recorded webinar


The purchase money security interest (“PMSI”) provides substantial benefits for both lenders and borrowers. However, the secured party must comply with the UCC perfection and notice requirements to obtain PMSI priority. This presentation reviews those requirements, including special rules for inventory and fixtures, and explains how to identify and avoid potential traps for the unwary PMSI secured party.



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In this recorded webinar, Paul Hodnefield, associate general counsel, covers the fundamentals of UCC purchase money security interests.

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Annie: Hello, everyone and welcome to today's webinar, "The Essentials of UCC Purchase-Money Security Interests." My name is Annie Triboletti, and I will be your moderator. Joining us today is Paul Hodnefield. Paul is the associate general counsel for CSC where he is responsible for advising the company regarding real-estate recording, notary, Uniform Commercial Code, and other public-record transaction services. And with that, let's welcome Paul.

Paul: Thank you, Annie. Yeah, in my role at CSC, it's my responsibility to be the subject-matter resource for all things related to the UCC search and filing process. And in that regard, I participate in the industry with the filing officers in their organization, IACA. I coach our task force on filing office operations and search logic for the American Bar Association. I monitor case law on a weekly basis. I monitor legislation on a daily basis. I am frequently involved in discussions of filing offices for various issues that pop up.

So needless to say, I get a lot of information from a lot of different directions. And one of the fun parts of my job is when I can come out and share that information. And that's what I'm going to do today with the topic purchase-money security interests. Also, I'll refer to them interchangeably as purchase-money security interests or PMSI, P-M-S-I.

In my role as the subject-matter resource, a lot of questions come in to me regarding purchase-money security interests, and that's what led me to put this presentation together. And what it's designed to do is give you an overview of the essentials of perfection of purchase-money security interests, and priority I should add.

So what I'm going to do today specifically is I'm going to run through the basic concepts of purchase-money security interests, I'll talk about how they're created, how they're perfected, what the requirements are, and then I'll move on and talk about some of the more challenging parts of the purchase-money process, namely purchase-money security interests in inventory, how that relates to consignments, and some other purchase-money-security-interest issues. And then, at the end of the presentation, we'll have time for some questions, and I'll be happy to take those. So without further ado, we'll go ahead and get started on some of the basic concepts of purchase-money security interests.

And the most fundamental concept about the purchase-money security interests is that it's about priority, it's all about the priority. Now priority is the order in which conflicting claims to the same collateral are resolved. After all, debtors frequently grant different parties security interests in the same collateral, and the courts need an orderly way to sort it out if the debtor should default. And that's what priority is. So priority is the way in which these conflicting claims are satisfied, and the way that it's done is based upon a first-to-file rule.

The general rule, under article 9, is that the first to file, or perfect their security interests by other means, is the first-priority secured party. And priority is important because of the way that the competing claims are satisfied. The first-priority secured party gets paid in full before the second-priority secured party gets any value out of that collateral. So priority is important.

Now what a purchase money security interest is is it's an exception to the general rule. What it does is a special type of security interest in favor of really two different parties, the seller of goods to secure the price or a person who advances funds that enable the debtor to acquire rights in the collateral. So, in each case, somebody's providing value that enables the debtor to acquire the collateral. And what the purchase-money security interest does is it gives the holder of the purchase-money security interest a super priority over conflicting claims in the same collateral. This makes the purchase-money security interest a very powerful risk-management tool for lenders.

Let me illustrate how this works. Under the normal priority rules, let's say we have a debtor that grants a blanket security interest in all its assets to secured party one, and secured party one files a financing statement on April 15th. A month later, the debtor grants a blanket security interest to secured party two, and secured party two files a financing statement and does so on May 15th, a month later. And finally, the month after that, the debtor grants a third secured party a security interest in the debtor's laser widget.

Now, absent to purchase money-security interest under the general rule, secured party one is going to have first priority in all of the assets of the debtor. The secured party two here is the second to file is going to have the second priority security interest in all the assets of the debtor. And our secured party number three will have third priority with respect to the laser widget because that's the only equipment subject to the security interest in this case.

Now, if we look at the same scenario but in a situation where the debtor has granted secured party three a purchase-money security interest in the laser widget, in that case, the priorities are changed a little bit. The first-priority security interest in the laser widget goes to secured party three, even though they were the last to file, because they have a purchase-money security interest in the laser widget.

