Essentials of the UCC Purchase Money Security Interest

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Annie: Hello, everyone, and welcome to today's webinar. My name is Annie Triboletti, and I will be your moderator kicking things off today. So joining us today is Paul Hodnefield, the associate general counsel for CSC. With that, I would like to welcome in Paul.

Paul: Thank you, Annie. Yeah, as Annie said, my name is Paul Hodnefield. I'm associate general counsel. And my role at CSC is to be responsible for supporting our transactional services, primarily UCC and also real estate services. And with those responsibilities, it's also my job to be active within the industry to stay on top of developments in the UCC. So to that end, I monitor legislation on a daily basis. I monitor case law. I am an active participant with the American Bar Association and the UCC Committee. I've co-chaired a task force for 17 years on filing office operations and search logic. In addition to that, I do training for filing offices so that their personnel understand their responsibilities under Article 9.

And needless to say, with all this, I get a lot of information, and I love it when I can come out and show or share this information with our customers. And that's what I'm doing today with a very important topic, the essentials of the purchase-money security interest, also sometimes called a PMSI or a PMSI.

The purchase-money security interest is a powerful risk management tool for lenders and the sellers of goods primarily because it enables them to get a super priority in goods that they the debtor to acquire. And so because it's so important, I'm going to focus on just the PMSI today, the purchase-money security interest and what it is, how it works, and hopefully give you some new ideas to think about.

Specifically what I'm going to do today is I'm going to begin by talking about some basic concepts about the PMSI or purchase-money, how it's created. Then I'll move on to talk about perfection of the purchase-money security interest and then some special cases, such as a purchase-money security interest in inventory, how it interacts with consignment transactions, and various other issues. And then we'll wrap up with a little bit of time for questions at the end.

So with that, I'm going to go ahead and get started with the basic concepts about the purchase-money security interest. Most important thing to remember is that it's all about priority. Priority is the order in which conflicting security interests are satisfied. The courts need an orderly method in order to do that. And so Article 9 has priority rules that tell the courts who gets what if the debtor defaults.

Now the general rule under Article 9 is that priority ranks from the earlier time of filing or perfection. In other words, the first to file a financing statement or otherwise perfect their security interest by alternate means if there are some available, such as by control or possession. So the first in time first in right, and this is important because the first priority security interest gets its claim paid in full before the second priority in the same collateral sees a penny of it. So priority is a critical aspect of the secured lending process.

Now there is an exception to that though, and that is the purchase-money security interest or PMSI. A purchase-money security interest is a security interest in favor of either the seller of goods to secure the price of the goods, or a lender who advances funds that enable the debtor to acquire rights in the collateral. And what a purchase-money security interest does is it gives the purchase-money secured party a super priority in the goods that they enable the debtor to acquire. So they get to jump to the head of the line with respect to those goods. And it's a way of encouraging investment in companies and investment through lending.

Now when it comes to a purchase-money security interest, a purchase-money security interest doesn't apply to everything necessarily. It's limited to goods, tangible objects, fixtures, which are tangible objects incorporated into real estate. It applies to consignment transactions. And in limited circumstances, it would apply to software that's part of an integrated transaction with goods.

Secured parties that are able to claim a purchase-money security interest include the seller of the goods if they're selling on credit. It includes a lender who finances the acquisition of the goods. And finally, consignment transactions, the consignor, the person that turns goods over to another to sell on their behalf can all claim a purchase-money security interest in the certain goods.

But one thing that is very important to remember, and this will be a constant theme throughout the creation and perfection of purchase-money security interests, is that the burden of proof lies on the secured party that's claiming to have purchase-money priority. The reason is that the purchase-money security interest is an exception to the normal rules of priority. And anytime you have an exception to the general rule, generally the courts are going to require strict compliance with the requirements. And in requiring strict compliance with those requirements, Article 9 places the burden solely on the secured party to prove that they have satisfied each and every element necessary to get that purchase-money security interest.

In fact, the secured party can do everything right, but if they can't prove it, they lose because they have the burden of proof. So that's the important thing to remember. The secured party has the burden of proof to show that they satisfied all the requirements for purchase-money security interests. Now, fortunately, that isn't a real high bar in most cases, but we'll talk about that more. Actually, we'll talk about all of these things more as we as we move through. We'll cover them in more detail.

