By Paul Hodnefield, Esq.
The purchase-money security interest (“PMSI”) generally takes priority over prior perfected security interests. However, to obtain the benefits of the PMSI, the secured party must strictly comply with the Article 9 requirements. In the case of a PMSI in inventory, that normally involves both timely perfection by filing a financing statement and notice to the holders of conflicting security interests. However, there are exceptions, as was recently demonstrated in the case of Financial Federal Credit, Inc. v. Crane Consultants, LLC, 2014 U.S. Dist. LEXIS 65125 (W.D.N.Y May 12, 2014).
Crane Consultants, LLC (the “Debtor”) was in the business of buying and selling cranes. Beginning in 2005, the Debtor obtained financing from Financial Federal Credit, Inc. (“FFC”), a lender that specialized in construction equipment financing. In exchange for the loans, the Debtor granted FFC a blanket security interest in all of its present and after-acquired assets. In 2005 FFC filed a financing statement to perfect its security interest.
In 2010, the Debtor entered into a complex transaction with three related companies, Ramar Crane Services, Ramar Steel Sales and Ramar Steel Erectors (collectively “Ramar”). The Debtor agreed to sell a new crane to Ramar and take one of Ramar’s used cranes as a trade-in. While described as a “trade-in,” the transaction was really a purchase. The purchase order for the used crane stated that the Debtor agreed to buy it for $450,000 and that the Debtor would give Ramar a 45-day promissory note for that amount, secured by the note and the used crane.
In late March of 2010, Ramar paid the Debtor in full for the new crane and some associated equipment. The Debtor delivered the new crane to Ramar shortly thereafter. The Debtor also delivered the promissory note to Ramar.
Meanwhile, the Debtor entered into another loan agreement with FFC. This transaction was apparently intended to provide the Debtor with the funds necessary to buy the used crane from Ramar. FFC later filed a financing statement on June 29, 2010, that provided a blanket collateral description and an attached schedule that specifically identified the used crane.
By August, the Debtor had not paid off the note. Ramar did not make any demands for payment. Nor did Ramar deliver the used crane to the Debtor. Nevertheless, Ramar did take action to protect its interest. On August 11, 2010, Ramar filed a financing statement to perfect its security interest in the note and used crane.
The Debtor later defaulted on the FFC loans. FFC brought suit against the Debtor and Ramar, seeking money damages and replevin of both the new and used cranes from Ramar. One of the defenses Ramar raised to FFC’s long list of claims was that Ramar held a PMSI in the used crane that was superior to any interest of FFC. The parties each brought cross motions for summary judgment.
FFC asserted that the used crane was inventory of the Debtor. To perfect a PMSI in inventory, the secured party must generally file a financing statement and send notice to the holder of any conflicting security interest. While Raman did file a financing statement, it never sent any notifications. Therefore, according to FFC, Raman was not entitled to PMSI priority.
The court was not convinced by FFC’s arguments. To begin with, the court had some doubt as to whether the used crane had ever become inventory of the Debtor. Even if it did, the court cited the Official Comment to UCC 9-324, which explains that if a debtor never receives possession of the inventory, the time period for sending the notice never begins and the PMSI has priority even without the notice. In this case, the Debtor never received possession of the used crane. Therefore, the court found that the notification provision did not apply.
The important thing to take away from this case is that the point when the debtor receives possession of inventory is the critical time for determining whether a secured party strictly complied with the statutory requirements for a PMSI in inventory. Ordinarily, the secured party will need to file its financing statement and send its notifications before the debtor receives possession of the inventory. If, however, the debtor never takes possession, the deadline does not arise and the secured party may be perfected—even without providing the statutory notifications. Of course, a secured party may want to provide the notifications anyway if there is any possibility of the debtor receiving possession, just to err on the side of caution.
Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at email@example.com or 800-927-9801, ext. 62375.