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welcome to our webinar the essentials of purchase money security interest my name is a new Shah and I will be your moderator joining us today is Paul Hartman field Paul is associate general counsel for corporation service company and serves as the company's subject-matter resource for UCC real estate and other transactional service matters he is a frequent speaker and writer on UCC search and filing issues and a 2013 recipient of a National Association of secretaries of State medallion award and with that let's welcome Paul thank you the purchase money security interest which is sometimes called for short a PMSI or a pimsy is one of the most useful secured lending tools available to commercial lenders the purchase money security interest provides benefits not just for lenders though but also for borrowers because while it does provide a great risk management tool for lenders it also means the borrowers can have better access to credit now the way that the purchase money security interest works is by really encouraging investment by giving a super priority to the secured party that holds a purchase money security interest at least with respect to the particular collateral involved now before I cover that in much more detail one thing I want to point out is that when it comes to obtaining a purchase money security interest a quick glance at article 9 would suggest that it isn't all that hard it's actually the the requirements are fairly simple to obtain to purchase money security interest and while these statutory requirements appear rather straightforward it's not always that simple there are plenty of ways for a secured party to lose its purchase money status if it doesn't fully understand and comply with all the rules now what I'm going to do today is provide some of the basic concepts about the purchase money security interest I'll begin with some basic concepts and I'll move on talk about issues related to the creation of a purchase money security interest and then on to perfection issues and then I'll address some very specific items related to certain types of purchase money transactions if you do have questions excuse me if you do have questions along the way please just enter them into the Q&A box on your screen and we'll be able to get to them at the end of the session first of all I want to start with some basic concepts first of all what is a purchase money security interest well it's all about priority that's that's what it really boils down to priority is the order in which conflicting claims are satisfied frequently a debtor will grant more than one security interest in the same collateral and the the courts need an orderly way to sort out who gets what if the debtor ever defaults and that's what priority is really about now the general rule under article 9 is a priority ranks from the earlier time of filing or perfections so the first-to-file financing statement is going to be first in line when it comes time if the debtor should default when it comes time to divide up the the value of the collateral now the priority is so critical in this context because of the way the competing claims are satisfied the first priority secured party is a general rule is going to have its claim paid in full before the second in line gets a penny so it's kind of an all-or-nothing deal first secure party gets gets paid in full if there's any value that collateral left over then the second secured party in line will get whatever is left over and on down the line until they run out of money or secured parties whichever comes first now the purchase money security interest is an exception to the general rule of priority the the purchase money security interest is a security interest in favor of either the lender of goods to secure the price of the goods or the seller of goods to secure the price or a lender a person who advances funds to enable the debtor to acquire rights in the collateral now if the skirt party qualifies for purchase money security interest then they get that super priority and they get to jump to the head of the line when it come if the debtor should default let me illustrate that how that works for you let's say that in 2010 the debtor granted its bank secured party 1 a security interest in all of its assets and the bank promptly filed its financing statement a year later in 2011 the debtor granted secured party number 2 a security interest in all of its equipment and secured party 2 filed a financing statement to perfect its security interest and then finally in 2012 secured party 3 provided the debtor with financing that enabled the debtor to acquire a laser widget and in exchange for that the debtor granted a purchase money security interest in the laser widget and secured Part III he promptly perfected by filing its financing statement well in this type of situation under the general priority rules secured party 1 would have priority with regard to all of the debtors assets only after secured party 1 was paid in full if there was any value of the equipment leftover after that then that would be applied to secured party - and if secured party 2 was also paid in full and there was still some value left over from a laser widget then secured party 3 would get it but more than likely secured party 3s and I can get a penny in fact frequently secured party 2 won't get anything there won't be enough money left but with a purchase money security interest assuming that secured party 3 did everything it necessary to obtain a purchase money security interest secured party 3 gets to go right to the front of the line there and it will have priority in the purchase money collateral the collateral it enabled debtor to acquire so it will have priority in that laser widget secured party 1 then will have priority for all the other assets subject to the security interest and finally secure party two comes in at the end of the line and as noted here oftentimes you know being at the end of the line for priority is not a good place to be