dispatches from the trenches TIPPING THE SCALES
It’s a Bird… It’s a Plane…
It’s a Super-Priority Purchase Money
Security Interest
BY KENNETH P. WEINBERG
A PMSI is a useful arrow in the quiver of many equipment finance companies. Still, no legal weapons or
tools are 100% effective. It is crucial, therefore, for a PMSI lender to have a good understanding of the
requirements of a purchase money security interest and to maintain adequate records evidencing that
those requirements have been met. Carefully drafted documents are a must.
KENNE TH P. WEINBERG
Founding Partner,
Marks & Weinberg, PC
The Uniform Commercial Code (UCC) gives special benefits to a “Purchase Money Security Interest,” which, generally speaking, is a security interest in goods or certain software
(called purchase money collateral) that secures an obligation of an
obligor 1.) incurred as all or part of the price of the collateral or 2.)
for value given to enable the debtor to acquire rights in or the use of
the collateral if the value is in fact so used (called a purchase money
obligation). 1
Traditionally, purchase money collateral could only consist of
“goods” but the revised version of Article 9 enacted in 2001 expanded
this concept to allow purchase money priority in software, which is
not embedded in the goods if 1.) the debtor acquired its interest in
the software in an integrated transaction in which it acquired an
interest in the goods; and 2.) the debtor acquired its interest in the
software for the principal purpose of using the software in the goods. 2
To this limited extent, a purchase money security interest (PMSI)
can exist in a general intangible, which is the proper classification of
software not embedded in goods.
When perfected in accordance with the terms of the purchase
money rules, a PMSI takes priority over a competing interest in the
purchase money collateral even if another secured party has a secu-
1 UCC §9-103(a).
2 UCC §9-103(c).
In order to qualify for purchase money priority, the PMSI lender
must follow certain rules. Those rules vary depending on whether
the underlying collateral constitutes “equipment” or “inventory”
under Article 9.
rity interest covering that same collateral that was perfected under a
previously filed financing statement (such as a senior secured lender
with an all asset filing). 3 A PMSI also will have priority over a lien
creditor whose interest arises prior to the date of the PMSI. 4 For
purposes of simplicity, this issue of Dispatches From the Trenches
refers to the conflicting secured party that is primed by the PMSI
as the existing lender and the secured party providing the purchase
money financing as the PMSI lender.
The concept of a PMSI arose to encourage borrowers to acquire
new items financed by the vendor or a third-party lender that makes
the acquisition possible. The theory is that the existing lender is not
“hurt” in any way by granting priority to the PMSI lender because,
if it weren’t for the loan made by the PMSI lender, the purchase
money collateral wouldn’t be owned by the debtor in the first place.
However, an existing lender may receive some comfort from property,
which it mistakenly believes the debtor owns free and clear of liens
and, as such, Article 9 places certain burdens on the PMSI lender to
evidence its lien in a timely fashion.
In order to qualify for purchase money priority, the PMSI lender
must follow certain rules. Those rules vary depending on whether the
underlying collateral constitutes “equipment” or “inventory” under
Article 9. 5 The applicable criteria are more cumbersome with respect
to Inventory than in standard financing transactions that involve
“equipment.”
Enable the Debtor to Acquire the Equipment.
For both equipment and inventory, a purchase money security
interest, by definition, requires that the loan proceeds “enable the
debtor to acquire rights in or the use of the collateral.” 6
3 UCC §9-324.
4 UCC §9-317(e).
5 See UCC §9-324.
6 UCC §9-103(a)( 2).