Now I want to move on and talk about the creation of a purchase-money security interest. In order to create a purchase-money security interest, there must be a security agreement. And it simply can't exist without one.

And an example of that is the CFB-5 v. Cunningham case. What happened here is the debtor ran an art gallery, and a friend of the debtor loaned the debtor money to buy a particular painting on the condition there would be a purchase-money security interest. The debtor used the money, bought the painting, hung it in the gallery, and then promptly defaulted. And the lender there, who pretty much did it on a handshake, argued that they were entitled to a purchase-money security interest. But the court said no, you've got to have a security agreement in place, and without a security agreement, there's no purchase-money security interest.

But assuming a security agreement is in place that grants a security interest, then the security interest is a purchase-money security interest to the extent that it secures a purchase-money obligation, in other words, the loan is for purchase-money purposes, and to the extent the collateral is purchase-money collateral. What is a purchase-money obligation? The money that enabled the debtor to acquire rights in the collateral.

But what happens if the loan is for more than the collateral or the cost of acquiring the collateral? Well, the purchase-money security interest will only extend to the extent that it's a purchase-money obligation, and the purchase-money priority won't apply to the other funds that were part of that transaction.

As far as purchase-money collateral, a debtor may pledge existing collateral in addition to the purchase-money goods. And as a result, they'll get the purchase-money priority in the collateral that was acquired with the lender's funds. But they won't get purchase-money priority in the other pledged collateral. The normal collateral rules would apply.

And then another thing is that the security interest is to secure the price of the goods or the collateral. Well, that opens a question. What goes into the price of the collateral? Well, the courts have answered that for us. Generally, it's the cost of the goods. That means the purchase price of the goods.

But there could be other components as well, for example, negative equity. Oftentimes, in a purchase-money security interest, somebody is acquiring equipment, and they might be trading in old equipment. And if they owe more on that equipment than its fair market value, in order to trade it in, they may have to finance that negative equity.

So the courts are split on that, though. Some courts say, yeah, because the transaction wouldn't have happened without financing the negative equity to pay off the old loan, we can include that as part of the purchase-money obligation. Whereas other courts in different jurisdictions have said no, negative equity is not part of the price of the collateral. And so the courts are split on that.

And then what about other fees that might go into the acquisition, like insurance and some other things that might be part of the cost of acquiring the goods? Well, the courts are also split on those things.

The important thing is to know what state law is applicable to a purchase-money transaction, and then take a look to determine whether these additional items beyond the price of the goods could be considered part of the purchase money or part of the price of the goods for purchase-money purposes.

Finally, the secured creditor claiming a purchase-money security interest must have enabled the debtor to acquire rights in the collateral. And if the debtor already had rights in the collateral, then the purchase money generally isn't available. For instance, a lender who finances a loan and takes a security, a tractor already owned by the debtor, that's not a purchase money. They didn't enable the debtor to acquire that piece of equipment. So it's not covered.

And there are some situations that can be questionable, like what about a sale-leaseback, where the debtor sells the collateral to essentially a lender, who then leases it back to the debtor. Again, take a look at the applicable state law on that.

Now one thing, remember that the secured party bears the burden of proof of showing that they enabled the debtor to acquire rights in the collateral. And that means that they have to demonstrate that the proceeds of the loan or the financing that was provided did, in fact, enable the debtor to acquire rights in the collateral. And that means tracing the loan proceeds to show that the debtor used them for acquiring the collateral. And it can get dicey sometimes because if the cash is just turned over to the debtor and the debtor might throw it in one account, but they acquire equipment later on from a different account at not quite contemporaneous in time. There are all sorts of factors that can figure into this. If you can't trace that money directly to that equipment, it might be a problem for the lender to be able to prove purchase money.

So because of that, it always is a good idea to transfer the funds directly to the seller of the goods to be able to prove that that portion of the loan proceeds was used to actually enable the debtor to acquire rights in the collateral. In the alternative, of course, a lender can make the check jointly payable to the seller and the debtor. And then that way, there's some evidence, some way to show that the funds actually flowed from the lender to the seller, that demonstrates that the debtor was able to acquire the rights and the collateral thanks to the funds provided by the purchase-money lender.

Next, let's talk about perfection of a purchase-money security interest. I get a lot of questions about this. One thing to bear in mind is that when it comes to preparing the financing statement on a purchase-money security interest, the sufficiency of the financing statement is determined by Article 9. And there are no special requirements in there for the financing statement that is filed to protect a purchase-money security interest.