probably not going to collect anything so the stakes are very high in this regard some other essential concepts to understand about purchase money security interest first of all a purchase money security interest isn't available for everything it's available for goods and it's available for software as part of an integrated transaction it's available for fixtures and pictures are a type of good and it applies to consignment transactions and I'll come back to that as well so really it's applicable to tangible goods for the most part it's not you're not going to be able to get a purchase money security interest in the acquisition of a copyright typically or acquisition of a trademark right and intangible rights now the secured parties that are eligible to obtain a purchase money security interest of course the seller of goods as I mentioned somebody that provides goods on credit and retains a security interest in the goods it's also available to a lender that advanced that that provides the value that enables the better to acquire rights in the collateral assuming that the debtor uses the value for that purpose and the consignor of goods in a consignment transaction all those are eligible to obtain a purchase money security interest now because they purchase money security interest is an exception to the general rules of priority the courts are in article 9 itself place the burden of proving compliance on the secured party so that the secured party is going to have the burden of proving to what extent their security interest is actually a purchase money security interest so this is important to understand about a purchase money security interest the secured party by claiming an exception and advantageous exception to the general rules is going to have to be able to prove that they have complied all the requirements and with many of these requirements it's got to be strict compliance so the secured party here has a pretty hefty burden and they have to be very careful to document everything with regard to the purchase money transactions so that they can prove in court because if they if they have the burden of proof and can't prove it it's not up to the other party that to prove that it's otherwise so secure parties do have to be prepared to prove up that they do in fact have a purchase money security interest now it's going to talk about the creation of a purchase money security interest an essential start on that is the security agreement there are there are cases out there where somebody has borrowed money to acquire goods and has used the money for that purpose but the secured party did not get a purchase money security interest because they did it on a handshake and merely loaning money for purchase money purposes does not create a purchase money security interest and case I used to illustrate that see FB 5 what happened here was the the debtor actually owned a an art gallery and a friend of the debtor loaned the debtor money to purchase art for the art gallery and the money was used for that purpose and so some certain pieces of art were hung on the wall of the gallery and debtor went into default and other creditors tried to take tried to get at the assets in fact the debtor filed for bankruptcy and because there was no security agreement it was done on a handshake the court said that there was you know the requirements for purchase money security interests were not satisfied and as a result instead of having a being able to exercise its security interest in the artwork that enabled the debtor to acquire the secured party was treated there's a unsecured general creditor so there must be a security agreement also a purchase money security interest is only a purchase money security interest to the extent it was a purchase money obligation and to the extent that its purchase money collateral what what this means is that a an obligation to repay a loan may include both purchase money and non purchase money components for example if somebody takes out a hundred thousand dollar loan for the purpose of buying a fifty thousand dollar piece of equipment and using the rest of the money for other operating purposes not the acquisition of goods the secured party it's only a purchase money obligation up to the value of the goods that the debtor acquired with that likewise it's all it's only a purchase money security interest to the extent that the collateral has purchased money collateral if the loan covered other types of collateral or its secured by other types of collateral it can only be it's only a purchase money security interest to the extent of the purchase money collateral so may a purchase money priority with some collateral but not with respect to others one one other issue with the you know a seller of goods to secure the price of the goods what goes into the price the courts have been kind of split on components I mean what is the price of the collateral the general rule is it's the price actually paid for the goods you know sticker price whatever the whatever the debtor paid for the goods but there's other things that oftentimes go into a transaction which aren't technically the price for example what about negative equity if the debtor is trading in a piece of equipment and the equipment is worth a thousand dollars as a trade-in but the debtor owes ten grand on it it's not at all unusual to roll that two thousand dollar difference back into the new loan and the question is is that negative equity part of a purchase money security interest well the courts have been split on that in some circuits the courts have said yeah it can be part of the purchase money security interest because the transaction would not have happened unless they had financed that $2,000 that that negative equity but in other circuits they've come out differently and the same thing applies to other types of fees that might be involved like extended service contracts or certain type of insurance arrangements the courts are somewhat split over whether or not these things can be considered part of the price so much of