One of the most frequently litigated issues in secured lending involves purchase money security interests (PMSIs) and their priority over earlier-filed blanket liens. While UCC 9-324 appears straightforward, strict compliance with its requirements is essential.
THE BASIC FRAMEWORK
A purchase money security interest arises when a lender provides credit enabling the debtor to acquire collateral, and that credit is in fact used for that purpose. The UCC provides special priority rules allowing PMSIs to leapfrog over earlier-filed security interests, but only if specific statutory requirements are satisfied. Courts hold that PMSI priority is an exception to the general first-to-file rule and must be narrowly construed.
NON-INVENTORY COLLATERAL
For equipment and other non-inventory goods under 9-324(a), the PMSI must be perfected when the debtor receives possession of the collateral, or within 20 days thereafter. No notice requirement exists for non-inventory PMSIs.
However, characterization matters enormously. Farm equipment held for resale by a dealer is inventory; the same equipment purchased by a farmer for use is equipment. The distinction determines whether additional notice requirements apply. Best practice is to perfect immediately, not within the 20-day grace period, as bankruptcy filing before perfection allows the trustee to avoid the unperfected security interest.
INVENTORY COLLATERAL
Inventory PMSIs face significantly more stringent requirements under 9-324(b): (1) the PMSI must be perfected when the debtor receives possession; (2) the purchase money secured party must send authenticated notification to holders of conflicting security interests who filed earlier; and (3) the notification must be received by the conflicting secured party within five years before the debtor receives possession.
The notice requirement creates numerous traps. The notification must state that the sender has or expects to acquire a PMSI and describe the inventory-generic descriptions are risky. The notification must be received (not merely sent) before the debtor receives possession, requiring careful coordination. The purchase money lender must search UCC filing records close to the transaction date to identify all parties with filed financing statements.
PRACTICAL GUIDANCE
Blanket Lenders: Monitor UCC filings carefully. When a financing statement is filed by a potential purchase money lender, investigate immediately. Consider whether loan documents restrict the debtor’s ability to grant PMSIs.
Purchase Money Lenders: Comply strictly with all statutory requirements. When in doubt, provide notice even if you believe the collateral is equipment-the cost of notice is minimal compared to subordination. Perfect immediately and document carefully the use of loan proceeds.
Both: Consider intercreditor agreements to establish clear priority and avoid disputes. Such agreements provide more certainty than relying on statutory priority rules alone.
CONCLUSION
Purchase money priority under Article 9 offers valuable protection to lenders financing specific acquisitions, but only when statutory requirements are scrupulously followed. In complex, multi-party lending arrangements, understanding these rules is essential to protecting your client’s position.
About the Author:
David Lutz [https://www.linkedin.com/in/davidalutz/%5Dis the principal attorney at Lutz Law Firm [https://lutzlawfirm.com/], 120 South 6th Street, Suite 1515, Minneapolis, MN 55402. His practice focuses on commercial law, including secured transactions, banking law, real estate, and commercial litigation. He can be reached at david@lutzlawfirm.com or 612-424-2110.
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