the paintings, Second Bank tried to repossess the postcard collection, but discovered that Bailey had sold the collection on April 1, 2009 to Professor Litton for $200, who had no knowledge of Second Bank’s security interest.

Which statement is correct?

1. Second Bank's security interest in the paintings has priority over First Bank's judgment lien. Litton holds the postcard collection free and clear of Second Bank's security interest.

2. First Bank's judgment lien in the paintings has priority over First Bank's security interest. Litton holds the postcard collection free and clear of Second Bank's security interest.

3. Second Bank's security interest in the paintings has priority over First Bank's judgment lien. Litton holds the postcard collection subject to Second Bank's perfected security interest.

4. First Bank's judgment lien in the paintings has priority over First Bank's security interest. Litton holds the postcard collection subject to Second Bank's perfected security interest.