In fact, there have been cases on it. One involved a case, it's about 20 years old now, but it's still good, and that's Key Bank v. Huntington Bank. And what happened was Key Bank had a blanket security interest on all the debtor's assets. And later Huntington Bank came along and it financed three particular pieces of equipment for the debtor. And it filed a financing statement to perfect its purchase-money security interest. But the financing statement described the collateral as just equipment. It didn't particularly describe the collateral.

Well, when the debtor defaulted, Key Bank and Huntington Bank were fighting over priority in these three pieces of equipment. Key Bank said, "No, we have priority in the equipment because our perfected-security interest covered all equipment, and there's nothing in the financing statement that identifies the equipment so that we know what's covered by the purchase-money security interest. So therefore, Huntington Bank shouldn't get purchase-money priority."

But the court noted that there are no special requirements for description of the collateral under Article 9. And in fact, that those who search the UCC records have an obligation to conduct further inquiry beyond the public record. And had Key Bank contacted the debtor or Huntington Bank, they could have learned specifically the equipment covered by it. And as a result, the court said Huntington Bank has a purchase-money security interest, and to find otherwise would run contrary to the black letter of the statute, other case law, and commentary on Article 9.

So that pretty well clarified that there's nothing special required in the financing statement to perfect a purchase-money security interest. Moreover, nothing in Article 9 requires a financing statement to even say it's a purchase-money security interest. What matters is not whether it says it's a purchase-money security interest. What matters is whether the secured party complied with all the requirements to get a purchase-money security interest in particular collateral.

As a result, looking at any given financing statement, a searcher cannot tell by looking at the financing statement whether it's purchase money or whether it secures a purchase-money security interest. The only way to do that is to conduct inquiry outside the public record of the parties involved. And many people don't realize this and find themselves surprised that they're subordinate priority in certain assets because it didn't have to say purchase-money security interest on it.

The deadline is critically important because it has to be strictly complied with. There are filing deadlines for purchase-money security interests. The general rule is that a purchase-money security interest must be perfected either before or within 20 days after the debtor receives possession of the collateral. Not when the debtor signs the sales agreement or signs the security agreement or does some other action. It's when the debtor receives possession of the collateral.

There are some exceptions to that 20-day rule, a purchase-money security interest in inventory, and we'll go into much more detail on that in a minute. Same with consignments and livestock purchase-money security interests. There are also some non-uniform state time periods. Nebraska and Tennessee, for example, they have a 30-day purchase-money security interest window. And actually, one of them, I think it might have been Tennessee, wanted to extend it even longer. Thank heavens that didn't happen because it would have made life miserable for those searching the UCC records. And then, finally, there's consumer goods, which I'll talk about later as well.

Now when does the debtor receive possession of the collateral? It's not always that cut and dried. I mean, the general rule is when the debtor takes physical possession, when the debtor shows up and picks up the goods that they have acquired, or when the goods are delivered.

But there are gray areas out there. For example, what happens if a debtor is leasing goods, they're leasing a piece of equipment, and at the end of the lease they decide to buy it and take out a loan to buy the equipment from the lessor? Well, in that case, they've already got the use of the equipment. So are they really enabling the debtor to take or to acquire rights in the goods? Well, actually yes. And the way that they determine when the debtor takes possession is when the goods become collateral, as that term is defined in Article 9, and therefore become subject of the security interest. There's a little more detail about that in the official comments to UCC Section 9-324, which governs purchase-money security interests and goods. But yeah, it is possible to get a purchase-money security interest in goods that the debtor has been leasing.

Kind of a tighter call is what happens if the goods are delivered in stages for assembly and testing? This happens frequently with large pieces of equipment or manufacturing equipment that has to be built and tested and calibrated and so forth. Well, here, is it when the first shipment shows up, the first pieces? Is it when it's completed and fully operational? Is it when the debtor signs off on the acceptance certificate and so forth?

Well, what the rule is under Article 9 is that delivery occurs when it would be apparent to a potential lender or a hypothetical creditor that the debtor had acquired an interest in the goods taken as a whole. So if you've got a bunch of bits and pieces of machines scattered around a loading dock, it might not appear to a hypothetical creditor that the debtor has received possession of collateral yet. But even if the machine isn't operational, if it has been assembled or substantially assembled, it might just appear to a potential lender that the debtor had acquired rights in the collateral. It's kind of a fuzzy area. And it's determined on a case-by-case basis under the particular facts and circumstances.