In that case, secured party one has the second priority security interest in the laser widget but first priority security interest in everything else. And secure party number two is way down at the bottom, in this case. They've got second-priority secured interest in every asset but the laser widget, in which case they come in third. So it's an exception to the general rule. It's a special rule designed to encourage investment and allow debtors to add value.

Some other important concepts to understand about the purchase-money security interests, one, is the scope. What does this purchase-money security interest capable of extending to? Well, goods, you know, tangible items, fixtures, which are a sub-class of goods. Consignment transactions, which occur when a party turns goods over to another party to sell on their behalf. And, in a very limited sense, to software if the software is part of an integrated transaction. I'm not going to go into software under purchase money, suffice it to say that it's only covered by a purchase-money security interest if it's built into other goods. Really the good rule of thumb here is that purchase money is available only to tangible things. It's not available for accounts and things like that.

And as far as the secured parties that can acquire a PMSI, well, you've got, as I mentioned earlier, the seller of goods, if they're providing the goods on credit to secure the price, and a lender that finances the debtor's acquisition of the goods. And then, also a consignor of goods to another is also eligible to obtain a purchase-money security interest, much more about that later.

A very important concept to understand about the purchase-money security interest has to do with the burden of proof. Because the purchase-money security interest is an exception to the general rule, the courts are normally going to require strict compliance with all the requirements that are necessary to obtain a purchase-money security interest. And article 9 expressly provides that the secured party is the one who has to prove that they have complied with each and every one of the requirements to obtain the purchase-money security interests that they claim. So it is important that everything the secured party does is done in such a way that they can document their eligibility for a purchase-money security interest.

Now, let's talk about how one goes about creating a purchase-money security interest. The first thing that has to occur is there has to be the grant of a security interest in a security agreement. Merely loaning money that a borrower uses to acquire goods does not establish the purchase-money security interest. There has to be a security interest, there has to be a grant of a security interest.

One example of how the courts address this, the case I cited here, CFB-5, this was a case involving an art gallery. And a friend of the owner of the art gallery advanced some funds to the gallery that the owner used to go out and acquire some artwork as inventory for the gallery. Before that artwork was sold, the gallery ran into financial problems, wound up in bankruptcy, and the court had to figure out who got what when it came to the inventory of the art gallery.

The person that loaned the money to the gallery claimed that he should be entitled to a purchase-money security interest because, you know, he provided the money that allowed the gallery to acquire the inventory. But there was no security agreement. And without a security agreement, there's no grant of a security interest and the court didn't need to look beyond that, the court said, "Without the security agreement, you don't have a purchase-money security interest." So the first thing that has to happen is you have to have a security agreement.

Next, it's got to be a purchase-money obligation and involve purchase-money collateral. What does this really mean? Well, the security interest will be a purchase-money security interest to the extent that the collateral secures a purchase-money obligation, meaning the loan is being undertaken to enable the debtor to acquire rights in that collateral. And it has to be for purchase-money collateral, meaning that the collateral for the purchase-money security interest is the collateral that the debtor acquired.

And that's why article 9 says, "To the extent," because it does allow a mixed transaction where, for example, the debtor might use some of the loan proceeds to acquire goods that would be subject to the purchase-money security interest, but they may use some of the funds for other purposes and it will be a purchase-money security interest only to the extent that the funds were used to acquire the purchase-money collateral. And it will be a purchase-money security interest only to the extent the collateral is a purchase-money collateral.

So it doesn't have to be an all-or-nothing type of thing, you can have a mix of purchase-money and non-purchase-money in the same transaction. Perfect it with the same financing statement but it may only be a purchase-money security interest to an extent and the rest of it would be subject to the normal rules of priority.

When it comes to securing the price of the collateral, remember the purchase-money security interest can run in favor of a party that is the seller of collateral to secure the price. Well, what is the price? Well, the price of the collateral, the general rule is of course it's a cost to the goods. You know, if goods cost $100, the price of the collateral is a $100. But there are times where there's more that goes into it. It's not that simple as a straight sticker price I guess.

There are other possible components, for example, negative equity. Negative equity occurs sometimes as part of a transaction where the debtor might be wanting to trade up. For example, trading in a bulldozer on which the debtor still owes $10,000 and wants to buy a new bulldozer that's worth half a million dollars. Well, the seller may finance that half-a-million-dollar bulldozer and pay off the $10,000 outstanding balance on the trade in, and then, roll those in to one total.