it will depend on where the transaction takes place and where the debtor is located now the transaction has to enable the debtor to acquire rights in the collateral if the debtor already has rights in the collateral there's a good chance so there couldn't be a purchase money security interest that might occur in a sale-leaseback type of situation where the debtor owns equipment and sells it to a leasing company that in turn leases our back to the debtor so in that type of situation purchase money or that type of transaction may not be eligible for purchase money security interest when it comes to actually paying for the goods remember that the debtor must actually use the proceeds or the the loan that are that's provided to make the purchase money acquisition the debtor must actually use it and if they don't then well then for one it can't be a purchase money security interest but even if they do eventually use it the secured party has to be able to prove that the funds that the secured party provided were the funds that were used to actually acquire the purchase money collateral and if the if there's a discontinuity between the the advance of the funds and the time that they actually are used may be they may be the debtor advances spun swing day and three weeks later the debtor goes out and buys a piece of equipment with it well during that time it's been commingled in a bank account and and all sorts of things can the lender trace those proceeds directly to that collateral well that that's an open question the courts will address that on a case-by-case basis and because it can be difficult to trace those funds unless it's well documented best practice is that lenders should always pay the the purchase price directly to the seller or in the alternative you know cut a check that's jointly payable to the seller and the debtor because remember it's the secured party that has to be able to prove that they've complied with the requirements for purchase money security interest and if they provided the value but can't prove that the value was actually used by the debtor to acquire the goods then there's a problem so for that reason it's always a good idea to have the vote you know good documentation as far as payments go where that money goes now I want to move on and talk about perfection of purchase money security interests and the some issues that arise in that regard first of all what about the financing statement well the sufficiency of any financing statement is determined by section 9 502 typically a in the case of a purchase money under Section nine 502 a financing statement is sufficient if it provides the name of the debtor name of the secured party and an indication the collateral there are no special requirements for purchase money security interest financing statements in fact cases that have tried to claim that a party was not entitled to purchase money priority based on their financing statement that otherwise complied with article 9 have largely failed for example key Becky Bank versus Huntington Bank this is a 2002 case out of Ohio what happened there was Key Bank had a blanket security interest in all the debtors assets and Key Bank made future advances based on on the arrangement they had with the debtor and before each future advance they do a search and then they go ahead and make the advance later Huntington Bank came along and Huntington financed the acquisition of three particular pieces of equipment for the debtor and Huntington filed the financing statement to perfect its purchase money security interest the financing statement didn't describe the three individual pieces of equipment instead it just said equipment which is a perfectly acceptable method of describing equipment under article 9 well after the debtor defaulted and the parties wound up in court in a priority dispute over the those three pieces of equipment Key Bank argued that that Huntington by not particularly describing that equipment was not entitled to purchase money priority because they keep anq would not have been able to determine what particular equipment was covered by that purchase money security interest but the court said sorry but that's not t
e way it works article 9 does not have any special requirements for a financing statement with a purchase money security interest the the collateral description rules are the same and we have a notice filing system and you know any party that is conducting a search is responsible for looking beyond the public record to learn the full state of affairs so key banks argument there didn't work and Huntington was entitled to its purchase money security interest so the thing to remember about that is a financing statement does not need to indicate that it is filed in connection with a purchase money security interest in fact it can say purchase money security interest but that doesn't make it so what makes a financing statement a purchase money financing statement or I should say what gives the secured party a purchase money security interest is compliance with the statute not anything specifically noted on the financing statement so anybody that conducts further inquiry beyond the state beyond the public record is going to learn about the purchase money claim they don't have to indicate that on the financing statement it's all established by the secured party's compliance with article 9 one of the things that's different about a purchase money security interest is that there are deadlines involved for perfection a normal you know a non purchase money security interest has no deadline for perfection a secured party can close a deal one day and they don't have to file a financing statement right away they can wait as long as they want now there are consequences to come with delay they could lose priority but to somebody have filed in the interim but there are no deadlines with regular you know the common security interests that's not the same with a purchase money security interest with a purchase money security interest the general rule under article 9 is