In the event the debtor has made a down payment to the vendor, it is best, if possible, to fund the full amount to the vendor and require the vendor to reimburse the debtor. Remember that perfection requires both: 1. Sometimes it is easy to determine when possession begins because the borrower signs some form of delivery receipt or the vendor has written evidence of the date of delivery. However, sometimes the situation is confusing, when the period between the delivery and the date of acceptance is extended due to testing, repair, additional deliveries of necessary pieces, etc.
There is also some statutory and case law indicating that taking possession as a lessee such as under a rental agreement , rather than as an owner is not enough to begin the 20 days running. In particular, the UCC provides:. For example, a person may take possession of goods as lessee under a lease contract and then exercise an option to purchase the goods from the lessor on secured credit.
This commentary is technically meant to address a situation where the lessor under a true lease finances the purchase option owed by the lessee. However, some lenders rely on this logic when financing the purchase option that a lessee has under a lease with a third party although this situation is slightly different than the example since the lessor is not the party that eventually becomes the secured lender.
Since inventory that is held for sale may be converted into accounts or other payment obligations, sometimes fairly quickly, and existing lenders that finance such inventory often expect for it to roll over from time to time, Article 9 places more stringent requirements on PMSI lenders intending to obtain a PMSI in inventory.
Complying with PMSI rules for inventory requires the following:. The notification requirement protects the non-purchase-money inventory secured party in such a situation: If the inventory secured party has received notification, it presumably will not make an advance; if it has not received notification or if the other security interest does not qualify as purchase-money , any advance the inventory secured party may make ordinarily will have priority under section Inasmuch as an arrangement for periodic advances against incoming goods is unusual outside the inventory field, subsection a does not contain a notification requirement.
Under subsection b 3 , the perfected purchase-money security interest achieves priority over a conflicting security interest only if the holder of the conflicting security interest receives a notification within five years before the debtor receives possession of the purchase-money collateral. If the debtor never receives possession, the five-year period never begins, and the purchase-money security interest has priority, even if notification is not given.
However, where the purchase-money inventory financing began by the purchase-money secured party's possession of a negotiable document of title, to retain priority the secured party must give the notification required by subsection b at or before the usual time, i. Some people have mistakenly read former section 3 b to require, as a condition of purchase-money priority in inventory, that the purchase-money secured party give the notification before it files a financing statement.
Read correctly, the "before" clauses compare i the time when the holder of the conflicting security interest filed a financing statement with ii the time when the purchase-money security interest becomes perfected by filing or automatically perfected temporarily.
Only if i occurs before ii must notification be given to the holder of the conflicting security interest. Subsection c has been rewritten to clarify this point. Inasmuch as the address provided as that of the secured party on a filed financing statement is an "address that is reasonable under the circumstances," the holder of a purchase-money security interest may satisfy the requirement to "send" notification to the holder of a conflicting security interest in inventory by sending a notification to that address, even if the address is or becomes incorrect.
See section definition of "send". Similarly, because the address is "held out by the holder of the conflicting security interest as the place for receipt of such communications i. Subsections b and c also determine the priority of a consignor's interest in consigned goods as against a security interest in the goods created by the consignee.
Inasmuch as a consignment subject to this article is defined to be a purchase-money security interest, see section d , no inference concerning the nature of the transaction should be drawn from the fact that a consignor uses the term "security interest" in its notice under subsection b 4.
Similarly, a notice stating that the consignor has delivered or expects to deliver goods, properly described, "on consignment" meets the requirements of subsection b 4 , even if it does not contain the term "security interest," and even if the transaction subsequently is determined to be a security interest. Priority in Proceeds: General. When the purchase-money secured party has priority over another secured party, the question arises whether this priority extends to the proceeds of the original collateral.
Subsections a , d , and f give an affirmative answer, but only as to proceeds in which the security interest is perfected see section Although this qualification did not appear in former section 4 , it was implicit in that provision. In the case of inventory collateral under subsection b , where financing frequently is based on the resulting accounts, chattel paper, or other proceeds, the special priority of the purchase-money secured interest carries over into only certain types of proceeds.
As under former section 3 , the purchase-money priority in inventory under subsection b carries over into identifiable cash proceeds defined in section received on or before the delivery of the inventory to a buyer. As a general matter, also like former section 3 , the purchase-money priority in inventory does not carry over into proceeds consisting of accounts or chattel paper. Many parties financing inventory are quite content to protect their first-priority security interest in the inventory itself.
They realize that when the inventory is sold, someone else will be financing the resulting receivables accounts or chattel paper , and the priority for inventory will not run forward to the receivables constituting the proceeds. Indeed, the cash supplied by the receivables financer often will be used to pay the inventory financing. In some situations, the party financing the inventory on a purchase-money basis makes contractual arrangements that the proceeds of receivables financing by another be devoted to paying off the inventory security interest.
