The UCC search and filing process can be tricky to navigate, with a lot of complexities and jargon to learn. One area that people new to UCC typically have questions around are purchase money security interests, specifically what they are and how they work.
According to UCC Article 9, a purchase money security interest (PMSI) is a special type of security interest that enables those who finance a debtor’s acquisition of goods to acquire a first priority security interest in the purchase-money collateral. Even if another creditor holds an earlier perfected security interest, the PMSI secured party would take priority.
PMSIs are often used by a seller of goods to secure the prices and advance the funds to enable the debtor to acquire the goods. However, it is important to note that the super-priority for the PMSI secured party is limited to the good that they enabled the debtor to acquire.
Defining Purchase Money Security Interest Concepts
Eligible PMSI Secured Parties & the Burden of Proof
In order to qualify as a PMSI secured party, the party needs to meet specific criteria. Eligible secured parties would be:
- Seller of goods
- Lender that finances the acquisition of goods
- Consigner of goods.
When trying to recuperate a debt, it is up to the secured party to prove and establish the extent to which the security interest is a PMSI. The need for proper documentation is why strict compliance is essential. Even minor deviations from the statutory rules could leave the secured party’s claim subordinate to the claims of other creditors.
Purchase Money Security Interest Example
Let’s use a hypothetical example to illustrate how a purchase money security interest works when it comes to prioritizing secured parties. In this scenario, you have the first secured party that filed a UCC on all assets in 2010. Then a year later, another secured party filed a UCC on equipment. So then another year later, another secured party then filed a PMSI UCC on a laser wigit model 1234.
In this case, secured party 3 has the highest priority because they filed on a specific machine, which means that their debt will be paid first. Secured party 1, which was filed in 2010, would have the next highest priority for all other assets, including equipment. SP2 is probably out of luck, because the older assets claim (which is inclusive of equipment) takes precedence.
Differences between UCC record filed to perfect a PMSI & any other UCC record
When comparing a UCC record filed to perfect a PMSI with any other UCC record, there are a few things to note:
- No special form is required
- No statutory requirement to indicate the financing statement is a PMSI
- General collateral sufficiency rules apply
PMSI Perfection Deadlines
In addition to the above, another distinction from a regular UCC-1 filing is that with a PMSI, generally speaking, the secured party must perfect the PMSI before or within 20 days after the debtor receives possession of the collateral.
There are some exceptions to the 20-day rule. Specifically, the following types of PMSIs do not necessarily have to be perfected within 20 days:
- PMSI in inventory
- Livestock PMSI (including domestic farm animals and aquaculture)
- Non-uniform state amendments
- Consumer goods
PMSI in Inventory
PMSI in Inventory Requirements
The secured transaction must meet specific requirements to qualify for PMSI in inventory priority status. With regards to perfection requirements, the PMSI must be perfected before the debtor receives possession of the inventory collateral. This supersedes the 20 day rule, which does not apply to PMSI in inventory.
For notice requirements, the secured party must send an authenticated notification to the holder of any conflicting security interests, by way of a letter. Additionally, the recipient must receive the notification before debtor receives possession of the inventory. The notice is effective for five years and has specific content requirements.
When a consignor’s interest is a PMSI in inventory, there are additional points to consider, specifically around the rights of the consignee and requirements for the consignor.
Rights of Consignee:
- Consignee is deemed to have rights and title to the goods identical to those of the consignor
- Consigned goods are subject to the claims of creditors and purchasers for value
Consignment PMSI Requirements:
- Perfect by filing before debtor receives possession of consigned goods
- Send notice to holders of conflicting security interests
- Ensure notice is received before debtor receives possession of the consigned goods
PMSI in Inventory General Guidelines
When filing for PMSI in inventory, you should take the following steps:
- File the UCC.
- Run a search to identify other secured party creditors. The through date of the state’s UCC records should be after your filing date.
- Send PMSI notices, which is a letter that will be sent to the identified secured party creditors.
- Deliver the inventory collateral.
CSC can assist with PMSI notifications and filing UCC financing statements. Learn more about our UCC services here
Want to learn more about UCC? View our recorded webinar, “The Essentials of UCC Purchase Money Security Interests”. See all of our upcoming webinars here.