that to obtain the purchase money security interest the secured party must file before or within 20 days after the debtor receives possession of the collateral now there are some exceptions to this purchase money security interests and inventory consignments purchase money security interests and livestock those those all have different time limits likewise there are some states notably Nebraska and Tennessee that have longer perfection periods 30 30-day periods and in the case of consumer goods a purchase money security interest in consumer goods is perfected without filing there's no no financing statement required but the important thing to remember about the the debt of calculating the deadline one applies is the trigger is the debtors receipt of possession when the debtor receives possession of the collateral so how does one calculate that it may not be always as simple as it might seem well the general rule is is when the debtor takes physical possession of the goods and you know that gets delivered and signed for or if the debtor goes and picks them up or buys them and drives off with them something along that line it's usually not that hard to determine but there are certain cases where it may not be as clear there are times where a debtor can obtain goods under other law not governed by article 9 that can affect when they would become subject to a purchase money security interest for example in the case of a lease leased goods then or doesn't have any ownership rights in those leased goods and under the Official comments to article 9 if the debtor decided to buy those at the end of the lease and obtain financing to do so then the goods would the debtor would receive possession at the time the goods came collateral as the term is defined by article 9 the bigger question though is what happens when the goods are delivered in installments as might happen with a large piece of equipment that has to be delivered in pieces and assembled and tested over time well here the it's more of a third party point of view remember that the filing system a lot of the article 9 filing system is designed to protect third parties that were not parties to the agreement so if it's if the collateral is being delivered in stages for assembly and testing the buyer generally is going to take possession when it would appear to a hypothetical creditor that the goods in the you know looking at the goods in the debtors possession that the debtor has acquired an interest in the goods taken as a whole so it's how it would appear to a third party let me kind of illustrate how this might work let's say debtor decided to purchase a large machine that had to be installed and tested and the parts of the machinery were delivered first one on January 15th second one on February 1st last one on March 15th the assembly and testing of the components of this machine began on February 1st and ran through April 30th and then on May 15th the debtor finally signed an acceptance certificate and handed it over to the handed over to the seller the the secured party whoever is claiming the purchase money security interest so when did the debtor receive possession of the goods well we know the last possible date would be that May 15th date but it's really up to the court to determine based on all the facts and circumstances of when in that period from January 15th through May 15th that a hypothetical third credit or third party creditor would take a look at the situation and decide that the debtor had acquired rights in the collateral so it's probably somewhere between February 1st and March 15th but you can't know for sure in advance so best practice of course file the financing statement at the earliest possible opportunity nothing requires a secured party to wait until the the debtor is signed off on it nothing you know signed off on acceptance nothing requires a secured party to even wait until after the security interests or the security agreement has been signed a secured party can file a financing statement before the security agreement is executed or before the security interest attaches the only caveat to that is they better have permission of the debtor do that in the case of a purchase money security interest it's probably a pretty good idea to file early rather than trying to calculate the 20 day window from some other little less clear point in time before I move on and talk about the special purchase money situations I do want to talk about what happens if subsequent events affect the security interest for example you know what happens with you know a refinancing of the loan you know debtor goes into default and there's a workout or refinancing something like that well the general rule under article 9 is that a purchase money security interest doesn't lose its status merely because the obligation is being renewed refinanced consolidated or restructured unfortunately however none of these terms were defined in article 9 so that's left to the courts to determine what these mean there is there isn't a lot of case law on this since 2001 but there is one case worthy of note lewiston state bank versus green line equipment what happened here is the debtor was a farmer and had granted a blanket security interest to it to his bank and mm-hmm later the debtor bought two tractors from the manufacturer and financed those and granted the manufacturer purchase money security interest the debtor ran into some financial difficulty and the dealer that sold those tractors originally decided to you know help out this farmer and what the what the dealer did is the dealer Reeth according to the dealer anyway the dealer refinanced the tractors for the farmer but how this happened was the dealer paid off the original secured party and then issued a new loan to the debtor refinancing those those tractors problem is that the court found it wasn't a refinancing once the original obligation was extinguished the the loan was a new obligation so it wasn't can you insulations so the important thing to remember here for you know when the debtor