Lesson 30: Purchase Money Security Interests (PMSI)

Welcome to Lesson 30 of our instructable on secured transactions. In this lesson, we will explore Purchase Money Security Interests (PMSI), a special type of security interest under the Uniform Commercial Code (UCC) Article 9.

What is a Purchase Money Security Interest (PMSI)?

A Purchase Money Security Interest (PMSI) is a special type of security interest that enables a lender to obtain priority over other secured creditors. It arises when a borrower uses the loan to purchase specific goods or equipment.

Key Characteristics of PMSI

  • Funds are used specifically to purchase the collateral.
  • The lender retains a security interest in the purchased asset.

Attachment and Perfection of PMSI

Think of 'attachment' and 'perfection' as the peanut butter and jelly of secured transactions—they're good on their own, but together, they make a great sandwich! These processes establish and maintain the lender's rights to the collateral.

Attachment

To attach a PMSI, the following requirements must be met:

  • Value must be given by the lender.
  • The debtor must have rights in the collateral.
  • A security agreement must be in place.

Perfection

Perfection of a PMSI ensures its priority over other claims. This can often be achieved automatically or through filing a financing statement.

PMSI in Inventory

For inventory, the lender must provide notice to other secured parties and file a financing statement before the debtor receives possession of the inventory.

PMSI in Equipment

For equipment, the lender must file a financing statement within 20 days of the debtor receiving possession of the equipment.

Priority Rules for PMSI

PMSI enjoys super-priority status, meaning it can take precedence over other previously perfected security interests. The rules differ slightly for inventory and equipment.

Important: Ensure timely filing to maintain PMSI priority.

Illustration: Priority Rules for PMSI

graph TD; A["Debtor"] -->|Buy Goods| B["Inventory"]; A -->|Buy Equipment| C["Equipment"]; B --> D["Lender (PMSI)"]; C --> D; D -->|Files Financing Statement| E["Secured Party"]; F["Other Secured Party"] -->|Claim| B; F-->|Claim| C;

Mathematics of PMSI

Consider the mathematical representation of the priority rule:

\[ \text{Priority} = \text{PMSI} \quad \text{if} \quad \pi_{\text{PMSI}} < \pi_{\text{other}} \]

Real-world Application

PMSI is commonly used in commercial transactions to secure loans for purchasing business equipment and inventory. Refer to Wikipedia for a broader overview of secured transactions.

Example Scenario

Consider a business purchasing new inventory financed by a lender. The lender perfects a PMSI, providing them priority over other secured parties who may have a general security interest in the debtor's inventory. For a more detailed understanding, you can check out Secured Transactions in Personal Property by Steven L. Harris and Charles W. Mooney.

Conclusion

Understanding PMSI is critical for both debtors and creditors in secured transactions. Proper attachment and perfection of a PMSI ensure the lender’s priority status, fostering confidence in collateralized lending.

Continue learning by reading about consignments in our next lesson.

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