What is the 'after-acquired property' clause?

It is a provision in a security agreement that gives the secured party a security interest in collateral the debtor acquires after the security agreement is signed. The PMSI is the main tool used to 'prime' or defeat this clause for specific new assets.

Does a PMSI cover the proceeds from the sale of the collateral?

Yes, a perfected PMSI in goods generally has priority in the identifiable proceeds. However, for inventory, this super priority is limited, typically only covering identifiable cash proceeds received on or before the delivery of the inventory to a buyer.

What is the difference between a Seller PMSI and a Lender PMSI?

A Seller PMSI is when the seller provides credit directly for the purchase price. A Lender PMSI is when a third-party bank or finance company provides the funds to the debtor to make the purchase. Both qualify for PMSI status if the statutory requirements are met.

Is a UCC-1 filing always required to perfect a PMSI?

No. For PMSIs in consumer goods, the interest is automatically perfected upon attachment. For all business-related collateral (inventory, equipment), filing a UCC-1 financing statement is mandatory to gain super priority.

Categories: Court Info

PMSI: Gaining Super Priority Under UCC Article 9

Meta Description: Understand the Purchase Money Security Interest (PMSI) under UCC Article 9. Learn how this special classification provides super priority to secure collateral, and the specific perfection requirements for inventory and non-inventory goods.

In the world of secured transactions, priority is everything. When a debtor faces financial distress, multiple creditors often vie for the same pool of assets. The Purchase Money Security Interest (PMSI) is a powerful exception to the standard “first-to-file” rule, offering a secured party a strategic advantage known as “super priority.” This specialized interest, governed by Article 9 of the Uniform Commercial Code (UCC), is critical for businesses that finance the acquisition of specific goods.

For creditors, understanding the precise requirements for creating and perfecting a PMSI is essential to safeguarding their investment. Failing to meet the strict statutory deadlines and notice provisions can instantly relegate a super-priority claim to a junior, less secure position.

The Essence of a PMSI: Defining the ‘Purchase Money’ Nexus

A PMSI is fundamentally tied to the acquisition of collateral. As defined in UCC § 9-103, a security interest qualifies as a PMSI to the extent that it is taken or retained by a creditor (either the seller or a lender) to secure an obligation that enabled the debtor to acquire the specific collateral.

Seller PMSI

The seller of the goods retains a security interest in those very goods to secure all or part of their purchase price (e.g., selling equipment on an installment plan).

Lender PMSI

A third-party lender advances funds to the debtor for the express purpose of acquiring specific goods, and the funds are, in fact, used for that purpose.

The UCC requires a “close nexus” between the value given (the loan/credit) and the acquisition of the collateral. If a debtor acquires property with unsecured credit and then, at a later date, grants a security interest in that property, it is not a PMSI.

The Power of Super Priority and the First-to-File Exception

The core significance of the PMSI lies in its super priority status. Generally, priority between conflicting security interests is determined by the “first-to-file” rule—the first party to file a UCC financing statement (UCC-1) or otherwise perfect their interest wins.

Case Scenario: PMSI vs. After-Acquired Property

Imagine a company, Debtor Co., has a standing loan with Big Bank, secured by “all current and after-acquired equipment.” Big Bank files a UCC-1 in 2020. In 2024, Debtor Co. buys a new piece of machinery financed by a specialized finance company, PMSI Financer. Without a PMSI, Big Bank’s 2020 filing would automatically claim the new machinery under the “after-acquired property” clause. However, if PMSI Financer properly establishes and perfects a PMSI in the new machinery, it takes priority over Big Bank’s earlier, broader claim, ensuring PMSI Financer is paid first from the sale of that specific machine.

Perfection Requirements: Two Paths to Super Priority

The specific steps required to perfect a PMSI and secure super priority depend on the nature of the collateral: is it inventory or non-inventory (like equipment)?

1. PMSI in Goods Other Than Inventory (e.g., Equipment, Software)

This path is simpler, primarily relying on a rapid filing deadline. The PMSI has priority over a conflicting security interest if:

The secured party extends credit to purchase the collateral.
The secured party files a financing statement covering the collateral when the debtor receives possession of the collateral or within 20 days thereafter (the 20-day grace period).

