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Purchase Money Security Interests - Nuances and Pitfalls

Date: Nov 18, 2014 @ 07:00 AM
Filed Under: Legal

The description in the notice of the items should, when possible, be more specific than just “inventory.” Many PMSI lenders will include a very broad definition and then one a bit more narrow, such as, “… including without limitation, vehicles or construction equipment and all accessions or attachments.”  Like the liberal notice filing standard for financing statements, however, the courts generally allow the secured party substantial leeway. (22.) The notices should also reference subsequent shipments. (23.)

Limits of A PMSI In Inventory Proceeds

While a lien under Article 9 generally follows through to proceeds, the PMSI in inventory is extremely limited in its follow through to inventory proceeds. The inventory PMSI only has PMSI priority over chattel paper and instruments constituting proceeds and proceeds of the chattel paper and instruments, to the extent approved in U.C.C. § 9-330, and in other identifiable “cash” proceeds received on or before delivery of the inventory to the buyer. (24.) Thus, a PMSI priority in inventory proceeds does not extend to accounts or cash payments received after delivery of the inventory to the buyer. Accordingly, a PMSI lien in inventory will not have priority over a factor or accounts receivable lien holder with a prior filing in accounts! Moreover, to the extent the proceeds become money in the bank, that is, a deposit account, the bank or any secured party with control over the deposit account will prevail over the inventory lien holder. (25.)


A consignor’s interest in inventory is treated like a PMSI and must be perfected like one, even if it is a true consignment. (26.) While a true consignment does not require an authenticated security agreement like a secured transaction, both a true consignment and a non-true consignment must comply with the filing requirements of Article 9. (27.)

Cross-collateralization and Inventory

Article 9 adopted a special rule for the interplay of inventory and cross-collateralization paragraphs, allowing a PMSI in inventory, under certain circumstances, even when the inventory collateral was not actually purchased with the funds that remain due and owing. Under this provision, the inventory lender retains its PMSI for its full balance even though some of the inventory is re-sold by the debtor, and, thus, the remaining inventory actually secures funds that were not advanced for the purchase of these items, but were advanced for the purchase of the items that were re-sold by the debtor. (28.)  When and if, however, the PMSI monetary obligation is paid in full and the security interest in the PMSI collateral remains, the secured party will lose PMSI status if the only remaining outstanding obligation was not a PMSI obligation. (29.)

Finally, as noted in our May 20, 2014 article entitled Titled Vehicles: Not as Simple as You Might Think, the secured lender must be reminded that when titled vehicles are held as inventory, placing a lien on the title is not sufficient to perfect a lien in the vehicle. The secured party must comply with Article 9’s inventory perfection rules, including those for obtaining a PMSI.


Article 9 also has a special provision for livestock that are farm products. (30.) Under this provision, a PMSI in livestock will have priority over the livestock and its identifiable products and proceeds if:

  1. The purchase-money security interest is perfected when the debtor receives possession of the livestock, Note: Like inventory, there is no grace period and the lien must be perfected prior to the debtor taking possession, which means there must also be “attachment”, to wit, value provided and an authenticated security agreement; and
  2. The purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest; and
  3. The holder of the conflicting security interest receives the notification within six months before the debtor receives possession of the livestock; (31.)  and
  4. The notification states that the person sending the notification has or expects to acquire a purchase-money security interest in livestock of the debtor and describes the livestock. (32.)

Note: Again like inventory, no 20 day grace period!

While the livestock PMSI section parallels the inventory PMSI in many regards, the notification to holders of conflicting security interests must be received within six months before the debtor receives possession, as opposed to five years in the case of inventory, and a livestock secured party’s PMSI priority in proceeds is far superior to that of an inventory PMSI lien’s priority. The PMSI priority in livestock extends to not only all identifiable proceeds, but also all products. (33.)

As for notification to other secured parties, as with inventory, the parties entitled to notification are secured parties who filed a PMSI filing before the date of the filing or that are temporarily perfected under U.C.C. §9-312(f).

Again like inventory, even if the secured party is not required to send notification to any parties, there is no twenty day grace period and the secured party must perfect before the debtor receives possession of the livestock to qualify for the PMSI. (34.)

Finally, “farm products” includes aquatic goods. (35.)  Curiously, however, the definition is written such that aquatic goods might be “crops” or “livestock.” If the aquatic goods are crops, the general inventory rules apply; if they are “livestock” the rules set forth in this section apply. For example, kelp (seaweed) would come within the definition of crops, and catfish would be considered livestock.



