What this is: A detailed examination of Purchase Money Security Interests (PMSI), a financial tool whereby a creditor loans money to a debtor for purchasing specific goods and secures a superior interest in those goods.
What this means: We help demystify the complex concept of PMSI, showing its relevance to UCC searching and filing procedures and how it can secure "super priority" over other interests in the same collateral, provided certain rules are adhered to.
UCC searching and filing procedures can be complicated at times. Just when you think you have mastered the correct forms, proper jurisdiction to file in and procedures to perfect your security interest, you are notified that a seller has successfully filed a PMSI filing which conflicts with the collateral of your perfected filing. A perfected PMSI filing has now taken priority over your secured interests.
In this article we will explore PMSI filings, how prioritization of filings plays out, benefits for all involved and requirements for filing perfection.
What is a PMSI Filing?
Section 9-103(b)(1) of the Uniform Commercial Code (UCC) states that “a security interest in goods is a purchase money security interest … to the extent that is the goods are purchase-money collateral with respect to that security interest.”
Simply put, a PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods. In return, the debtor grants the creditor a security interest in those goods.
Are PMSI Filings Different Than Non-PMSI Filings?
In many ways, a PMSI is the same as any security interest.
- A Seller and its customer first must execute a security agreement. In the case of a PMSI, however, it is very important that the agreement relate only to the goods that will be transferred to the customer in the future.
- General requirements for the sufficiency of a financing statement apply and include debtor name, secured party name, addresses and an indication of the collateral. Section 9-502(a).
- There are no special forms or statutory requirements to indicate the financing statement is a PMSI.
The major difference between a PMSI and a non-PMSI is the way the debtor acquires the collateral. If the debtor already owns the collateral that is pledged to the creditor, then the creditor’s interest in the collateral is a non-PMSI. If, however, the collateral is acquired by the debtor with the proceeds of the credit extended by the creditor to the debtor, then the creditor’s interest in the collateral is a PMSI.
Browse our PMSI & Consignment Services page to ensure your Purchase Money Security Interests (PMSI) are properly perfected and protected.
Collateral Determines Requirements for Perfection (Section 9-324)
When filing a financing statement with the intent to perfect PMSI priority, the filer should be aware that PMSI rules differ depending on the type of collateral obtained with loan proceeds. Procedures depend on whether your security interest is in inventory or non-inventory, consignments, livestock or fixtures. Below is information regarding more common collateral types - inventory or non-inventory collateral. See Section 9-324 for details on less common types. These requirements must be followed or the super priority benefit of these filings will be withdrawn.
Tip: Be aware that some jurisdictions have non-uniform purchase-money rules. Check individual state’s rules for information.
In general, a Seller must file the appropriate financing statements with the secretary of state or other filing office in the state where the customer is legally organized. Again, general requirements for the sufficiency of a financing statement apply.
Rules for Perfecting Inventory Collateral (Section 9-324(b))
- The PMSI must be perfected by a UCC-1 filing which identifies the goods sold as collateral.
- The filing must be perfected before the debtor receives possession of the inventory.
- A notice is required to be sent to the current secured party or parties that hold the conflicting security interests in the inventory collateral.
Tip: Conduct a UCC search as part of this process to determine parties which may have filed UCCs with conflicting collateral.
- Notice must state that the debtor expects to acquire a PMSI in the debtor’s inventory and should describe the inventory.
- Notice must be authenticated by the secured party claiming the PMSI.
- Notice is effective for 5 years and must be resent if/when the financing statement is continued.
- Notice must be received prior to debtor taking possession of the collateral.
Tip: When sending notices, use a mail/carrier service that can verify delivery of your notification.
Rules for Perfecting Non-Inventory Collateral (Section 9-324(a))
The rules for obtaining a PMSI for non-inventory collateral are frequently less stringent than those filings with inventory collateral. To obtain purchase money priority in goods other than inventory, livestock and fixtures – such as equipment collateral – the creditor must satisfy 2 requirements:
- The secured party must be able to demonstrate that the borrower’s credit was used to purchase the collateral.
- The PMSI must be perfected by filing a financing statement either before or within 20 days after the debtor receives possession of the collateral.
Jumping Ahead With Super Priority
The general rule for prioritization of perfected security interests is “first in time, head of the line.” A perfected security interest will take priority over any subsequent perfected security interests. An exception to this rule is the PMSI filing which takes “super priority” over other security interests.
This super priority trumps all other perfected secured interests in the collateral. This includes perfected filings created and filed before that of the PMSI. With this special security interest, the seller will have additional remedies to assist in collecting its receivables or will have priority to retrieve and resell goods sold on credit for which the customer failed to pay.
Who Benefits From a PMSI Filing?
A PMSI provides benefits not only to sellers and borrowers but can also provide a benefit to lenders as well. A deeper look into the PMSI filing practice surfaces the following benefits:
Seller Benefits: A properly perfected PMSI will have superior rights to the specific inventory the Seller is selling to that customer and to certain identifiable cash proceeds from the inventory over a conflicting security interest in the same inventory.
Borrowers Benefits: Without the PMSI lender, the borrower would not have the ability to purchase the collateral and wins from being able to finance the assets. PMSI lending also allows borrowers better access to credit and oftentimes on more favorable terms.
Lender Benefits: Lenders benefit because PMSIs reduce their risk and encourages investment. The existing lender, with first priority, benefits from the debtor gaining access to additional funds in order to obtain inventory/equipment essential for the operations of the debtor.
A PMSI is a useful tool in the toolbox of many finance companies. The PMSI exception allows creditors that may not be first in line to still get a secured interest in collateral. To gain this secured interest, the lender must be sure their loan funds were used to buy the goods, file a UCC1 and follow other regulatory rules based on the type of collateral.
It is crucial for a PMSI lender to have a good understanding of the requirements of a PMSI and to maintain adequate records evidencing that those requirements have been met in order for them to benefit from the super priority they are striving for.
What is an example of something I can do to reduce the risk of my filing being rejected?
We still see many filings prepared with the entity name followed by “a Delaware Limited Liability Company” or d/b/a names. The only way to be sure you have the correct debtor’s name is to review the charter document and any amendments for registered organizations and usually the unexpired state-issued driver’s license or unexpired state-issued ID for individual debtors. The name on the UCC filing should be styled to match the name on these sources. For more information, check out our article 11 Mistakes to Avoid When Preparing Your UCC Filings.
Is there somewhere I can go to access all of the new UCC forms?
If you’re a current client and need guidance selecting forms, complying with state statutes and rules or tracking UCC filings, visit our UCC ProFile page to learn about our online UCC preparation, filing and maintenance system.
What if there was a debtor name error in the UCC1 filing but the UCC3 continuation was filed reflecting the correct debtor name… does that resolve the incorrect debtor name?
Unfortunately, it does not. The only way to amend the debtor’s name is to file a UCC3 debtor name amendment. A UCC3 continuation extends the life of the UCC another 5 years unless the UCC was filed in Wyoming, which has a 10-year statutory period. To correct or change a debtor name, a UCC3 debtor name change amendment should be filed. We answer these and many more questions in our article 5 Questions About Avoiding Fatal Debtor Name Mistakes on UCC Financing Statements.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.