Legal Expert Tip: If the goods are consumer goods, a PMSI is automatically perfected upon attachment, and a financing statement filing is not required for perfection against other creditors (though it is wise for certain protections).

2. PMSI in Inventory

Since inventory is constantly being sold, the requirements are more stringent and involve a mandatory notice step to protect prior secured parties (like a general asset-based lender). The PMSI takes priority if all four following conditions are met:

The PMSI must be perfected (via UCC-1 filing) at the time the debtor receives possession of the inventory. There is no 20-day grace period.
The secured party must send an authenticated notification (PMSI Notice) to the holders of any conflicting security interests (identified by a UCC search).
The holder of the conflicting security interest must receive the notification within five years before the debtor receives possession of the inventory.
The notification must state that the sender has or expects to acquire a PMSI in the debtor’s inventory and reasonably describe the inventory.

Caution: Maintaining the Nexus

Refinancing, consolidating the debt with non-purchase money debt, or commingling purchase-money funds can potentially cause the PMSI status to be lost (the “transformation rule” vs. “dual status” rule). Consult with a Legal Expert to structure loan documents to preserve the PMSI status, especially in non-consumer transactions.

Key Takeaways for Secured Parties

A properly executed and perfected PMSI provides a vital tool for creditors to secure their loan and mitigate risk, particularly against prior “blanket” liens. Focus on these critical points:

Verify the Close Nexus: Ensure the loan proceeds are directly and factually used to acquire the collateral. For lenders, best practice is often to pay the seller directly or issue a joint check.
Know the Deadline: For equipment and non-inventory goods, you have a 20-day grace period from the debtor’s possession to file your UCC-1. For inventory, you must file and give notice before the debtor takes possession.
Conduct a UCC Search: If financing inventory, a thorough UCC search is mandatory to identify all prior filers who must receive a PMSI Notice.

PMSI Quick Summary

Feature	Description
UCC Article	Article 9 (Secured Transactions)
Primary Benefit	Super Priority over prior general liens.
Non-Inventory Deadline	Perfect within 20 days of debtor possession.
Inventory Requirement	Perfect before possession and send prior notice to existing secured creditors.

Frequently Asked Questions (FAQ) About PMSI

What is the “after-acquired property” clause?
It is a provision in a security agreement that gives the secured party a security interest in collateral the debtor acquires after the security agreement is signed. The PMSI is the main tool used to “prime” or defeat this clause for specific new assets.
Does a PMSI cover the proceeds from the sale of the collateral?
Yes, generally, a perfected PMSI in goods also has priority in the identifiable proceeds. However, for inventory, the super priority for proceeds is highly limited, usually only extending to identifiable cash proceeds received on or before the delivery of the inventory to a buyer.
What is the difference between a Seller PMSI and a Lender PMSI?
A Seller PMSI is when the seller provides credit directly for the purchase price. A Lender PMSI is when a third-party bank or finance company provides the funds to the debtor to make the purchase. Both qualify for PMSI status if the statutory requirements are met.
Is a UCC-1 filing always required to perfect a PMSI?
Not always. For PMSIs in consumer goods (like a financing interest in a refrigerator for home use), the interest is automatically perfected upon attachment, meaning no UCC-1 filing is required. For all business-related collateral (inventory, equipment), filing is mandatory to gain super priority.

Disclaimer

This blog post was generated by an AI and is for informational purposes only. It does not constitute legal advice. The requirements for Purchase Money Security Interests (PMSI) are based on the Uniform Commercial Code (UCC) Article 9, which may vary slightly by state. Any person or business seeking to secure or enforce a PMSI should consult with a qualified Legal Expert to ensure strict compliance with all filing and notice requirements.

By mastering the strict requirements of the Purchase Money Security Interest, creditors can strategically elevate their secured position, offering critical financing to debtors while protecting their own capital. The diligent application of UCC Article 9 rules is the foundation of smart, secure lending.

Purchase Money Security Interest, PMSI, UCC Article 9, Secured Transactions, Super Priority, First-to-File Rule, Perfection of Security Interest, Financing Statement (UCC-1), After-Acquired Property Clause, PMSI in Inventory, PMSI in Equipment, 20-Day Perfection Window, Secured Creditor Priority, Purchase-Money Obligation, Close Nexus Rule, PMSI Notice Requirement, Collateral, Debtor, Seller Financing, Lender Financing

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