The ABCs of PMSI: A Primer on Purchase Money Security Interests (PMSI), Part 1


In a typical secured credit facility, a lender provides a loan to a borrower secured by all of the borrower’s assets, including any property acquired after the loan was closed. On closing, the lender files a UCC funding statement in the appropriate jurisdiction to ensure that they have a perfect first priority lien in the collateral. The lender might be surprised to learn that his perfect security interest in a property acquired subsequently may become subordinate to a purchase price security (PMSI) held by a seller or other party who finances the borrower’s purchase of the asset. inventory, equipment or other assets.

What is the particularity of a PMSI?

A creditor who has a PMSI has the ability to get priority over (or “override”) already perfect collateral. The priority given to PMSIs is an exception to the UCC 9-322 (a) “first-to-file” rule, which governs the priority of most collateral.

What is a PMSI?

In short, a PMSI is a security interest in property securing credit granted to enable the debtor to acquire or use the property. A security given by a buyer of goods to the seller of the goods that secures the deferred payment of the purchase price would generally be a PMSI, as would a security given by a buyer to a lender who advances funds to the buyer to allow to the buyer to buy goods from a seller to obtain such advances.

To constitute a PMSI, the UCC requires a “close link” between the acquisition of the collateral and the guaranteed obligation. A delay between acquiring the collateral and securing the related debt will prevent the discovery of a “close connection”. For example, if a buyer purchases property in cash and then obtains a loan from a lender at a later date and provides security over those assets to secure the loan, the lender’s security would not constitute a PMSI. A “close connection” generally exists for ancillary obligations, such as interest, late fees, installation costs, insurance and other “obligations for expenses incurred in connection with acquisition rights on the property. guarantee ”.

How does a creditor get a PMSI?

To obtain a PMSI, the buyer must sign a security agreement providing security over the goods sold in favor of the creditor (whether the seller or a lender). The obligee must perfect its security interest in the property, which is usually done by filing a UCC financing statement in the appropriate jurisdiction (which in most cases is the jurisdiction of the buyer’s organization).

What is the priority of a PMSI?

Under UCC 9-324 (a), in the case of a PMSI involving property other than inventory or livestock, a creditor who perfects his PMSI before or within 20 days of taking possession of the guarantee by the buyer will take precedence over the security interests that were perfected before the perfection of the creditor’s PMSI. This is true even if the PMSI holder is aware of the prior secured parties and prior deposits covering the security under a post-acquisition ownership clause. A PMSI that is not developed within this timeframe will have the priority determined by the normal “first-to-file” rule of UCC 9-322 (a).

Next article

UCC treats PMSI in inventory differently from PMSI in other types of collateral. In Part 2 later this month, we’ll discuss PMSI in inventory and consignment goods, and look at a few ways a secured lender may want to address PMSI in their loan documents.


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