Service Area: UCC Services

Big Foot, a Unicorn, and a UCC Financing Statement

Posted on March 9, 2023 by - UCC Financing Statements

The 6 Myths of UCC Filings: Big Foot, a Unicorn, and a UCC Financing Statement All Walk into a Credit Conference

No, wait – not the right joke.

Let’s try again. Big Foot, Unicorns & UCC filings all have one thing in common: crazy myths surrounding their existence and, in the case of the UCC filing, crazy myths about their effectiveness.

While I’m not an expert on Big Foot and I think Unicorns are pretty, one thing I do know is the immense benefit UCC filings bring to your credit process. Today, I would like to dispel some of the age old myths about UCC filings.

Myth 1: “It’ll never work. I’ll always be behind the bank & never get paid.”

Fact: Bank relationships change – i.e. refinance. You may find you need to subordinate to a bank, but you will still remain ahead of other secured creditors.

Myth 2: “My customer’s bank won’t let them sign the security agreement.”

Fact: The bank should not have a problem with you being a secured creditor, however, the bank may request that you subordinate.

Myth 3: “The UCC filing will hurt my customer’s credit rating.”

Fact: UCC filings do not impair your debtor’s credit rating. The filings will appear on the credit report, but simply to provide confirmation that another creditor has a secured position or that you pledged collateral for trade credit.

Myth 4: “If I ask my customer to sign a security agreement, they are going to leave me & buy from a competitor that won’t ask them to sign a security agreement.”

Fact: Are you 100% positive your competitors are not filing UCCs or, at the very least, including security language in their agreements? The truth is, company’s everywhere file UCCs, and it’s a normal aspect of doing business. Reassure your concerned customer that the UCC filing simply allows you (the vendor) to be a secured creditor in the unlikely event they file bankruptcy.

Myth 5: “Eh, it’s not worth the money or the hassle!”

Fact: Hassles? You don’t need no stinkin’ hassles! This is why there are companies, like NCS, who will handle the “hassles” for you.

We can cultivate your collateral description, review your agreement to ensure it contains important aspects like the granting clause, pull the articles to confirm your debtor’s name & jurisdiction, process the actual filing, monitor the filing for expiration & monitor your customer for changes with the secretary of state.

You’re right, it may seem like a hassle to you, but to us it’s second nature. A minimal fee could save you hundreds of thousands of dollars in the event your debtor defaults.

To be a secured creditor or not to be, that is the question. Nah, there is no question because you should always be a secured creditor.

Myth 6: “A UCC filing will make me sprout a horn, grow fur & give me magical powers with glitter!”

Fact: OK, you got me there.

The Bottom Line

UCC filings are magical; UCCs grant you a security interest and put you in the best possible position to get paid, in the event your customer defaults.

Take the smart step and become a secured creditor, and don’t believe all the mythical malarkey surrounding their effectiveness.

NCS Credit Is Your UCC Filing Expert

We are UCC experts and we can help you implement a full service UCC Filing Program. Need help with a single filing? We do that too! