Understanding Purchase Money Security Interests (PMSI)
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Understanding Purchase Money Security Interests (PMSI)

In the world of secured financing, the Purchase Money Security Interest (PMSI) holds a unique position. Unlike typical secured credit facilities, PMSIs can override previously perfected security interests, offering significant advantages to creditors. A Purchase Money Security Interest (PMSI) is a security interest in goods that secures credit extended to enable the debtor to acquire or use those goods.

This article provides a comprehensive understanding of PMSIs, their benefits, and the process of obtaining and perfecting them.

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The Basics of Secured Credit Facilities

In a standard secured credit arrangement, a lender provides a loan to a borrower, secured by the borrower’s assets, including those acquired post-loan closure. To ensure their priority, lenders file a UCC (Uniform Commercial Code) financing statement in the relevant jurisdiction, aiming to secure a perfected, first-priority lien on the collateral. However, lenders might be surprised to discover that their perfected interest in an after-acquired property can be subordinated to a PMSI held by another party financing the borrower’s purchase of inventory, equipment, or other assets.

What Makes PMSI Special?

PMSIs hold a special status because they can take precedence over earlier perfected security interests. This exception to the “first-to-file” rule under UCC 9-322(a) allows PMSIs to gain priority, a significant deviation from the norm that usually dictates that the first registered interest has priority.

Definition of PMSI

A PMSI is essentially a security interest in goods that secures credit extended to enable the debtor to acquire or use the goods. For instance, a security interest granted by a buyer of goods to the seller to secure deferred payment is a PMSI. Similarly, a security interest granted by a buyer to a lender who advances funds for purchasing goods also constitutes a PMSI. The key requirement is a “close nexus” between the acquisition of the collateral and the secured obligation. Delays between acquiring the collateral and securing the related indebtedness can prevent a PMSI classification.

Establishing a PMSI

To establish a PMSI, the buyer must sign a security agreement that grants a security interest in the purchased goods to the creditor. The creditor must then perfect this security interest, typically by filing a UCC financing statement in the appropriate jurisdiction, which is generally the buyer’s organizational jurisdiction.

Priority Rules for PMSI

Under UCC 9-324(a), a PMSI in goods other than inventory or livestock gains priority over earlier perfected security interests if the PMSI is perfected before or within 20 days after the buyer takes possession of the collateral. This rule holds even if the PMSI holder is aware of prior secured parties and filings. If the PMSI is not perfected within this period, its priority will be determined by the regular “first-to-file” rule.

PMSI Under Personal Property Securities Act (PPSA)

The Personal Property Securities Act 2009 (Cth) (PPSA) in Australia establishes a framework for secured parties to protect their security interests and resolve priority disputes. The act requires secured parties to register their interests on the Personal Property Securities Register (PPSR), a process known as ‘perfecting’ their interest.

Definition and Registration of PMSI Under PPSA

Under section 14 of the PPSA, a PMSI is defined as a security interest where the money lent funds all or part of the purchase price of the collateral. PMSIs can also arise in scenarios such as PPS leases or commercial consignments. To register a security interest, one must create a PPSR account and complete a registration form, specifying the type of collateral, details of the secured party, grantor details, and selecting the PMSI option.

Timing for PMSI Registration

The priority of a PMSI under the PPSA depends on timely registration. For collateral that is part of the grantor’s inventory, the PMSI must be registered before the grantor takes possession. For non-inventory collateral, registration must occur within 15 days of possession. Failure to register within these timeframes subjects the PMSI to the standard “first in time, first in line” rule.

Defeating a PMSI

Despite the priority afforded to PMSIs, there exists a security interest that can override a PMSI: perfection by control. Although this category is rare, it is crucial for secured parties to be aware of its implications. Perfection by control typically applies to specific types of collateral, such as deposit accounts, investment property, or letter-of-credit rights.

Practical Considerations for Creditors

Creditors aiming to utilize PMSIs must be diligent in ensuring compliance with the relevant UCC or PPSA provisions. This includes timely filing of financing statements and maintaining the necessary documentation to prove the “close nexus” between the secured obligation and the acquisition of the collateral. Additionally, understanding the specific requirements and exceptions under each jurisdiction’s law is essential.

Legal Assistance

Given the complexities involved in identifying and perfecting a PMSI, seeking legal assistance can be beneficial. Legal professionals can provide guidance on the proper execution of security agreements, the filing process, and strategies to maintain the priority of the PMSI over other security interests. They can also help navigate potential conflicts and ensure compliance with all relevant regulations.

Conclusion

Purchase Money Security Interests offer a unique advantage to creditors by allowing them to prime earlier perfected security interests. Understanding the nuances of PMSIs under both UCC and PPSA frameworks is crucial for creditors to effectively utilize this powerful tool. By adhering to the specific requirements for establishing and perfecting a PMSI, creditors can secure their interests and maintain priority over other secured parties. Legal guidance can further ensure compliance and address any complexities that may arise in the process.

Disclaimer: The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.

Published by: Nelly Chavez

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