if the debtor is in default goes in to work out or wants to refinance there's nothing wrong with refinancing or restructuring the obligation as long as it's the same obligation once that original purchase money obligation is extinguished however you know any new loan on that same collateral probably isn't going to be entitled to purchase money security interest status so the important thing to remember again it's got to be the same transaction or part of the same obligation not a new obligation in this case had the dealer you know bought the loan from the manufacturer or otherwise taken an assignment of it it would have been the same one and they could have restructured it or refinanced it but as it was they extinguished that and as a result they weren't entitled to purchase money on their loan to the to the farmer again the general rules of purchase money security interests has to be you know a loan made to enable the debtor to acquire rights in the collateral it's a purchase money security interest to the extent that it's purchase money collateral and a purchase money obligation and it has to be perfected by filing a financing statement before or within 20 days after the debtor receives possession of the collateral now there are some special rules that apply in certain cases and the most important is a purchase money security interest in inventory now purchase money security interest in inventory must be perfected before the debtor receives possession of the inventory so it's got to be perfected there is no 20 day window in here there is no 20 day rule the secured party must perfect before the debtor receives the inventory there is a notice requirement as well this is to prevent situations where a debtor or a lender may be obligated to make future advances for acquisition then the taury and the debtor could run off and essentially double finance the inventory by financing it both from the seller and from you know another lender that's obligated to make future advances on the inventory so the way they deal with this is through a notice requirement secured party must send an authenticated notice to the holder of any flicking conflicting security interest now the recipient also has to receive that notice and that's received not it's not just sin but the the recipient must receive it before the debtor receives possession of the inventory now once it's received that notice will cover deliveries of inventory for the next five years the notice is effective for a five year period and it has some content requirements that I'll come back to here in a moment first of all what is inventory well its goods other than farm products which are leased by a person is lessor so the leased goods by a leasing company are actually inventory of the leasing company if they're held by a person for sale or lease to be furnished under a contracted service or to be furnished under a contract to service and this is the classic definition of inventory you know the stock of a store is inventory if it's goods that are furnished by a person under contract to service all the repair parts that a repair company has those would be inventory and raw materials works in progress or other materials used or consumed in the business those are all considered inventory now whether goods are inventory in a particular situation is generally determined by the purpose for which the goods are held one case I saw that Illustrated how the courts approach this was Buffalo molded plastics this is one where Buffalo molded plastics was a manufacturer of automobile components that they sold the GM and following a common practice before the GM bankruptcy I don't know if it still is but what would happen is GM would agree to buy the manufacturing equipment for particular components actually they they would have the right to buy it in case the debtor went out of business that way they wouldn't you know they wouldn't have a break in the supply chain if the manufacturer went out of business they could just take the equipment and give it to somebody else so Buffalo bought some manufacturing equipment from a manual from a company that provided at the the cellar and everything was fine until Buffalo wound up in in default and what happened there was that a creditor one creditor a buffalo challenged the purchase money security interest claimed by the seller of the goods by saying that this was inventory a buffalo because they were going to resell the equipment to GM at some later time and of course the the skirt the the seller of the goods disagreed with that it it never reached a decision by the court but the court laid out how they did make the determination of whether the goods are inventory and that's you know for what purposes of being held if it was being held for resale to GM then that equipment probably would be inventory but if it was being used primarily for the manufacture of goods then probably not but again it settled before the court have reached a decision on it now when sending a purchase money security interest notice the first step is to conduct a search the idea here is it's necessary to identify who needs to receive the notice and because of this the search has to be done I D Li anyway after the filing of the financing statement and that's because if the financing statement is filed to perfect the security interest sometime after the search is conducted there's a possibility that another lender could have sneaked snuck in there during that period and if that happens and that lender doesn't get the notice to which they're entitled that can affect the purchase money security interest so it's always a good idea to wait and conduct a search after the financing statement has been filed so it's a also a good idea to make sure that the through date on the search when the when the state's index has caught up to the file date make sure it's on or after the file date when interpreting the search for purposes of sending purchase money notices you don't need to send them to anybody that has a lapsed financing statement but any financing statement