So a good suggestion here, don't wait for delivery. There's nothing that requires the secured party to wait until delivery of the goods before filing a financing statement. That 20-day window after delivery is not when it has to be filed. It's the last time it can be filed. It can always be filed before the debtor receives possession of the collateral. And that is really the safest way to go.

Next, I want to talk about the special rules applicable to purchase-money security interests in inventory. There are a number of special rules here that require the secured party who's claiming that purchase-money security interest in inventory to jump through some extra hoops, I guess.

First of all, what is inventory? Well, it's goods other than farm products. Farm products are treated separately for a number of different things under Article 9. But they're goods that are leased by the person as a lessor. They're held for sale or lease or to be furnished under a contract of service, so in other words, replacement parts and things that are being held under a contract, consumables for the collateral. If they're furnished under a contract of service, again, replacement parts, things like that, and raw materials and work in progress as it's being assembled, or also materials used or consumed in the business. So it's a broad range. So it's not just the inventory that's being held for sale. It can be a broader range.

Now the special perfection requirements under Section 9-324 state that a purchase-money security interest in inventory must be perfected before the debtor receives possession of the inventory. There's no 20-day window. So it's got to be perfected beforehand. So this is where timing is critical to meet that deadline. Now where the purchase-money security interest is to cover ongoing deliveries of inventory over time, restocking the shelves, so to speak, if the PMSI isn't perfected for that first delivery, only the first delivery will be outside the scope of the purchase money, as long as it's perfected before more come in. Anything that comes in after perfection can get the purchase-money priority in inventory.

But there's one more step to this, and that is the secured party must also send a notice to the holder of any conflicting security interests in order to get their purchase-money priority. This notice must be sent so that it is received before the debtor receives possession of the inventory collateral. Now that notice has to include, and again this is only for inventory, the notice has to include a statement that the sender of the notice has or expects to acquire a purchase-money security interest in the debtor's inventory. It has to describe the inventory, and it has to be authenticated by the purchase-money secured party. Now I believe "authenticated" was the term that was used under revised Article 9 since 2001 until the 2022 amendments, and I think that's now been changed to "signed." But signed is a broad term and is equivalent of authenticated.

The description of the inventory, it must reasonably describe that collateral. It's really the same kinds of rules as for a financing statement. There are no special description requirements found in Article 9 for a purchase-money security interest, even in inventory. So a specific description isn't necessarily required. It sometimes isn't a bad idea, depending on what you are providing. Some secured parties will put all goods acquired as inventory from XYZ party, the secured party, that type of thing.

When it comes to the authenticated or signed, it doesn't necessarily mean a signature. It just means that the secured part is meaning to adopt or authenticate the notice. And that doesn't require somebody with a pen and ink or even an electronic signature. In First Financial Bank v. GE, the purchase-money security interest notice was sent on the secured party's letterhead. It listed the sender's full name and address and identified the relative department. But it didn't have the name or signature of the employee that sent it, nor did it have the title of the employee that sent it. And there, a court said, well, the secured party put its name on here. It gave a department to direct any communications related to this. So that's sufficiently authenticated. I think at best it is a best practice to include all that information. A signature can be typed. But it's usually best to have an ink signature, but you don't have to.

As far as the notice contents, remember it had to say that they expect to acquire a purchase-money security interest in inventory, and it had to describe the collateral. And what I've got on the screen here is an example, kind of a composite of a lot of different purchase-money security interest notices that I have seen.

Generally what you have is it's addressed to and the party that it's addressed to is the holder of a conflicting security interest as identified by a search. And then it says they expect to acquire a purchase-money security interest in the inventory of the debtor. And it describes the collateral. And then it also has a communications contact if there are any questions about that.

Now this is an example only. I'm not saying that this will work in any particular situation. Before using this particular language, anybody that wants to send a notice should be checking with their legal counsel to make sure it is sufficient. This is for representative purposes only.

As far as the steps involved in sending a notice, the first step is to conduct the purchase-money security interest notice search. You don't know who to send them to, you don't know who has the conflicting security interest until after conducting a search. That's the purpose of a search. So the idea here is to identify the notice recipients. So search, the best practice would be to first file the financing statement. Then wait until the jurisdiction's "through date," in other words the date on which all UCC records submitted that day are showing up in the index and the states provide this information. Do the search once the "through date" has caught up to the file date. And then conduct that search, and then review the search to identify who's going to get the notices.

