Do you say “P.M.S.I.” or “pimm zee”?: Part 1

Crosswalk B&W

Under UCC Article 9, the general rules for determining security interest priority are (1) that perfected security interests have priority over unperfected security interests, and (2) that perfected security interests have priority according to their respective times of filing or perfection.  See § 9‑322(a). That is why we pay so much attention to the chronology of a UCC search report. One exception to the general rules involves purchase‑money security interests, or PMSIs.

A “purchase‑money obligation” is an obligation incurred for some or all of the price ofcollateral, so long as the funding is, in fact, used to enable the debtor to acquire rights in the collateral.  See § 9‑103(a)(2). And “purchase‑money collateral” is goods or softwarethat secure a purchase-money obligation.

Note that a PMSI must involve goods – equipment, inventory, farm products, or consumer goods – or software.  See §§ 9‑102(a)(44), -102(a)(33), -102(a)(76). One cannot have a UCCPMSI in accounts, chattel paper, general intangibles, instruments, or investment property, or in anything else that is not goods or software.

Under the first part of the general rules stated above, a perfected security interest will have priority over an unperfected security interest.  Therefore, to take advantage of the exception to the general rules and achieve purchase‑money priority, one must perfect the security interest. For equipment, inventory, farm products, and software, which are eligible for a PMSI claim, a security interest can – and must – be perfected by filing a financing statement.  See § 9‑310. For consumer goods, filing is advisable, both to provide protection in the event of a further sale of the consumer goods to a second buyer (see § 9-320(b)), and in case the secured party cannot establish all the requisites for a PMSI but still desires to have a perfected security interest (see § 9‑309(1)).

Note that, generally, the burden is on the secured party claiming a PMSI to establish the existence and extent of the PMSI.  See § 9‑103(g).

So, if one has a purchase‑money obligation and purchase‑money collateral, one has the opportunity to acquire a purchase‑money security interest, or PMSI.  How? More on that next time, in PMSIs – Part 2.

NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.