And when it comes to . . . is that negative equity part of the price, you know, that extra $10,000 that got financed? Well, on this, the courts are split. There are some courts that say, "It can be part of the price," and others that say, "It's not part of the price." So bottom line is it depends on what state you're in, it's not consistent, it varies from state to state.

There are other possible price components as well, you know, licensing, registration fees, insurance provisions, things like that that might be part of the price. And again, that's going to vary from state to state. The courts are split on those issues.

Now the purchase-money security interests, the loan must enable the debtor to acquire rights in the collateral. What exactly does this mean and are there any limitations on this? Well, there are. For example, a loan secured by goods in which the debtor already has rights probably isn't going to qualify for a purchase-money security interest. For example, in a sale-leaseback transaction, here the debtor owns collateral, sells it to a leasing company which, in turn, leases it back to the debtor. It's a way of generating some additional cash flow. Well, the debtor had rights in the collateral prior to that transaction, so was that a purchase-money transaction? Well, that might be open to some interpretation and there's a very good chance it would not qualify for purchase-money.

It's also important to know because the secured party bears the burden of proving each and every requirement for obtaining a PMSI, it's important that the secured party be able to trace the loan proceeds. In other words, if they're going to advance funds to the debtor, they better be able to prove that the debtor actually used funds for the intended purpose.

Because if the debtor doesn't . . . for example, it can be something innocent, like the debtor might commingle the funds, in the debtor's bank accounts, use it for other things and use other funds to acquire the collateral the loan was really intended for. Well, if that happens, the secured party may not be able to prove that the funds that were advanced were used for the intended purpose and enabled the debtor to acquire rights in the collateral. So the secured party better be able to prove that that was the case.

And the best practice, the best way to do that is to ensure that the payment goes directly to the seller, if at all possible, or at least that the check is jointly payable to the seller and buyer so that, you know, there's some method of tracing, you know, the funds from the lender to the seller of the goods to show that the funds were actually used to enable the debtor to acquire rights in the collateral.

Now, I'll move on and talk about perfection of purchase-money security interests. Purchase-money security interests, with one exception, are always going to be perfected by filing. When it comes to filing, what gets filed is financing statement, a UCC financing statement.

Now, that financing statement and the sufficiency of it for purchase-money purposes is going to be determined by UCC section 9-502. This is applicable to the contents of a financing statement, for a sufficient financing statement. And in section 9-502, there are absolutely no special requirements for financing statements filed in connection with a purchase-money security interest. It doesn't have to say, "Purchase-money security interest." It doesn't have to have any type of special markings or special collateral descriptions or anything that would otherwise distinguish the financing statement as a purchase-money security interest.

In fact, there's a case out there that illustrates this pretty well, Key Bank versus Huntington Bank. What happened was Key Bank had a blanket security interest in all the debtors assets and they perfected it just fine. Later, Huntington Bank financed three particular pieces of equipment for the debtor. And when Huntington filed its financing statement, it said, "Purely equipment," that's all it said was the word equipment on there.

Well, it was a purchase-money security interest. Huntington advanced the funds for the debtor to buy this equipment. They were used for that purpose. Everything made it qualify for a purchase-money security interest. But after the debtor defaulted, Key Bank argued that Huntington was not entitled to purchase-money priority because Huntington didn't bother to particularly describe the equipment and therefore Key Bank, from looking at the financing statement, couldn't tell which equipment was covered by the purchase-money security interest.

Well, the court looked at that argument and disagreed. The court said, "There are no special rules for purchase-money security interests, so the normal rules apply. A description by type, such as equipment, is acceptable under article 9," and therefore, the financing statement filed by Huntington was sufficient, and it perfected the purchase-money security interest.

Court went on to note that these are just notices and that those who searched the records, or those who are interested, have to conduct further inquiry, beyond the public record, to learn the full state of affairs. And as a result, to find the way the Key Bank argued that you have to particularly describe, otherwise it's not good, the court said, "No, that's contrary to the statute commentary and existing case law."

So bottom line is that you can't distinguish a purchase-money security-interest financing statement from a non-purchase-money financing statement. They can look identical. And another lesson to that is just because it says, "Purchase-money security interest," on the financing statement, that doesn't make it so.

