Purchase Money Security Rules in Equipment and Inventory – Part Six
Corporate, Due DiligenceWe are pleased to welcome attorney, Bennett L. Cohen of Cohen, Salk and Huvard, P.C., as a special guest blogger. Please read on for the sixth installment of Bennett’s seven-part blog series on Purchase Money Security Interest in Equipment and Inventory.
Frequently Asked Question #7: How Does a Lender Obtain a PMSI in Inventory?
A purchase-money secured party who finances inventory for a borrower (or in the case of a seller, retains a security interest to secure all or part of its price), will prime an earlier perfected blanket security interest in the borrower’s inventory, if each of the following conditions are met:
(i) the purchase-money security interest is perfected (usually by UCC filing, together with the execution of a written security agreement) when the borrower receives possession of the inventory (thus, inventory possessed by the borrower prior to the date of such perfection will not be eligible for PMSI status),
(ii) the purchase-money secured party must obtain a current UCC search on the borrower and send an authenticated (written) notice to the holder of each conflicting security interest stating that the purchase-money secured party has or expects to acquire a purchase-money security interest in inventory of the borrower and describes such inventory (and it is recommended that such description include the types of inventory to be financed), and
(iii) the holder of each conflicting security interest receives the notice within five years before the borrower receives possession of the inventory (which means such notice must be repeated once every five years). Article 9 makes it clear that the notice to prior filers may be sent either before or after the UCC filing, so long as the notice and UCC filing both occur prior to the delivery of the PMSI inventory to the borrower.
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