This is important because if the search is conducted before filing the financing statement or even before the "through date" has passed, there could be other financing statements that slipped in there. And if they didn't get a notice, the secured party hasn't strictly complied with the notice requirements, and it could wind up being subordinated with their priority. So it is important to do it properly and also make sure to leave enough lead time so that all this can be accomplished and the notice delivered before the debtor receives possession of collateral.

Now some things when conducting a purchase-money notice search, you need to interpret it correctly. First of all, some jurisdictions will include lapsed financing statements for up to a year on the search. If the financing statement is lapsed and no continuation statement was filed, then those can generally be ignored. You don't need to send a notice.

If a financing statement has been amended, don't assume that if it's been amended to change party information or even delete a party in some cases, that it exempts any party from notice requirements. If they're on there and the financing statement is still effective or unlapsed I should say, it's probably a good idea to be safe rather than sorry and just send them to everybody.

If the financing statement has been terminated but is not lapsed, it's really a matter of how much do you want to risk because a terminated financing statement may remain effective A searcher cannot know that without conducting further inquiry to verify that all the secured parties on that financing statement authorized filing the termination. That's adding time and cost to the process. So often it's simpler to just send the notices rather than try to filter out whether there's a terminated financing statement, allegedly terminated that still remains effective. So the marginal cost of doing that is not that much, and it's far cheaper, in many cases, than conducting the due diligence necessary to filter these out. But every secured party is going to have to make that decision on their own based on a cost benefit analysis of their own practices.

So what secured parties listed on a financing statement need the notice? Well, obviously, the current secured party or secured parties of record need to receive the notice. What about a deleted secured party? Well, it's easier to send a notice oftentimes than to verify that they were properly deleted. If an amendment has been filed to delete the secured party, the risk is probably low that they could still have an interest in the collateral. But it's really up to the secured party to decide whether they want to incur the added expense of sending the notice.

If the secured party listed is a collateral agent or a representative of the secured party, you send the notice to the secured party listed in the financing statement. It's not necessary to go beyond the financing statement to figure out who the secured party represents as collateral agent or representative of the secured party. The name on the financing statement is the name being held out as the proper place to send the notice, and it will be effective if sent to such parties.

What if there have been assignments? Well, bear in mind that even a full assignment does not remove a secured party as secured party of record. And as a result, it is important if there has been an assignment, treat the assignment as an amendment to add a secured party and send to both parties.

Here's why. Let's say we have a financing statement with Secured Party A. Secured Party A files an assignment to Secured Party B. What is the effect of that assignment? Secured Party B is added as a secured party of record. Secured Party A isn't removed by virtue of filing that assignment. In fact, under Article 9, it says the effect of such an assignment is to make Secured Party B a secured party of record. It doesn't say anything about removing Secured Party A. In addition, another section of Article 9 says a secured party of record remains a secured party of record until an amendment is filed to delete the party. An assignment is not an amendment to delete a party.

So what could happen in that case, if somebody did a search and sent a letter just to Secured Party B, it could turn out that Secured Party A still has some sort of interest. And moreover, if Secured Party A made another loan, they would still remain secured by that financing statement and would get priority relating back to the original date. So don't even get involved in the weeds here with trying to figure out who gets them between an assignor and assignee. Send it to both. It's cheap insurance.

As far as sending the notice, there are a number of issues out there. When it comes to calculating the deadline, it's based on the receipt of the collateral. The notice has to be sent so that it was received before the debtor receives possession of the collateral.

So when does the debtor receive possession of the collateral? I think pretty much the same rules that applied to the 20-day window for calculating that, it's when the debtor actually received possession, or when it would appear to a hypothetical lender that the debtor had rights in the collateral. There are cases out there on this. Constructive possession can trigger the notice deadline, in a case where the debtor actually didn't have possession because it was being worked on by a third party and in a segregated area, but it would have appeared to a potential lender that it was in the possession of the debtor. So be aware of that. Again, these are decided on a case-by case basis based on all the facts and circumstances.

Remember that strict compliance with the notice requirements is necessary. That means sending it so it arrives before the debtor receives possession of the inventory collateral. And remembering to send the notice. The notice has to be sent and it has to be received in a timely manner.

