Purchase Money Security Rules in Equipment and Inventory – Part Five
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 fifth installment of Bennett’s seven-part blog series on Purchase Money Security Interest in Equipment and Inventory.
Frequently Asked Question #5: How Does a Lender Obtain a Purchase Money Security Interest in Equipment?
A purchase money secured party who finances specific equipment 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 equipment, if such purchase money secured party files its UCC financing statement against the borrower covering the specific equipment being acquired, within twenty (20) days after the borrower receives possession of such equipment.
Frequently Asked Question # 6: When is the Borrower Deemed to Have Received Possession of the Equipment for Purposes of Calculating the 20-day Grace Period for Filing to Perfect PMSI in Equipment?
In many situations there is a delivery document to confirm when the equipment was delivered to the Borrower and there will be no controversy as to when the Borrower “receives possession” of the equipment for purposes of starting the 20-day grace period. However, there are other situations described in Comment 3 to Code Section 9-324 in which the delivery date is not the date the Borrower “receives possession”. Said Comment describes the following situations (which is not meant be all situations that may apply): (1) when equipment is delivered to Borrower in stages, and then assembly and testing are completed at the Borrower’s location, “possession” would occur for purposes of commencing the 20-day rule “when, after an inspection of the portion of the goods in the debtor’s possession, 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”, and (2) if the equipment is currently leased to a Borrower and it decides to exercise its lease option to purchase the equipment from the lessor on secured credit, the Borrower would be deemed in possession of such equipment commencing on the date the equipment became subject to the seller’s (formerly the lessor’s) security interest and no longer subject to the lease.
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