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However, equipment lessors still need to have the grant of a
security interest effective when the goods are delivered. Some equipment finance agreements and leases intended as security operate
to have the lease commence and the security interest granted after
delivery and inspection. This technical glitch could theoretically
cause problems and the safer approach is to have the grant effective
no later than upon delivery.
Another issue is the description on the notices sent to existing
lenders. Article 9 does not provide much guidance as to what constitutes a sufficient description of collateral in the notice. However, it
is important to understand that its purpose is simply to place the
other creditors on notice of the PMSI lender’s potential interest,
thereby allowing them the opportunity to contact the PMSI lender
for more detail.
Arguably, the “reasonably identifies” standard for security agreement descriptions of §9-108(a) should be the benchmark. However,
that section expressly provides that a description of the collateral
by category — for example, “inventory” — constitutes “reasonable
identification.” Obviously, a description so vague does not help the
existing inventory financier identify the goods subject to the PMSI.
That being said, given the very general description requirement
under revised §9-504 for financing statements, the drafters of Article
9 may have expected a general description to be sufficient because it
would put the existing lenders on notice that another creditor might
have a claim to some of debtor’s inventory. Any reasonable existing
lender could investigate and could obtain a list from the PMSI lender
of specific goods in which it has a PMSI.
Further, it seems unreasonable to require a specific description
of the inventory in order to get a super-priority — especially given
that the statute provides for the notice to be “good” for five years.
Many PMSI lenders provide a very broad description (anything
it finances) and, if possible, a slightly more narrow one (“including,
without limitation, construction equipment or various diggers,
cranes, lifts, drills, and other accessions, attachments or additions
to vehicles”). For a captive finance company, it is easier to craft a
notice, which identifies goods of every kind and description manufactured or sold by its vendor affiliate(s).
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 and diligently formulated
procedures are a must. m
KENNETHP. WEINBERG is a founding partner of Marks & Weinberg, PC.
Weinberg has significant experience in dealing with virtually every type
of equipment and facility lease financing. He has penned Dispatches
From the Trenches since 2002, and routinely publishes articles in a
variety of equipment leasing and financing journals. Weinberg graduated cum laude from the University of Georgia School of Law, J.D.,
and was executive articles editor of Journal of Intellectual Property
Law. If you have any questions or comments about this column or
other industry-related legal issues, contact Weinberg at 205-251-
8307 or visit www.leaselawyer.com.