As we’ve discussed recently in other articles, UCC Article 9 governs security interests, including purchase money security interests, or PMSIs. A PMSI is an interest in goods purchased from the secured party, or with money borrowed from a secured party for that purpose, and can be secured by inventory, goods, livestock, or other personal property. UCC Section 9-102(a)(48) provides that ‘inventory’ can include works in progress.
The flexibility built into Article 9-102(a)(48) can be beneficial to a materials seller or lender. For instance, if a mid-tier parts manufacturer takes out a loan to purchase steel for use in making his product, the lender may take a security interest in the parts while they are a work in progress. The security interest will automatically attach to the parts as the parts are completed and move to the shelf as inventory.
A properly perfected PMSI in inventory may have priority over a senior conflicting security interest in the same inventory, an advantage often referred to as the PMSI “super priority.” Certain requirements must be met to ensure a super priority interest:
- The supplier or lender and the buyer or borrower must execute a security agreement identifying the secured property and its intended use.
- The PMSI must be properly perfected by filing the appropriate financing statements with the secretary of state in the buyer or borrower’s state or other filing agency as required by law.
- The PMSI must already be perfected at the time the buyer or borrower receives the goods that will become the inventory. (Perfection prior to delivery.)
- The secured party must give written notice to any holder of a conflicting security interest, indicating the PMSI creditor is acquiring or expects to acquire a PMSI on certain items in the buyer’s inventory, which must be sufficiently described. Notice must be received by the holder of a conflicting security interest prior to the buyer or borrower’s receipt of the goods. If properly executed, the notice is valid for five years.
Once the super priority interest is in place, the supplier or lender will have additional remedies at its disposal in the event the buyer or borrower defaults on his promise to pay. See UCC § 9-324.
If you are a supplier or lender with questions about purchase money security interests on inventory or a priority of liens issue, contact the experienced business litigation and transactional law attorneys at Glass & Goldberg. Glass & Goldberg provides high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law. Call us at (818) 888-2220, email us at firstname.lastname@example.org, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.