Purchase Money Security Rules in Equipment and Inventory – Part Two
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 second installment of Bennett’s seven-part blog series on Purchase Money Security Interest in Equipment and Inventory.
Frequently Asked Question # 2: What Obligations Qualify as a “Purchase Money Obligation”?
The term “purchase money obligation” is defined under the Code as “an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.” In order for an obligation to be considered a “purchase money obligation” secured by purchase money collateral, there must be a “close nexus” between the acquisition of collateral and the secured obligation. Several examples of secured obligations which do not have such “close nexus” and as a result, the lender will not be able to claim a purchase money security interest include (a) where the borrower has already bought the collateral on open account before the security interest attached and the lender’s funds are merely reimbursing the borrower for such expenditure, and (b) where a lender bundles purchase money debt with completely unrelated debt which is not purchase money, the purchase money debt will be treated as a purchase money obligation, but the completely unrelated debt will not be treated as a purchase money obligation.
It should also be noted that the definition of “purchase money obligation” under the Code includes not only the principal amount of the loan or credit sale, but also includes related transaction expenses that bear a “close nexus” to the secured transaction, such as sales taxes, duties, finance charges, interest, freight charges, costs of storage in transit, demurrage, administrative charges, expenses of collection and enforcement, attorney’s fees and other similar expenses.
In contrast with former Article 9, Revised Code Section 9-103(f) provides relief for PMSI lenders for commercial transactions and clarifies that a purchase money security interest does not lose its PMSI status (a) if the purchase money collateral also secures a non-purchase money obligation, (b) if the purchase money obligation is secured by both purchase money collateral and non-purchase money collateral, or (c) if the purchase money obligation has been renewed, refinanced, consolidated or restructured.
Frequently Asked Question # 3: When Does a Lender Need to Qualify for a PMSI?
The sole purpose of a PMSI is to gain super-priority over an earlier UCC filer, and if there is no earlier filer or if the earlier filer agrees to execute an inter-creditor agreement subordinating the earlier filer’s security interest in the prospective collateral being financed by lender on terms satisfactory to the lender, there is no reason to seek to qualify for a PMSI.
Be sure to check back next week when Bennett L. Cohen answers more of your questions on PMSI! Looking for more educational resources? Visit the First Corporate Solutions resource library here to download documents relating to Corporate Transactions, UCC Filing, Lien Searching and more!