1.)    See, In re, Raymond Robert Saxe, Jr. and Yvonne Mare Saxe, 491 B.R. 244 (Bankr. W.D. Wis. 2013).
2.)    U.C.C. § 9-324(f) and U.C.C. § 9-103(c).
3.)    U.C.C. § 9-102(44) Crops- A PMSI will trump an owner or mortgagee or others claiming under real property law. § 9-334(i). Manufactured Homes- A PMSI will trump a construction lien. U.C.C. § 9-334(e).
4.)    A secured party may trump an earlier lien in chattel paper or instruments if all the terms of Section 330 of the  UCC are met, but the PMSI rule and doctrine have no application. U.C.C. § 39-330.
5.)    U.C.C. § 9-103.
6.)    In re Peaslee, 13 N.Y. 3d 75, 913 N.E. 2D 387, 885 N.Y.S.2d 1 (N.Y. 2009); In re Myers, 393 B.R. 616 (Bankr. S.D. Ind. 2008). But see, In re Penrod, 392 B.R. 835 (9th Cir. B.A.P. 2008).
7.)    U.C.C. § 9-103, Official Comment 3.
8.)    U.C.C. § 9-103 (f).
9.)    For a full discussion regarding perfecting PMSI liens in fixtures, see  Fixture Filings: Often Misunderstood, February 18, 2014.
10.)  U.C.C. § 9-324(a).
11.)  The Bankruptcy Code provides a thirty day grace period, effectively allowing ten more days then the Article 9 PMSI rules. 11 U.S.C. §2547 (2) (A).
12.)   U.C.C. § 9-324. Official Comment 3. Official Comment 3 to Section 9-324 of the UCC, new to     the Code with the 2001 revision, defines when a debtor receives possession of the collateral.
13.)   Brodie Hotel Supply, Inc. v. United States, 431 F. 2d 1316 (9th Cir. 1970).
14.)   U.C.C. § 9-502 (d).
15.)   U.C.C. § 9-303(b).
16.)   U.C.C. § 9-324(f).
17.)   U.C.C. § 9-309(l).
18.)   U.C.C. § 9-203.
19.)   This notice must only be sent if the conflicting secured party filed a financing statement before the PMSI became perfected, through a filing or on a temporary basis. Official Comment, U.C.C. § 9-324.
20.)   The secured party must provide new notices at least every five years. U.C.C. § 9-324(b)(3).
21.)   U.C.C. § 9-324 (b) (1)-(4).
22.)   Fedders Financial Corp. v. Chiarelli Bros. 221 Pa. Super 224, 289 A.2d 169, 10 U.C.C. Rep. 880 (Pa. Super. 1972) (notice including many types of inventory upheld although PMSI only in one type); In re Southern Vermont Supply, Inc. 58 B.R. 887, 1 U.C.C. Rep. 2d 532 (Bankr. D.Vt. 1986) (court applies “notice filing” standard); In re Daniels, 35 B.R. 247, 37 U.C.C. Rep. 2d 967 (Bankr. WD. Okla. 1983).
23.)   See, Steven L. Sepinuk, PMSI Notification What to say and How to Say it, The Transactional Lawyer, Vol. 1  (Aug. 2011).
24.)   U.C.C. § 9-324(b).
25.)   Id; U.C.C. § 9-327.
26.)   “Security interest” includes any interest of a consignor. U.C.C. § 1-201 (b) (35). Pursuant to U.C.C. § 9-102(20), consignment, “means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale….” Note that a “sale” need not be the exclusive reason for the delivery of the goods. U.C.C. § 9-102, Official Comment 14. Georgetown Steel Co., LLC v. Progress Rail Services, Corp. (In re Georgetown Steel Co., LLC), 318 B.R. 352, 358 (Bankr. D.S.C. 2004) (iron was delivered for sale although merchant processed the iron into steel prior to sale.) But, if the collateral was only delivered to the seller for storage, there is no consignment, only a bailment and Article 9 does not apply. In re Greenline Equipment, 390 B.R. 576 (Bankr. N.D. Miss. 2008).
27.)   U.C.C. §§ 9-310 (a) and 324(b).
28.)   U.C.C. § 9-103.
29.)   U.C.C. § 9-103, Official Comment 4.
30.)   U.C.C. § 9-324(d).
31.)   The secured party must send notices at least every six months.
32.)   U.C.C. § 9-324(d) (1)-(4).
33.)   U.C.C. § 9-324 (d).
34.)   U.C.C. § 9-324 (d), (e).
35.)   U.C.C. § 9-102(a)(34)

Frank Peretore, Robert L. Hornby & Ryan O’Connor
Chiesa Shahinian & Giantomasi PC
Frank Peretore, Esq., member and Co-Chair of Chiesa Shahinian & Giantomasi PC’s Equipment Leasing and Financing Group, has over 30 years’ experience representing equipment lessors and asset based lenders. He represents national and regional finance companies and banks ranging from closely held companies to Fortune 100 companies. Peretore’s representation includes the negotiation and drafting of loan/lease documentation and the purchase/sale of individual transactions and full portfolios as well as the enforcement of lessors’ and secured creditors’ rights in thousands of matters in the state, federal, and bankruptcy courts. As a long-standing leader in his field, Peretore has published two highly-acclaimed books titled “Secured Transactions for the Practitioner: How to Properly Perfect Your Personal Property Lien and Assure Priority” (2018 Edition) and “Workouts and Enforcement for the Secured Creditor and Equipment Lessor” (LexisNexis 2015 Edition). Peretore received his law degree from Georgetown University Law Center.

Robert L. Hornby, Esq. is Co-Chair of Chiesa Shahinian & Giantomasi PC’s Equipment Leasing and Financing Group. An experienced litigator, Hornby represents national and regional banks and finance companies in all aspects of equipment leasing, asset based lending and civil litigation in New York and New Jersey state and federal courts. Hornby regularly counsels clients on a wide range of matters unique to the equipment leasing and finance industry, including drafting master documentation, enforcement of secured creditors’ rights and lien priority. He also counsels clients regarding their compliance with state and federal cybersecurity laws and regulations. Hornby recently co-authored the 2018 Edition of “Secured Transactions for the Practitioner: How to Properly Perfect Your Personal Property Lien and Assure Priority.” Hornby received his law degree cum laude from Seton Hall University School of Law, and his undergraduate degree cum laude from the University of Arizona. He served as a Judicial Law Clerk for the Honorable David S. Baime, PJAD (ret.) in the New Jersey Appellate Division.

Ryan O’Connor, Esq. is an associate in the firm’s Equipment Leasing and Financing and Bankruptcy and Creditors' Rights groups. He has assisted in the advising and representing of creditors, predominantly lenders in the equipment finance and leasing sector, in connection with litigation both inside and outside of bankruptcy. Prior
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