The purchase-money security interest (“PMSI”) offers secured parties a super priority over competing lenders in the same collateral. The requirements to obtain a PMSI are rather simple. The secured party merely needs to perfect and, if required, provide notice within statutory time deadlines. Those deadlines are based on when the debtor receives possession of the collateral. Thus, it is critical that secured parties correctly calculate the point at which the debtor receives possession to ensure they fulfill the statutory requirements before the deadline.
The time when a debtor receives possession may not be entirely clear when the collateral is delivered in stages over an extended time period. A secured party that miscalculates the relevant dates in that situation risks losing its PMSI priority. This article explains the statutory PMSI deadlines, identifies how courts actually calculate the date of possession when delivery occurs in stages and offers best practice suggestions for managing PMSI deadline risks.
Statutory PMSI Deadlines
Generally, a secured party that qualifies for a PMSI merely needs to perfect its security interest by filing a financing statement before or within 20 days after the debtor receives possession of the goods. There are no other special filing requirements. What matters is the time of filing.
If the collateral consists of inventory or livestock, however, the 20-day period does not apply. The PMSI must be perfected by filing before the debtor receives possession of the inventory or livestock. In addition, the secured party must send a notice to the holder of any conflicting security interest so it is received before the date that the debtor receives possession of the inventory or livestock.
When Debtor Receives Possession of Collateral
When delivery of the collateral occurs in stages, the point at which the debtor receives possession of the goods is not always obvious. For example, a large piece of equipment may require multiple deliveries over time as various components are installed and tested. In such cases it may be hard to tell when the debtor actually receives possession for PMSI perfection and notice purposes.
The Official Comments to Article 9 and case law provide guidance for how the courts resolve that issue. In such cases, the courts generally determine that the debtor receives possession of the goods when it would appear to a potential creditor that the debtor has acquired an interest in the collateral.
The PMSI perfection and notice requirements exist to protect third parties, not the secured party or debtor. Basing the time when a debtor receives possession of collateral on outward appearances is consistent with the objective of protecting third parties.
Nevertheless, many secured parties use different methods to determine when a debtor takes possession of collateral delivered in stages. For example, some secured parties use execution of the security agreement as the baseline for calculating the PMSI deadlines. Other secured parties use a different milestone, such as when the debtor signs a delivery certificate, confirms the goods are as promised or makes the first payment due.
It’s risky to rely on dealings between the secured party and debtor alone to establish the point at which the debtor takes possession of collateral. Typically, a potential creditor would not be aware of these dealings. A court may accordingly disregard these events when it analyzes the transaction from a third-party perspective.
Conclusion and Best Practices
The courts calculate when a debtor receives possession of collateral based on the circumstances as they appear to potential creditors, not transactions between the secured party and debtor. Consequently, if there is any question of when the debtor receives possession of collateral delivered in stages for calculating PMSI compliance deadlines, the secured party should step back and look at the situation from an outsider’s perspective. If it looks like the debtor may have an interest in the collateral, it probably does.
Secured parties can avoid PMSI deadline risks when collateral is delivered in stages simply by filing financing statements before shipping the first installment of goods. The secured party need not wait for some later event to file its financing statement. In fact, the secured party can file its financing statement even before the debtor executes the security agreement or the security interest attaches. The secured party merely needs the debtor to authorize the filing in an authenticated record. An email will often suffice for this purpose.
Likewise, if the PMSI covers inventory or livestock, the secured party is free to send the required notices well before possession of the collateral could become an issue. The holder of any conflicting security interest just has to receive the notice sometime before the debtor receives possession of the inventory or livestock.
Time is always of the essence for PMSI compliance. When collateral is delivered in stages, secured parties should not wait until a particular event—such as the last shipment, completion of testing or the debtor’s final acceptance—before taking action. The prudent secured party will perfect its PMSI and send any required notices at the earliest opportunity, before deadlines become an issue.
Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at phodnefi@cscinfo.com or 800-927-9801, ext. 62375.