Businesses that sell personal property and do any amount of financing of those products should be familiar with preparing and filing financing statements to perfect their security interests. UCC Article 9 governs security interests, including purchase money security interests, or PMSIs. A PMSI is an interest in goods purchased directly from a secured party, or with money borrowed from a secured party for that purpose, and can be secured by inventory, goods, livestock, or other personal property.
UCC Section 9-102(a)(48) allows a supplier to obtain a security interest in inventory, among other items of personal property. Inventory, in the UCC Article 9 sense, can include ‘works in progress,’ such as items on an assembly line.
The flexibility built into Article 9-102(a)(48) can be beneficial to a supplier or lender. A mid-tier parts manufacturer, for example, might take out a loan to purchase steel for use in making his parts. The supplier can take a security interest in the parts while they are yet a work in progress. Then, the supplier’s security interest will follow the parts as the parts are completed and become the buyer’s inventory.
The benefit to the supplier is that a properly perfected PMSI in inventory may have priority over a senior conflicting security interest in the same inventory. This advantage is often referred to as the PMSI “super priority.” Be sure to maintain your right to super priority by meeting these requirements:
- The security agreement between the supplier or lender and the buyer or borrower must clearly identify the secured property and its intended use.
- The supplier or lender must perfect his security interest by filing the appropriate financing statements with the Secretary of State in the buyer or borrower’s state, or other filing agency as required by the law of the buyer or borrower’s state.
- The supplier or lender must perfect his security interest PRIOR TO DELIVERY of the goods that will become the inventory of the buyer or borrower.
- The supplier or lender must give written notice to any holder of a conflicting security interest. The notice must indicate that the supplier is acquiring or expects to acquire a PMSI on certain specific items in the buyer’s inventory. Notice must be received by the holder of a conflicting security interest PRIOR TO DELIVERY of the goods that will become the inventory of the buyer or borrower. (The notice will be valid for five years if properly executed.)
Once the super priority interest is in place, the supplier or lender may have additional remedies under UCC Section 9-324 in the event the buyer or borrower defaults on the debt.
For more information about legal matters related to your business, the attorneys at the Scolieri Law Group, P.C. can help. Located in western Pennsylvania, our attorneys are experienced in Pennsylvania business law and can take care of the details for you every step of the way. Contact us today at (412) 765-0546 or via email at firstname.lastname@example.org.