Do you say “P.M.S.I.” or “pimm zee”?: Part 3

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Why allow a PMSI to disturb the relatively straightforward order-of- filing priority scheme?

There are at least two reasons:

  • Facilitating seller financing
  • Limiting the power of existing secured parties.

Sometimes a seller of goods is willing to provide financing to a buyer. Sometimes the seller’s financing is on better terms than the buyer’s line of credit with its traditional lender, or perhaps the buyer does not have a line of credit and the traditional lender cannot or will not extend additional credit to the buyer. If the seller were willing to provide the financing and step into line behind the traditional lender, whose perfected security interest would attach to the new goods, great! But if the seller expects or requires that it will get a first-priority security interest on the new goods – goods it is selling to the buyer – the transaction cannot be completed without the cooperation of the traditional lender; unless there was a special rule to enable a seller to “jump ahead.”

Say neither the seller nor the existing lender/secured party is willing to finance a buyer; perhaps the buyer wants to add a new product line to complement existing lines, but the seller does not provide financing, and the existing lender views the idea as a change in business model that it does not support. Should the existing lender’s reluctance prevent the would-be buyer from pursuing the effort? No. If the buyer can find another lender who would provide financing, the new lender could satisfy the technical requirements to create a PMSI, enabling the buyer to proceed and limiting the effect of the existing lender’s refusal or inability to provide additional financing.

Note that it is common for loan documents and similar agreements to include restrictions on additional financing or further security interests. Though the PMSI rules allow for a seller or new lender to “jump ahead” in terms of priority, to do so might be a breach or event of default under existing agreements, so a would-be buyer must still be wary.

So, for some types of funding – of purchasemoney obligations – and for some types of collateral – purchasemoney collateral – one has the opportunity to satisfy the technical requirements and take advantage of an exception to the general rules of priority to acquire purchasemoney priority and a PMSI!