that's been amended or even terminated it might be a good idea to send a notice even if the it's been terminated but it's still one lapsed lapse and termination are two different concepts also if the collateral has been amended or restated so it doesn't appear that the inventory is still covered probably still a good idea to send notice of course that's in an ideal world where the costs of due diligence really don't matter but you always do have to balance I guess to a certain extent the costs of sending the notice versus the risk involved but as a general rule in an ideal world better safe than sorry so who actually gets the notices well of course the current secured party or parties of record on a financing statement that covers the same collateral certainly have to get the notice if a secured party has been deleted from a financing statement that covers the same collateral again in an ideal world you would send a notice to that deleted secured party but you know technically it wouldn't be required if a secured party is the collateral agent like on a syndicated loan where there's multiple participants the the sender of the notice is entitled to rely on the name and address provided for the secured party's on the financing statement they don't have to do additional research to identify each additional secured party that isn't listed on the financing statement and if there has been a an assignment it's a important understand that an assignment in the UCC records only a met only assigns the right to amend the financing statement it does not assign the security interest and therefore both the ass ignore and a signal need to receive the notice for purchase money when it comes to calculating the deadline for sending the notice again bear in mind that the receipt of the collateral by the debtor is the the absolute deadline for sending that notice so send it as early as possible preferably before the debtor is going to receive possession of the goods and make sure it's received before they receive possession of the goods if the debtor never receives possession then a notice isn't really required but bear in mind that the debtor may take constructive possession even though they've never taken actual possession the goods they they might have constr
ctive possession there's one case out there where the debtor had the goods a grenade at its customers location and under its complete control and that was deemed to be constructive possession which required the secured party to send a notice as far as the notice requirements go the secured party has to strictly comply with those requirements or it may not be able to assert its purchase money priority so the best practice send the notice by you know so that the that in manner that provides evidence of the time of receipt preferably by a signature so usually the best method is something that required that provides proof of delivery because remember that secured party has the burden of proving that it complied with all the requirements for purchase money security interest so you know typically certified mail or overnight delivery is the best method those will get the those will get a signature and in time of delivery typically now windows will notice need to go out remember it has to be received before the debtor receives possession of the inventory once it's received its effective for five years what happens at the end of that five year period though if the secured party is going to file a continuation on that financing statement and they want to continue to receive purchase money priority in any inventory that they provided during that continued period for the financing statement then they are going to have to send a new notice it's not a continuation of an existing notice it's a new notice also the new notice is not tied to the continuation statement it can be sent at any time there's no six-month window for sending the new notice once it's received it will cover inventory delivered during the the following five years so if it's sent a year before the financing statement is continued that's great it'll continue to cover the deliveries of collateral you just got to be sure to track the expiration date of the notice separately from the expiration date of the continuation because there are no necessary connections between the continuation statement of the UCC financing statement and when the notice has to be sent so for sending the new notice best practice first of all conduct a search so that you can purge any any scare parties that have let their financing statements lapse from the notice list and then send the notice so it is received before the fifth anniversary of the last date or of the date the last notice was received so here's how that can work in practice let's say we have a financing statement filed on January 15th 2012 that means it's going to be effective until January 15th 2017 the notice was sent on April 1st 2012 about two two and a half months after the financing statement was filed and that will be effective until April 1st 2017 so the secured party is going to be able to get purchase money priority only from April 1st to January 15th now to get purchase money priority beyond that January 15th lap state of the financing statement the secured party will have to continue the financing statement but if it doesn't send another notice it will only get purchase money priority until April 1st 2017 so it has to send a new notice that's received before April 1st 2017 as far as the notice contents go it has to say that the sender expects or has acquired a purchase money security interest in the debtors inventory it has to include the description of the inventory and it has to be authorized by the secured party now what does it mean to be now it has to be authenticated the the notice it must be an authenticated notice that doesn't mean it has to be signed by the secured party a there have been cases out there where something less was required the first financial case I cite here was determined the notice was determined to be authenticated when