In fact, you know, the financing statement simply doesn't need to indicate that it's filed in connection with a purchase-money interest. Those who are interested in it can always contact the parties involved to find out what particularly is covered by the financing statement and whether it's a purchase-money claim. And always remember that purchase-money security interests are established by the secured party's compliance with the statutory requirements, not by what the financing statement says. Or if even that the security agreement says, "Purchase money," it's not required. Purchase money is established by the conduct of the secured party, the facts and circumstances, not necessarily by the financing statement itself.

Now, one of the big concerns of secured parties that claim purchase-money security interests is the deadline. There are, in the purchase-money realm, deadlines that are very strict and have to be complied with when it comes to filing for perfection.

For ordinary security interests that are not purchased-money, there is no deadline. And when you file, I mean there's certainly risk for how long you wait to file after the transaction is concluded. But, in a purchase-money world, there are some strict deadlines.

Now, the general rule for purchase-money security interest is that the secured party must perfect at security interest by filing a financing statement before or within 20 days after the debtor receives possession of the collateral. Note that the trigger here is the debtor receives possession of the collateral, not the debtor signs off on the collateral, or the debtor, you know, accepts the collateral, or the debtor makes a payment, or the debtor signs the security agreement.

The courts are going to look at when the debtor received possession of the collateral. That's something also that the secured party is going to have to prove as far as the date when the data received possession of the collateral. Frequently, that's not a problem but sometimes it can be, in certain cases, and we'll come back to that in a moment.

There are some exceptions to this 20-day filing rule though. One is the purchase-money security interest in inventory, also consignment transactions that are deemed the equivalent of a purchase-money security interest. Purchase-money security interest in livestock has a different rule. And there are some non-uniform things out there.

Also with consumer goods. With consumer goods, the general rule is that a purchase-money security interest in consumer goods does not require filing. It's automatically perfected without filing. And I'll come back to each of these a little later on.

First of all, a debtor receives possession. When does a debtor receive possession? Well, in most cases, it's going to be when the debtor takes physical possession of the goods. They pick them up and walk out of the dealer with them, or drive them away, or, you know, they get physically delivered to the debtor's location. All of these things are taking physical possession of the goods, but there are some times where it's not quite so clear.

For example, what if the goods are required under a law other than article 9, such as a lease? In this type of situation, the debtor already has the goods in the debtor's possession. Right? I mean it's a lease. They're leasing a piece of equipment so they might have had it for three years already by the time they decide to buy out the lease and finance the equipment at the end of lease. For example, they buy it at fair market value and finance it.

Well, article 9 deals with that. In the official comments it points out that the buyer takes possession in such a case when the goods become collateral," that term is to find in article 9. In other words, when they are no longer subject to the lease, they then become collateral. And so, closing in that type of case typically is going to be where that occurs. So there are times where the debtor might have possession of the goods, they might not have rights in the collateral like we are thinking of like ownership rights, and that would cause a different calculation for when that 20 days begins to run.

Also, what if the goods are to be delivered piecemeal, and assembled, and then, tested, over a period of time that can run from days to months? Well, article 9 also understands that this happens. And, in this case, the official comments are helpful to point out that a buyer takes possession after an inspection of the portion of the goods in the debtor's possession as a whole would lead a potential lender, or a hypothetical creditor, to believe that the debtor had acquired rights in the goods when taken as a whole. In other words, if it looks like the debtor has possession, they probably do, at that point, to a hypothetical creditor.

There are cases out there in this, the Master Services case is one example. What happened here was that with Masters Services, Master Services had received goods, and they were assembled over a period of time, and then tested. And then, the secured party, in that case, didn't get around to filing the financing statement until more than 30 days after the assembly and testing was complete. They didn't file within 20 days of the delivery of these items. They didn't file within 20 days of the time the assembly was complete. They waited more than 30 days after that point.

And so, what the secured party argued was that, "Well, we filed within 20 days of the debtor making its first payment which shows that the debtor was signing off on acceptance of the goods and, therefore, that should be good enough to perfect the purchase-money security interest." But the court said, "Nay-nay, it would have appeared to a hypothetical creditor way before then, certainly more than 20 days before the time the financing statement was filed that the debtor had possession of the goods," so the secured party, in that case, was unable to purchase money priority.

