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
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
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.