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:
- The PMSI must be perfected at the time the debtor receives possession of the inventory.
- The filer must give written notification to the holder of the conflicting perfected security interest in the debtor’s inventory.
- The holder of the conflicting security interest must receive the notification no more than five years before the debtor receives the inventory.
- 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.