So those are the general rules for perfection, calculating the deadlines, and so forth. Now I want to talk about some specific cases or specific types of purchase-money security interests that have special rules. And the most important there is the purchase-money security interest inventory. These are handled a little bit different than purchase-money security interests and other kinds of goods.

First of all, what is inventory? Well, inventory looks at the nature of the goods in the hands of the debtor. It's defined as goods, other than farm products, that are leased by a person as a lessor. In other words, if I lease a car, the car isn't my inventory, it's the inventory of the company that leased it to me, so the inventory of the lessor, in that case. They are goods that are held by a person for sale or lease or to be furnished under a contract of service.

So if I have an equipment dealership, the equipment I have on my lot is going to be inventory because I'm holding it to sell or lease to people. Likewise, my parts department back there, which has all of these widgets and fan belts, and everything else that goes in to keep equipment running, you know, that's there to be furnished, you know, for service purposes. So that's going to be inventory as well.

And finally, inventory is going to consist of raw materials that are used in the manufacturing process, as well as works-in-progress and similar things. So if I have a plastic-injection molding company, the raw plastic powder that will be used to create the plastic goods would be my inventory because it's going to be used and consumed in the manufacturing process.

Now, when it comes to perfection of a purchase-money security interest in inventory, the 20-day rule doesn't apply. If the collateral consists of inventory, the security interest must be perfected by filing a financing statement before the debtor receives possession of the inventory. No 20-day window, it's got to be in there before.

Now, that doesn't mean if there's going to be a lot of inventory delivered over a period of years, perfection is going to cover everything after the financing statement is filed. If some of it was delivered before the financing statement was filed, it'd still be subject to the security interest, but it wouldn't be a purchase-money priority. So even filing late and that type of thing will still protect future deliveries of inventory. So there is no 20-day rule. It's got to be perfected before the debtor receives possession of that inventory in order to get purchase-money priority.

And there is another requirement as well and that is that the secured party must send notice to the holder of any conflicting security interest to let that party know that the secured party is claiming a purchase-money security interest. And this is because it's possible for a debtor to kind of game the system without that notice. They might have a lender that's committed to finance inventory and will make advances as the inventory comes in, but they might acquire inventory from a different party that's financing it and find a way to double finance it. So to protect against the double financing by the debtor, a notice is required to go out.

And it's important to understand the best process to handle those notices. The first is you have to identify who receives the notice. Well, it's the holder of any conflicting security interest in the same collateral. And the only way to do that is to run a search, which is just a normal UCC search, to identify the holders of these conflicting security interests.

Now, the best practice for doing that is to file the financing statement to perfect the purchase-money security interest, and then, do the search after that so that anybody that filed right up to the minute when that financing statement was filed that is entitled to notice is going to receive it. Because if a notice doesn't go to somebody that was entitled to receive it, the secured party is going to lose its purchase-money priority, at least with respect to that party's claim.

So best way to do that, file the financing statement, wait until the through date the filing office catches up to that date, the date of filing, that's usually within a couple of days. And then do the search, identify the holders of any conflicting security interests, and send notices appropriately.

Now, when interpreting the search, a few things to bear in mind. Number one, if the financing statement has lapsed, there are some jurisdictions that will report lapsed financing statements for up to a year as part of the UCC search. If it's lapsed generally, it's not necessary to send a notice to the secured parties listed on that financing statement.

Now, if the financing statement has been amended to add change, delete, or anything with parties on there, you cannot assume that the amendments were authorized and that, based on those amendments, you don't have to send all of them. The best practice is to just simply send to all the parties that are listed on there that could be secured parties. It's cheap insurance compared to the alternative—a necessary party doesn't get the notice.

Same thing with a terminated but unlapsed financing statement. It's important to understand that a termination statement may not terminate the effectiveness of the financing statement, that's going to depend on the authority of the filer. For example, if the termination statement that was filed was not authorized by the secured party of record, it's not effective. And you can't tell that from the face of the public record. So if it's not effective, then that secured party, on the financing statement, is entitled to notice and better receive one.

Likewise, if there are multiple secured parties and a termination is filed by one, that termination statement is effective but only with respect to the interest of the secured party or parties that authorized it. Bottom line is that a terminated financing statement may remain fully effective. And as a searcher looking to send out PMSI notices, it's not going to be apparent from the face of the record. It cannot be determined whether the record is still effective or not.

