A perfected Purchase Money Security Interest (PMSI) presents another exception to the first-to-file or first-to-perfect rule. According to 9-324(a), a PMSI will have priority over any other security interest (unless there is another conflicting PMSI). This is often referred to as a super priority. However, PMSIs have different priority rules depending on the type of collateral. For instance, 9-234(a) covers goods that are not inventory or livestock; 9-3234(b) covers PMSIs in inventory; 9-324(d) covers livestock; and 9-324(f) covers software.

Goods other than Inventory and Livestock

Thus, if SP1 has a perfected security interest in equipment and SP2 has a PMSI in the same equipment, then the PMSI will win as long as it is perfected within 20 days after delivery.

Inventory

However, if SP1 has a perfected security interest in inventory and SP2 has a PMSI in the same inventory, then SP2 has a much higher burden to ensure that they maintain their priority. According to 9-324(b), the PMSI party needs to have 1) perfection by the time delivery occurs, 2) provided notice to any other secured parties that there is a PMSI on the inventory, 3) that notice is received within five years before the debtor receives possession of the inventory, and 4) the notice needs to say that there is a PMSI and that the PMSI is about the inventory.

Proceeds

These rules also apply to the proceeds of goods. To determine whether the proceeds attach and are perfected we need to follow the standard process.

  1. First, determine the priority of the original collateral.
  2. Second, determine whether the proceeds attach and are perfected. See 9-315(a), (c) and (d).
    1. This process needs to be done for each type of collateral.
  3. Figure out the priorities of the proceeds. See 9-322(a).

When it comes to goods as covered by 9-324(a), then super priority rules do not change for proceeds. However, for inventory, a PMSI would only maintain a super priority for cash proceeds and the remaining proceeds would follow the analysis of the general rule of 9-322(a).

The Double Debtor Problem

Picture a situation where a secured party obtains a security interest against a debtor. Later, that debtor sells the collateral to a buyer who secures that purchase by another secured party. If the second secured party had filed or perfected first, then the first secured party would not have been able to defend themselves in priority. See 9-322(a).

However, this problem does not exist because Article 9 recognized the policy issues and created 9-325 to ensure that a secured party who obtains an interest defends their priority from a buyer who gets a secured interest.

Deposit Accounts

Deposit accounts can only be perfected by control. However, there are several ways to control a deposit account and each different method shapes what kind of priority the secured party may have. For instance, a control agreement will beat no control, control by a depositary bank will beat a control agreement, and control by becoming the depositary bank’s customer will beat control by a depositary bank.

So once again, the steps for analysis are:

  1. Determine what kind of collateral is at stake.
  2. If the collateral is a deposit account, then perfection must occur by control.
  3. Determine how the secured party obtained control to figure out priority.
Disclaimer

The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.

Will Laursen

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