The problem for the secured party is that they bear the burden of proving when the notice was received. So that means it's not just a matter of putting a stamp on it and dropping it in the mail. There has to be some sort of evidence of when it was delivered. And the secured party can do this by U.S. mail by using certified mail. Other methods, like FedEx or UPS or other overnight delivery that requires a signature as proof of delivery, or some other equivalent of that, because again the secured party has to be able to prove that it was received before the debtor received possession of the collateral. It may very well have, but if the secured party can't prove it, they're missing an element necessary to get purchase-money priority. And if they can't prove it, it may cost them dearly.

As far as the timing goes, again, that has to get there before the debtor receives possession of the collateral. Once it's received, the notice is effective for five years. Now not coincidentally, a financing statement is effective for five years. But there's no connection between the five-year period on the notice and the five-year period on the financing statement. It's important to understand that.

Now if the financing statement is to be continued, obviously the notice is going to have to be resent because the continuation doesn't continue the notice. All it does is continue the financing statement, and there's no requirement that they be sent and filed at the same time. So if the financing statement is to be continued, then it's going to be necessary to do a re-notice.

Note that unlike a continuation, which has to be filed within six months before the lapse date of the financing statement, there's no such six-month window for a purchase-money security interest notice. It can be sent after three years, and it will be effective for five years from the date it was received. Again, there's no connection between the notice effective period and the financing statement effective period. You could resend notices every year, and there's nothing wrong with that. They can't be rejected. It's not a filing office issue.

So best practices for renotice, if the financing statement is to be continued and it's necessary to resend notices, it's a good idea to conduct a search. That'll allow the secured party to purge any former recipients whose financing statements have lapsed. And then make sure to send the notice so that it is received before the fifth anniversary of the date the addressee received the original notice or the last notice. And again, obtain proof of delivery because the secured party is going to have to prove that they did, in fact, get it to the recipient in a timely manner.

Another issue to consider is that proof of delivery. And I can't emphasize this enough. The secured party has to prove when it was delivered. And frankly, in using certified mail, the post office is notorious for not returning the proof of delivery. And sometimes even returning the proof of delivery with the traditional green cards can take months. Usually it's pretty prompt, but it can take a while.

So what happens if that doesn't come back, especially when the debtor is itching to have their inventory collateral delivered? Well, that's really a business decision how long you want to have to wait before resending. I don't know if there is a standard practice out there, but every lender should check on their own. I believe that when we're doing it, it's 30 days if it doesn't come back. That allows time for delivery if the debtor isn't available or whatever, the post office can't get a signature. But I can't recommend any particular time. That's really a risk-based decision that each secured party will have to make.

I mentioned earlier that consignments are within the scope of purchase-money security interests for Article 9. A consignment is a transaction where one party turns over goods to another party to sell on their behalf. And certain types of transactions that are consignments would fall within the scope of Article 9. And when they do, they are treated as a purchase-money security interest in inventory, which means that the consignor, even though they own the goods that are turned over, has to file a financing statement and send a notice in order to protect their rights in the in those goods. And that's because the consignee, the person they turn it over to is deemed to have rights identical to the consignor. In other words, if the consignor could sell the goods free and clear, the consignee can sell the goods free and clear. If the goods could be reached by a creditor of the consignor, the goods can be reached by a creditor of the consignee, unless they're protected through treating them as a purchase-money security interest in inventory.

So a consignment, there's a lot of consignment stores out there and things. That's not what we're talking about. What about when a lender has repossessed collateral and they turn it over to a merchant that sells those kind of goods and they sell them as part of their used inventory? That might be a situation where the lender who repossessed the collateral will have to perfect the purchase-money security interest in inventory to protect their interest in those consigned goods.

So it requires perfecting the security interest before the consignee receives possession of the consigned goods. It means having to send a notice to the holder of any conflicting security interests, and it means that that notice has to be received before the debtor receives possession of the collateral.

As we're getting closer to the end here, I want to talk about some other purchase-money security interest issues. One is a purchase-money security interest in livestock. There are special rules for a purchase-money security interest in livestock. It's actually very similar to a purchase-money security interest in inventory, but the notice period is different. There's no 20-day window. The security interest has to be perfected before the debtor receives possession of the livestock. And a notice must be sent that's received before the debtor receives possession of the livestock. But the notice is only good for six months. I think that's because the livestock have a shelf life before they get converted into something else. So something to bear in mind. It's very similar to a purchase-money security interest in inventory. It's just that the effective period of the notice changes. It's much shorter, only six months.