it was sent on the secured party's letterhead had the full name and address of the secured party who to contact with any questions and so that was sufficiently authenticated even though it lacked a signature even an employee name it has to include a description of the inventory there are no special rules for how to describe inventory in a purchase money security interest notice so best practice is to just follow the standard article 9 collateral description sufficiency requirements it doesn't have to be a specific description either as I mentioned it can be by type or category it doesn't have to be specific now we we actually get a lot of these purchase money security interest notices because oftentimes the sender follows that better safe than sorry rule and they send them to the name and address in the return to of financing statements that show up on the search which is actually meant for filing off issues so they know where to send the acknowledgement copies so we see a lot of these notices and what I've done is put together an example it's kind of a composite of the common features that all these notices have each one's a little bit different I've noticed but you know they have you know that the notices sent typically pursuant to the UCC and then they'll cite the section of the UCC and then it explains that the secured party either has or expects to acquire that purchase money security interest in inventory and then they will provide a description of the inventory and provide contact information in case anybody has questions about it now a live livestock purchase money security interest is actually very similar to inventory and I'm not going to spend a lot of time on it but the only real difference between a purchase money security interest in livestock and one in inventory is that with livestock the notice is only effective for six months it's not effective for five years purchase money security interests are available for fixtures but there are some different rules involved with fixtures in order to get a purchase money security interest in fixtures the debtor must have an interest of record or must have possession of the real property involved the security interest must be perfected by a fixture filing before the goods become fixtures or within 20 days thereafter it is the trigger date here is not when the debtor receives possession when the goods become fixtures which is sometimes a difficult determination so you know that's that's kind of a not not always a very clear date like it might be if you know it was when the goods were dirt now it must be perfected by a fixture filing which is a defined term under article 9 and that means a financing statement covering fixtures it has to satisfy the requirements in Section nine five oh two a and B for filing in the real estate records and it must be filed in the office where a mortgage would be recorded on the affected real property so by definition a fixture filing is filed in the real estate records filing a financing statement on fixtures with the central filing office of the state where the debtor is located does not perfect the purchase money security interest in fixtures under this rule I mentioned earlier consignment transactions consignments are within the scope of article 9 or at least some consignments there article 9 does define what consignments fall into it and under article 9 if it is a consignment transaction within its scope the consigners interest in the consigned goods is a purchase money security interest in inventory here's why a consignment is a transaction where a party the consign or turns over goods of the consign or owns to a consign to allow the consign e to sell them so the you know you might have heard of consignment shops and things somebody's turning over goods to another to sell on their behalf and in this type of situation the consign ORS interest once it's turned over to the consign II is a purchase money security interest in inventory and that's because the consignees deemed to have the same rights and title to the goods as the consign or that's how the consign II can transfer title to the goods in that type of situation and because the consign II is deemed to have the same right and title as an owner the consign or that means creditors of the consign II can reach those consigned goods to satisfy their claims so in order to prevent other creditors from going after consigned goods the consignor must comply with the purchase money security interest in inventory requirements so they have to perfect by filing a financing statement before the debtor receives possession of the goods they have to send a notice to the holder of any conflicting security interest in the goods and make sure that notice is received before the debtor receives possession of the consigned goods consumer goods no filing is required if the collateral consists of consumer goods it's perfected automatically without filing and but the determination of whether goods are consumer goods is important here because some consumers buy goods that wouldn't you wouldn't ordinarily think of as consumer goods consumer goods are those acquired for personal family or household purposes but is a tractor or a consumer good it might be you know a bobcat you know of one of those friend loaders that can be a consumer good and how does how does the lender know for sure whether it's consumer good or not it could make a difference because if they don't file because it's a consumer good and it's later determined not to be a consumer good then they're unperfect 'add well the courts actually give the lender a fair amount of leeway on this they allow the lender to rely on the borrower's representations so if in the loan documentation the borrower represents that the goods will be used for personal family or household purposes then generally that's all that's required the secured party doesn't have to do anything more there are some non-uniform purchase money security interest rules out there Florida does not allow for a purchase money security interest in fixtures