UCC basics series #4: Purchase money security interest (PMSI)

Back-to-school with UCC basics!

Welcome back! We’ve got one final lesson for you: the purchase money security interest (PMSI).

The PMSI holds a favored position under UCC Article 9. If a transaction qualifies as a PMSI, the secured party can achieve a superior position even in relation to other secured parties that have perfected before it. A PMSI is generally a two-party transaction; the supplier or seller of goods retains a security interest for the purchase price.

When perfecting a PMSI, there are additional requirements pertaining to notification of prior secured parties and filing deadlines. In particular, these sections specify the requirements for PMSIs in inventory collateral and in non-inventory collateral:

• Inventory – Security interest taken on goods that are being resold to another party for resale. (e.g., Sony sells stereos to Circuit City, who then resells to the general public; Black & Decker sells circular saws to Home Depot, who then resells to customers)
• Non-Inventory (Equipment/Machinery) – Security interest taken on a specific piece of collateral and the debtor retains the equipment. (e.g., copier, refrigerator, forklift, printing press)

When inventory is used as collateral, the UCC requires four conditions to be met before a security interest can qualify as a PMSI:

1. The PMSI must be perfected at the time the debtor receives possession of the inventory.
2. The filer must give written notification to the holder of the conflicting perfected security interest in the debtor’s inventory.
3. The holder of the conflicting security interest must receive the notification no more than five years before the debtor receives the inventory.
4. The notification must state “that the person giving the notice has or expects to acquire a purchase money security interest in inventory of the debtor, describing such inventory by item or type.”

PMSI’s for non-inventory collateral can be achieved with less effort. The notification requirements do not apply.

And that concludes our UCC basics series! We hope you joined us throughout the week, and were able to discover some useful information from our series. To suggest topics for future posts, or to pose a question regarding anything you’ve read, post a comment here, or e-mail CT Lien Solutions.

Comments

[real estate degrees]

Thanks for teaching me some concepts about PMSI..I am hearing this topic for the first time and could understand the topic well..

[Cash Collection Trolleys]

Thanks for that! really helped.

[Amanda Rasizzi, CTLS Marketing]

Perfection of a lien can be achieved by a timely filing of a UCC-1, or Financing Statement. In the case of non-inventory PMSIs, the UCC-1 must be filed within 20 days of the debtor taking possession of the equipment. In the case of non-inventory PMSIs, the rules are less stringent; there is no set timeframe, but we might advise that the sooner you file, the better, as the first Secured Party to perfect holds the first position on the collateral.

[Pat Grimes]

PMSI’s for non-inventory collateral can be achieved with less effort. The notification requirements do not apply.

What are the stept to perfect our lien? Is there a time frame to file the UCC in order to perfect a purchase money security interest?