The only way to do that is to conduct due diligence to the parties involved, contact them each, and determine what their claims are. So that's one way to do it but that's time and labor-intensive. So the alternative to that is just send . . . if it's a terminated on lapse financing statement, just send the notice to the secured parties. It's probably far cheaper than spending the time and effort to confirm with each of them that they don't have a claim anymore.

Now, once you've done the search, and you have to look at the individual secured parties that are listed, you got to determine which of them is entitled to the notice. Now, as I said, the best practice, just send it to all of them. It's not always going to be cost-effective though. So bottom line, if you are going to trim back that list, the first step is determine who the current secured party or parties are, and then send them notice.

If a secured party has been deleted, an amendment is filed to delete the secured party, technically, they don't need the notice but you don't know whether that amendment is effective or not. And if it wasn't authorized by the right party, then it's not an effective amendment and that secured party that was deleted still is entitled to the notice. So the safest practice is to still send a notice to that party.

If the financing statement lists a collateral agent for a syndicate or a representative of the secured party, it is not necessary to look beyond the financing statement to identify the individual secured parties represented by the agent or representative. All you have to do is send it to the secured party at the name and address listed there, and that will be good to get it to any other parties that they represent for purposes of the financing statement.

If there has been a UCC3 assignment filed from secured party one to secured party two, for example, it's important to understand that a UCC3 assignment does not assign the security interest. All it does is assign some or all of the assignor's right to amend the financing statement. In effect, all an assignment does, in the UCC records, is add a secured party of record. It doesn't delete the assignor. Because of this, it is important that both of them receive a notice.

And there is a case that came out, just last Friday, that really illustrates this. TSAWD Holdings, this is a case arising out of the Sports Authority bankruptcy. And what happened here is the secured party that was providing inventory to the Sports Authority stores, it did send the purchase-money security interest notice but it only sent it to the assignor. There was a UCC3 assignment filed for the financing statement. I think Bank of America was the original secured party as collateral agent for a syndicate of lenders.

Later, an assignment had been filed to a new secured party who was acting as the agent of the lenders. And when the purchase-money secured party sent their notice, they only sent it to Bank of America, not to the assignee. And as a result, the court said, you know, "The assignee didn't get it. You didn't send it to them, and you have to strictly comply with these notice requirements." And as a result, the secured party was found to not qualify for purchase-money security interest in the inventory, all because they didn't send it to enough secured parties related to that financing statement. So it's important to remember that both the assignor and assignee have an interest and, you know, send them both the notice.

When it comes to when to send the notice, well, the holder of the conflicting security interest must receive the notice within 5 years before the delivery of the inventory to the debtor. What this means is that a notice is effective for 5 years. So for calculating the deadline, it's got to be before the debtor receives possession of the collateral.

What happens if the debtor doesn't actually receive it? Well, then no notice is required. But that's going to be fairly rare. That might happen in a situation where the debtor might buy goods from a supplier but the supplier never ships them to the debtor, instead they drop ship them directly to the end buyer of the debtor. Debtor never has the goods so no notice is required in that situation. But, in most situations, a notice would be required.

One example of where that can get a little cloudy is a case I have cited here just as an example of how this figures out, Absolute Machine Tools versus Liberty Precision Industries. What happened here was the debtor was in the business of selling and installing particular equipment and the debtor sold some equipment to a buyer but the debtor didn't actually possess . . . they had to order the equipment from the manufacturer, and they had to manufacturer ship it directly to the buyer.

And it was set in a place where the debtor actually controlled the machine during the installation and setup. And the court said, "Well, no, that debtor was never really in possession of it but they had constructive possession because they had it under their control." And so, a notice was required in that case and the seller's secured party, the debtor's secured party was unable to get purchase-money priority because they didn't send a notice in that situation.

Now, it's important to satisfy the statutory notice requirements. The statutory notice requirements are not particularly difficult to understand and they have to be complied to strictly. One example the Sports Publishing Inc. case I cited there. In this case, the debtor received possession of the inventory but the secured party never sent a notice to the holder of any conflicting security interest. And they argued that they didn't really need to because all the other conflicting parties, they knew about it, you know, they had other places where these people would know.

But the court said, "Tough. You did not strictly comply with the notice requirement, you have to do that." The notice requirements are strictly-construed according to the court and, as a result, the secured party was not given purchase-money priority. They lost that. And as I said, that TSAWD Holdings case also reinforced that the notice requirements are strictly-construed and the secured party must comply with them.