However, the purchase-money priority in inventory does carry over to proceeds consisting of chattel paper and its proceeds and also to instruments to the extent provided in section Under section e , the holder of a purchase-money security interest in inventory is deemed to give new value for proceeds consisting of chattel paper.
Taken together, sections b and e enable a purchase-money inventory secured party to obtain priority in chattel paper constituting proceeds of the inventory, even if the secured party does not actually give new value for the chattel paper, provided the purchase-money secured party satisfies the other conditions for achieving priority. When the proceeds of original collateral goods or software consist of a deposit account, section governs priority to the extent it conflicts with the priority rules of this section.
Priority in Accounts Constituting Proceeds of Inventory. The application of the priority rules in subsection b is shown by the following examples: Example 1: Debtor creates a security interest in its existing and after-acquired inventory in favor of SP-1, who files a financing statement covering inventory. New Article 9 makes certain changes to the former Article 9 scheme by providing for perfection on attachment as to 1 sales of payment intangibles and promissory notes which, as discussed in Chapter 4 Scope of Article 9 , were outside the scope of former Article 9 , 2 certain security interests in letters of credit, 3 security interests in investment property created by a broker, and 4 security interests created by the assignment of a health-care insurance receivable to a provider.
Automatic perfection for security interests in beneficial interests in trusts, which was not part of former Article 9 as enacted in many states, including Arizona, has been eliminated by new Article 9. The change in the treatment of assignments of beneficial interests in trusts was made because of an increased use of such interests as collateral. The proper way to perfect a security interest in a beneficial interest in a deed of trust is dealt with in Chapter 20 Perfection as to Fixtures and Other Real Estate-Related Collateral.
Temporary perfection for certain collateral such as instruments and documents of title has not been eliminated but rather moved to new section There were differing rationales for the situations where filing was not required ranging from the fact that the transaction was not really a financing transaction or the transaction was so out of ordinary course that a creditor might not think about perfecting its interest to transactions in which the creditor was relying on possession for perfection and there was a need to allow a debtor or other party temporary access to the collateral to accomplish a transfer of the collateral.
As was noted in Chapter 17 Perfection as to Goods Subject to Certificate of Title Legislation , perfection by compliance with a certificate of title law is the equivalent of filing a financing statement. See new c. Such is not the case as to automatic perfection and, as will be seen in Part VI Priority , relying on automatic perfection poses a risk in consumer goods cases that can be avoided only by filing a financing statement.
In general. Perhaps the most important instance of automatic perfection is that for a purchase money security interest in consumer goods. Under former section 1 d there was perfection on attachment as to a purchase money security interest in consumer goods other than a security interest in a vehicle required to be registered or in a fixture as to which a creditor desired the protection against real estate parties achieved by making a fixture filing.
New section 1 tracks former section 1 d in substance, but rather than state the rule in terms of an exception to filing, new section 1 provides that a purchase money security interest in consumer goods, other than one that is subject to a statute or treaty such as a certificate of title law , is perfected on attachment.
The exemption from filing for purchase money creditors in the consumer context is premised on a belief that requiring all creditors who extend such purchase money credit to file would place a burden on the filing system that is outweighed by the protection accorded to the relatively few creditors who take interests in consumer goods after the debtor already owns them. The exemption from filing for purchase money security interests in consumer goods is made even though the effect is to create the possibility of a secret lien.
The distinction between purchase and non-purchase money interests is important throughout the law of secured financing and in bankruptcy and whether a security interest is or is not purchase money can be controlling as to matters other than automatic perfection.
Here the question is whether there is a purchase money security interest in goods such as will result in automatic perfection. Under new section b 1 , a security interest is a purchase money security interest in goods to the extent that the goods are purchase money collateral with respect to the security interest.
New section a 2 , in turn, defines a "purchase-money obligation" as an "obligation 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.
Thus, for a security interest to be a purchase money security interest in goods under new section the goods must secure a purchase money obligation and this means that the obligation must have been incurred to secure the price of the collateral or the value must have been given by the creditor to enable the debtor to acquire rights in the collateral and the value must have been in fact so used. The classic instance of a purchase money security interest in goods historically has been a conditional sales contract, i.
The other type of purchase money credit is that involving a loan that enables the debtor to acquire rights in the collateral. Under new section a 2 , a loan results in a purchase money security interest only to the extent the loan "the value" actually is used to acquire the goods. To help assure that loan proceeds are actually used to acquire goods, lenders should be advised to make checks payable to the seller of the goods or the debtor and seller. Please help us improve our site!
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