If a secured party has a perfected security interest in purchasemoney collateral, the secured party should be able to acquire purchasemoney priority – and take advantage of an exception to the general rules of priority – by satisfying the technical requirements of § 9-324.
If the purchase-money collateral is consumer goods (see § 9102(a)(23)), perfection occurs even without filing (see § 9309(1)) and the PMSI priority begins at attachment of the security interest (see § 9-203(a)). Remember that, generally, the burden is on the secured party claiming a PMSI to establish the existence and extent of the PMSI (see § 9103(g)), and a filing can be useful to memorialize the facts of the transaction, even though filing is not required.
If the purchasemoney collateral is equipment or farm products other than livestock, a PMSI takes priority so long as it was perfected before or within 20 days after the debtor receives possession of the purchasemoney collateral. See § 9-324(a).
If the purchasemoney collateral is inventory, there are two important differences. First, the security interest must be perfected before the debtor receives possession of the purchasemoney collateral; there is no 20-day grace period. See § 9-324(b)(1). Second, the secured party claiming the PMSI must send, and all secured parties with prior perfected security interests in inventory must receive, a qualifying notification before the debtor receives possession of the purchasemoney collateral. See § 9-324(b)(2)- (b)(4). An “inventory PMSI prenotification” must (1) state that the sender has or expects to have a PMSI in inventory, (2) identify the debtor, and (3) describe the inventory. The secured party claiming the PMSI should send the notification by some means that allows the creation of evidence of receipt by the competing secured parties – for example, certified mail return receipts.
Note that it is easy to overlook the limitation that an inventory PMSI prenotification is only effective for five years. See § 9324(b)(3). Inventory itself probably turns over much faster than that, but an inventory financing relationship could last longer than that. Therefore, an inventory PMSI prenotification should be renewed on a schedule similar to continuation of a UCC financing statement.
If the purchasemoney collateral is livestock, a “livestock PMSI prenotification” is required. It is similar to an inventory PMSI prenotification, except that it must be received by the holders of competing security intertests in livestock within six months before the debtor receives possession of the purchasemoney collateral. See § 9324(d).
Note that it is necessary to “refresh” a livestock PMSI prenotification at least every six months, due to the small window for notification, if the debtor is continuing to receive possession of purchasemoney collateral.
If the purchasemoney collateral is software, the special priority rule applies only if the software is acquired or used in goods that are also purchasemoney collateral. See § 9324(e).
Why the special treatment of PMSIs? More on that next time, in PMSIs – Part 3.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.