So how does a secured party send the notice to best protect itself? Well, remember that the secured party has the burden of proof, and they have to prove that the holder of the conflicting security interest received the notice before the debtor received possession of the collateral. So they have to be able to prove that receipt, and the only real way to do that is to send the notice by a method that will show proof of delivery. That means certified mail, overnight delivery service, or courier. Anything that's going to get a signature and provide proof of that delivery.

As far as timing of the notice, as I said, it has to be received before the debtor receives possession of the inventory. And you determine when it was received based on, as I said before, how it would appear to a third-party hypothetical creditor if you can't prove a particular point in time a debtor took possession. Once it's received, that notice will cover deliveries of inventory for the next five years. At the end of that five-year period, unlike a UCC where you can file a continuation statement, the notice has to be recent. In other words, a new notice has to go out.

Now, the notice is not tied to the financing statement in any way. There is no connection between them other than a coincidental connection. A secured party can send that new notice every year. They can send a new notice every four years, however they want to do it. The important thing is that they overlap so there's no break in the continuity of the notice. There is no limitation on when it can be sent. There's no six-month window like there is for continuation of a UCC financing statement.

In practice, if you're continuing the financing statement, you're probably going to need to continue or to resend the notice. But they are not on the same time frame and you can't rely on a continuation tracker to track the notices because they may have a different expiration date than the financing statement.

So the best practice for sending the new notice is, first of all, conduct a search so that you can purge from that list any secured parties that allowed their financing statements to lapse in the interim. And then send the notice so it's received before the fifth anniversary of the receipt date of the original notice.

As far as sufficiency of the notice contents goes, it's fairly simple. All it has to say is that the debtor either has or expects to acquire a purchase-money security interest in inventory. It has to describe the inventory, which follows the article 9 rules, and it has to be authenticated by the secured party.

The description of the inventory only needs to reasonably identify the collateral. In fact, the courts really apply the same standard for sufficiency of the notice collateral descriptions, for a financing-statement collateral description. One example is First Financial Bank versus GE. Here, the secured party sent a notice and described the collateral as . . . I think it was new and used boats. And again, the prior secured party claimed that that wasn't specific enough because it didn't identify the specific collateral. The court said, "No, that's good enough. It's the normal article 9 description rules. It only needs to reasonably identify the collateral."

As far as authenticated, that does not mean a wedding signature is required, or even a printed signature. It just has to provide enough information to show that it came from the party that it's purported to come from. And looking at that first financial case again, the notice had the . . . it was on the letterhead of the secured party, it provided contact information for the secured party, it listed the sender's name and address. Everything was there, the only thing it really lacked was a signature, an employee name, and the title of the employee that sent it. The court said, "That's still okay," that that was enough to authenticate it as having come from the secured party.

Here's an example I put together as an example of what goes into a purchase-money security interest in inventory notice. This was not intended to be necessarily legally-sufficient for any particular purpose. This is really a composite based on the many purchase-money security-interest notices that we receive here at CSC. Because some people are sending them even to the party listed as the, "Return to," for the filed financing statement. They really don't need to do that but it gives us a chance to see what goes into these PMSI notices, and this is just a representative example.

So that's a purchase-money security interest in inventory. Now I want to talk about consignments. Certain types of consignments fall within the scope of article 9. Typically these will be a consignment to a party that isn't normally known by its creditors to be involved in the sale of goods for another. We see this a lot in the jewelry industry, a lot of goods are provided on consignment to jewelry stores by the manufacturers. We see it in other industries as well. And as a result, these types of consignments fall under article 9 because they are similar to a security interest.

And under article 9, in a consignment that falls within the scope of article 9, the consigner's interest is that of a purchase-money security interest in inventory. So, in other words, if it is a consignment transaction, the consignor has to comply with all the rules for a purchase-money security interest in inventory. The rights of the consignee are deemed equivalent of those of the consignor. In other words, they have the right to sell the goods and that also means that their creditors can reach the goods if the consignee defaults.

So, you know, it's treated just the same way as a purchase-money security interest in inventory and that means that the consignor of the goods has to file a financing statement, send the purchase-money notice, and, you know, keep track of the lapse dates and re-notices as necessary.

