Key Takeaways
- Security interest in goods bought on credit.
- Grants super priority over other creditors.
- Covers seller or lender financing scenarios.
- Automatic perfection for certain consumer goods.
What is Purchase Money Security Interest (PMSI)?
A purchase money security interest (PMSI) is a legal claim a creditor holds on goods purchased with credit or loan funds that enabled the buyer to acquire those goods. This security interest ensures the creditor has priority over other claims on the same collateral.
PMSI arises when either the seller finances the purchase or a lender provides funds specifically for buying the goods, tying the collateral directly to the purchase transaction.
Key Characteristics
Understanding the main features of PMSI helps you identify its benefits and limitations:
- Priority advantage: PMSI grants superior priority over other security interests in the same goods, even if those interests were perfected earlier.
- Collateral specificity: The collateral must be the exact goods purchased with the financing, not unrelated assets.
- Automatic perfection: In many cases, PMSI on consumer goods is perfected automatically without additional filings.
- Statutory basis: PMSI rules and priorities are governed by the Uniform Commercial Code, particularly sections addressing financing facilities and obligations.
How It Works
PMSI functions by linking the creditor’s security interest directly to the purchase transaction. If you acquire goods on credit from a seller, that seller holds a PMSI in those goods until you pay in full.
Alternatively, if a lender provides you with funds expressly to buy specific equipment, that lender obtains a PMSI in the purchased equipment. This interest allows them priority over other creditors in case of default.
Examples and Use Cases
Common scenarios illustrate how PMSI benefits both creditors and debtors:
- Seller financing: A retailer selling machinery may retain a PMSI until the buyer completes payments.
- Lender financing: A bank loan used to purchase manufacturing equipment creates a PMSI on that equipment, securing the loan.
- Corporate examples: Airlines like Delta and American Airlines often finance aircraft purchases with PMSIs to secure their investments in expensive equipment.
- Consumer goods: When using a business credit card to buy inventory, the creditor may establish a PMSI in the goods purchased.
Important Considerations
While PMSI offers strong protections, strict compliance with filing and notification rules is essential to maintain priority status. Missing deadlines or improper documentation can cause loss of the super-priority advantage.
Before relying on PMSI, review your financing options and ensure your agreements clearly specify the security interest. This proactive approach helps protect your interests in complex credit situations.
Final Words
A purchase-money security interest gives you priority over other creditors for the collateral tied to your loan, enhancing your position in case of default. To fully benefit, ensure you meet all filing and perfection requirements under the UCC for your specific transaction.
Frequently Asked Questions
A Purchase Money Security Interest (PMSI) is a security interest a creditor obtains in goods when they either sell those goods on credit or advance funds that allow the debtor to purchase them. The key point is that the collateral securing the loan is the same property the credit helped acquire.
In seller financing, the seller extends credit to the buyer and retains a security interest in the goods sold to secure payment. This means the seller holds a PMSI in the goods until the buyer pays off the purchase price.
A PMSI grants 'super priority,' allowing the creditor to take precedence over other security interests in the same collateral. This priority advantage is especially important during debtor insolvency, as PMSI holders are often paid before other creditors.
Yes, PMSIs in consumer goods and certain other assets can be perfected automatically without additional filing steps. This automatic perfection simplifies the creditor's process to secure priority in the collateral.
PMSI typically covers goods, fixtures, consignment transactions, and to some extent, software embedded in goods. However, it does not apply to all types of collateral and is limited by statutory rules.
The Uniform Commercial Code (UCC), specifically sections 9-324 and 9-103, governs the requirements and priority rules for PMSIs. Compliance with these statutes is essential to maintain PMSI priority status.
Yes, a PMSI can cover both purchase-money and non-purchase-money obligations as well as both purchase-money and other types of collateral. However, strict compliance with statutory requirements is necessary since PMSI is an exception to general priority rules.