A purchase-money security interest is available for fixtures. The rules are slightly different. They're governed by a different section of Article 9 than applies to other types of goods, Section 9-334. To get a purchase-money security interest in fixtures, one of the conditions is the debtor must have an interest of record in the real estate records for the real property, or they have possession of the real property. And the security interest must be perfected by a fixture filing before or within 20 days after the goods become fixtures. So we've got quite a different trigger here. It's when the goods become fixtures, not when the debtor takes possession of them.

What is a fixture filing? A fixture filing is a financing statement covering goods that either are or are to become fixtures, and it has to be filed in the office where a mortgage would be recorded on the affected real property. In other words, a financing statement filed in the location of the debtor that covers fixtures while it will perfect a normal security interest in fixtures with normal priority, it will not perfect a purchase-money security interest in fixtures. That requires filing of a fixture filing in the real estate records.

Consumer goods, generally, if the collateral consists of consumer goods, a purchase-money security interest is automatically perfected without the filing of a UCC record. It's just automatic perfection, other than title property. You can't do that with a car for example. But it's automatically perfected as soon as the security interest attaches.

So the determination is critical here. What if you have somebody that goes out and buys a small riding lawnmower that ordinarily would be used to mow a home's lawn, but then they take it and they take it to their small business outside of town, which has a big yard on the highway, and they use it to mow that? Is it a consumer good, or is it equipment in a commercial sense? Well, the issue can be critical because if that business files for bankruptcy and there's no financing statement filed on it, and the mower is deemed to be commercial goods equipment, then the secured party won't have a perfected security interest. On the other hand, if they're determined to be consumer goods, no filing was required.

Well, the courts have addressed this issue, and what they have decided is that the nature of the goods is determined by the debtor's representation. So if the debtor goes in and says, "I'm buying this good for personal, family, or household uses," and the lender finances based on that, and then they go and take it straight over to their business and use it commercially, the lender is entitled to rely upon the debtor's representation, and the courts will enforce that.

One issue that comes up from time to time is what happens if there are subsequent events. Under former Article 9, 25 years ago, oftentimes purchase-money security interests were destroyed by refinancing and certain other actions that might occur after the security interest was perfected. Well, under Article 9 as it exists today, a purchase-money security interest doesn't lose its status even if it's renewed, refinanced, consolidated, or restructured. So you're free to refinance, to adjust the terms of the deal. It doesn't destroy the purchase money character of that.

There is, however, a limitation to that. That's illustrated with Lewiston State Bank v. Greenline Equipment. What happened here is the debtor wanted to trade in a couple of pieces of equipment and acquire a couple pieces of new equipment. So they went into the equipment dealer, and the equipment dealer paid off the original loan that the debtor had taken out to acquire the trade-in equipment. And then it financed the new equipment and rolled the payoff into that.

Well, here, the court determined that it was not a purchase-money security interest with the original because Greenline was the original lender as well, I should say. But because Greenline had paid off that original loan, it was not a refinance. Oh, forgive me. I got one fact screwed up. The debtor didn't trade it in. The debtor kept that equipment, just financed the new equipment. But the lender paid off the old loan and then financed that additional difference. So the debtor retained the equipment and then in addition to new equipment. But the lender by paying off the old loan, that old obligation ceased to exist. So they didn't have a purchase-money security interest in that old equipment because that loan had ceased to exist. It wasn't a refinance due to that. My apologies for going off and confusing that. But bottom line, as long as it's the same transaction, it generally won't destroy the purchase-money nature.

It is important to know that there are some non-uniform jurisdictions out there. Florida omitted a portion which deals with the priority of security interests in fixtures. So be aware of that if taking a purchase-money security interest in fixtures that may wind up in Florida. Louisiana does not have the 20-day rule for fixture filings before the goods become fixtures. So good idea to file before the goods are delivered. And then also note that Louisiana fixture filings are not filed in the real estate records. They're filed in the personal property records. But they are still a fixture filing in the personal property records if they otherwise comply. And then, as I mentioned earlier, Tennessee and Nebraska have the 30-day window in which to perfect a purchase-money security interest instead of the 20-day.