Kansas does not have a consumer goods exception for the filing requirement so you have to file even on consumer goods in Kansas a purchase money security interesting fixtures in Louisiana must be filed in the regular UCC index and there is no 20-day rule so always important to file as early in Louisiana as possible and Tennessee in Nebraska as I mentioned they have a 30-day window for filing as the financing statement related to the purchase money security interest although Tennessee is spa they filed bills the last couple of years that would extend it out to 90 days but they never made it through through the legislature that would be really great for secured parties because they'd have 90 days to perfect a purchase money security interest but not real good for those that search the UCC records because there could be hidden liens to pop up and take priority up to 90 days after the date of the search so I don't know whether that that type of bill had will get any traction in future years so in any event those are a lot of the issues that arise in the context purchase money security and interests I tried to hit the things that people ask the most questions about that's point I'm going to turn it back over to Anu for to take your questions Thank You Paul that was great so we will now open up the Q&A questions session rather for the sake of time I'm going to skip over any other closing items that we have the only one thing I want to mention is that on the screen we have a poll question for you would you like to be contacted by a UCC specialist you can make your selections here and somebody will be in touch so Paul let's get right into it Patrick is asking does the priority of a purchase money financier attach to proceeds it can identifiable proceeds from the purchase money collateral but it doesn't to the same extent I mean that is it depends on the type of proceeds and whether they're identifiable so really it has to depend on the particular situation okay James is asking in the case where the bank finances an 8020 purchase of a piece of equipment if the bank were to send its eighty percent of purchase price directly to the seller of the equipment and the debtor were to send the remaining twenty percent to the seller does this jeopardize the pens II uh no because the the obligation the seller is still financed you know a purchase money obligation it's purchase money collateral I'm frequently asked well is there is there a point where a down payment becomes so big that it would jeopardize the the purchase money security interest and typically no because it it's to the extent that's what the code says to the extent so to the extent it's a purchase money obligation and to the extent its purchase money collateral it's a purchase money security interest so in that type of situation the secured party has provided value it's enabled the debtor to acquire rights in the collateral and that type of transaction structure that way shouldn't have any impact on that thank you Chris is asking is notice to senior secured parties only required for inventory inventory livestock and consignment transactions which of course are treated as an inventory purchase money security interest that's correct it's not required for you know other types of goods just inventory and livestock and consignments thank you Christina's asking she wants to confirm that the notice requirements is only for inventory notice is not necessary for purchase of equipment or other collateral that is considered inventory I think you just went over that yes okay and a follow up question from Christine so if the debtor does not own where the fixtures will be installed and a secured party may not perfect the pens and fixtures well they have to they either have to have an interest of record which means that they're in the Grand Tour grantee index either is an owner or a long-term lessee or some other real estate interest or they have to be in possession of the real property if neither of those apply than they then they're not entitled to it the purchase money in pictures may not be available thank you John is asking if a bank finances of built a billboard and its fixtures but the customer does not own the land their billboard sits on are we still covered typically you know as long as the billboard is an asset I mean a billboard can be moved not easily of course but it would depend on the particular facts and circumstances of the arrangement between the landowner and the owner of the billboard but you know it is a general rule there's no reason why somebody couldn't get a purchase money security interest in that type of case either as a fixture or as in personal property if it's not a fixture Timothy is asking if a secured party has a ABA filing and later modifies to append Z can they later change this back to an ABA filing by modification or do they need to refile to perfect the ABA filing I must I'm gonna have to assume here that ABA means all business assets if I'm wrong you know you shoot us an email afterwards and we'll answer the question but actually all business assets would would finance say later or would cover a later pimsy a pimsy wouldn't even be necessary because the secured parties and first priority to begin with unless there's unless there's a prior secured party but and all business assets are all assets filing would cover purchase money security interests there's no requirement to indicate that it's purchase money Thank You Charlene is asking what if they didn't send the notifications when they filed the continuation of the financing statement can they send now to secure interest yeah you can send the notice later it's just that any inventory delivered you know the inventory and advances delivered during the period when the notice wasn't in effect won't be entitled to purchase money security priority okay thank you Paul so that is all the time we have today if we didn't get you a question we will contact you with the response after the webinar thank you to everyone who joined us today we hope to see you next time [Music]