Some other purchase-money things to go over, livestock. If the purchase-money security interest is in livestock, it's again almost exactly the same thing as an inventory purchase-money security interest. There's one big difference though, but like an inventory purchase-money security interest, there's no 20-day window. It has to be perfected before the debtor receives possession of livestock. There's a notice required that has to be received before the debtor receives possession of the livestock. The difference is that the notice is only effective for 6 months instead of 5 years, so it's necessary to resend notices much more often. And the notice contents are very similar to that of a purchase-money security interest in inventory.

There is also a purchase-money security interest available in fixtures. And in that case, the debtor must either own the property, have an interest of record, or be in possession of the property. The security interest must be perfected by filing a fixture filing before or within 20 days of the time the goods become fixtures. So there's a different calculation here for the time period. It's before or within 20 days of when the goods become fixtures.

When do they become fixtures? I haven't seen any case law on that, but we do know it's not when they're necessarily delivered, it could be at some later date. That might buy the secured party more time but, because of the ambiguity, I think it's best to perfect the earliest time possible to be sure you don't have to get involved in those types calculations.

Also, it has to be done by a fixture filing, which is a financing statement covering fixtures that is filed in the real-estate records. It has to comply with all the debtor, secured party and collateral-description information of 9-502(a), it has to provide a description of the real property, indicated covers fixtures, and be filed in the real-estate records under 9-502(b), and that means filing it in the office where a mortgage would be recorded on the affected real property.

Consumer goods. I mentioned earlier that if the collateral consists of consumer goods, no filing is required. The issue is, you know, when are goods consumer goods versus other types of goods? Well, it depends on, you know, a few things, how the goods are going to be used. Consumer goods are goods that are used or acquired for use for personal family or household purposes.

And there may be goods where it's difficult to tell. For example, you know, a small tractor might be more than the average person would get for home use and it would be more commonly used in a business. But hey, some people use it for personal, family, or household uses, so how do you determine whether it's consumer goods or commercial goods?

And ultimately, it's going to be a fact-based determination, although the secured party is entitled to rely on the debtor's representation. So if the debtor says, "This is going to be consumer goods," put it in the security agreement. And there are cases out there where the courts have held that a secured party is entitled to rely on the debtor's representation as to what they're going to use the goods for when it comes to perfection, even if they later use the goods for a different purpose.

I'm often asked about the impact of subsequent events. Will that destroy the purchase-money priority, such as refinancing and things like that? And the answer is, in general, no, it won't. A purchase-money security interest doesn't lose its status simply because it's renewed, refinanced, or consolidated, or otherwise restructured. These terms aren't defined, in article 9, so it's up to the courts to figure out what they mean.

There isn't a lot of case law on this yet, but there is one case that illustrates what isn't a refinance. In this Lewiston State Bank versus Greenline Equipment, what happened was the debtor owned a couple pieces of equipment that they had purchased on credit from a manufacturer. And they wanted to trade those in for some different equipment, they still had some outstanding debt owed on them, so an equipment dealer agreed to take them in and paid off the loan with the existing secured creditor.

And then, later, you know, they provided the new equipment to the debtor and filed a financing statement. The problem was that here we had two separate loans involved. It wasn't a refinance or consolidation. Because the dealer paid off the loan, it extinguished that original loan. It was gone. So this was a new loan. And because of the way that it was structured, they were not entitled to purchase money priority. So it's got to be the same transaction. A refinance or a workout isn't going to destroy purchase money as long as the original loan isn't extinguished. It can be refinanced, consolidated, restructured but don't extinguish it or that could wind up creating problems.

There are non-uniform jurisdictions out there when it comes to purchase-money security interests. Florida, for example, omitted purchase-money security-interest provisions from its section that deals with the priority of security interests in fixtures. Kansas doesn't distinguish between consumer goods and commercial goods for purposes of purchase-money perfection, which means you got to perfect by filing a financing statement in consumer goods.

Louisiana doesn't have the 20-day window for perfecting a security interest in fixtures. And also, fixture filings, in Louisiana, are filed in the central index, not in the real property records. Tennessee and Nebraska, they each have a longer purchase-money security-interest filing window, up to 30 days after a debtor receives possession of the equipment.

So I think that's pretty much going to wrap up the presentation. With the remaining few minutes, I'm going to turn it back over to Annie for Q&A. By the way, my contact information is on the handouts. If you do have questions, you can always feel free to contact me on this stuff. I'm always happy to share information I have.

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