Monitor - November/December 2011

This standard is arguably not met by a loan that permits the debtor to retain collateral already in its possession or for which it has already paid. As such, the safest way to assure that this requirement has been satisfied is for the PMSI lender to pay the vendor directly for the goods. Reimbursing the debtor can cause problems since some courts have held that reimbursing the debtor directly means it was the debtor’s money (and not the PMSI lender’s loan) that allowed the debtor to acquire rights in the equipment and have therefore disallowed PMSI treatment. Other cases have held that as long as the debtor’s payment to the vendor and the secured party’s reimbursement of the debtor are closely connected in time and planning, they should be viewed as part of the same transaction — therefore allowing PMSI treatment.

In the event the debtor has made a down payment to the vendor, it is best, if possible, to fund the full amount to the vendor and require the vendor to reimburse the debtor.

Perfection Within 20 Days of Possession for Equipment.

For equipment, the PMSI lender must be perfected either before or within 20 days after the date the debtor receives “possession” of the equipment. Remember that perfection requires both: 1.) a grant of a security interest, the giving of value and the debtor having rights in the collateral; and 2.) a filed financing statement perfecting the security interest.

Sometimes it is easy to determine when possession begins because the borrower signs some form of delivery receipt or the vendor has written evidence of the date of delivery. However, sometimes the situation is confusing, when the period between the delivery and the date of acceptance is extended due to testing, repair, additional deliveries of necessary pieces, etc.

The UCC offers some guidance where deliveries occur in stages, stating that the 20-day period begins when “it would be apparent to a potential lender to the debtor that the debtor has acquired an interest in the goods taken as a whole.” 7

There is also some statutory and case law indicating that taking possession as a lessee (such as under a rental agreement), rather than as an owner is not enough to begin the 20 days running. In particular, the UCC provides:

“[One] issue concerning the time when ‘the debtor receives possession’ arises when a person acquires possession of goods under a transaction that is not governed by this article and then later agrees to buy the goods on secured credit. For example, a person may take possession of goods as lessee under a lease contract and then exercise an option to purchase the goods from the lessor on secured credit. Under §2A-307( 1), creditors of the lessee generally take subject to the lease contract; filing a financing statement against the lessee is unnecessary to protect the lessor’s leasehold or residual interest. Once the lease is converted to a security interest, filing a financing statement is necessary to protect the seller’s (former lessor’s) security interest. Accordingly, the 20-day period in [this section] does not commence until the goods become ‘collateral’ (defined in §9-102), i.e., until they are subject to a security interest.”

This commentary is technically meant to address a situation where the lessor under a true lease finances the purchase option owed by the lessee. It basically says that the 20-day clock starts to tick once the “lease” is converted into a “secured loan.”

7 UCC § 9-324, Official Comment No. 3.

However, some lenders rely on this logic when financing the purchase option that a lessee has under a lease with a third party (although this situation is slightly different than the example since the lessor is not the party that eventually becomes the secured lender).

Additional Requirements for PMSI in Inventory. Since inventory that is held for sale may be converted into accounts or other payment obligations, sometimes fairly quickly, and existing lenders that finance such inventory often expect for it to roll over from time to time, Article 9 places more stringent requirements on PMSI lenders intending to obtain a PMSI in inventory. Complying with PMSI rules for inventory requires the following:

• • The PMSI lender must conduct a UCC search against that entity to reveal all secured parties of record as of that time.

• • The PMSI lender must review the search results to see if any existing filings cover either “inventory” or the type of goods that the PMSI lender will be financing (e.g. construction equipment). If any of these filings are found, the PMSI lender needs to send a PMSI notice to the secured party that filed that financing statement. Such mailings should be accomplished in a manner that allows the PMSI lender to provide such notices were sent. This notice is “good for” five years. Some lenders simply send PMSI notices to any secured creditors revealed by the search (rather than spending time or taking the risk of operations personnel making a judgment call as to the scope of the filing).

• • The PMSI lender must have perfected the security interest (meaning there is a grant of a security interest under a signed document and a UCC financing statement filing in place) on or before the date the debtor receives possession of the inventory. In other words, the 20-day window available for equipment is not available for inventory.

One issue meriting additional attention is the requirement that a PMSI lender has a perfected interest when goods are first possessed by its debtor. This requirement is tricky in some industries (especially for some traditional equipment leasing companies).

If future transactions are contemplated, the PMSI lender may want to word its notices and the collateral description on its financing statements broadly so as to avoid having to repeat the foregoing each time.

One issue meriting additional attention is the requirement that a PMSI lender has a perfected interest when goods are first possessed by its debtor. This requirement is tricky in some industries (especially for some traditional equipment leasing companies). As long as the UCC filing is broad enough to cover future schedules and unlisted goods that are later subject to those schedules, it should be relatively easy to avoid the timing problem with respect to the UCC filing after the first transaction.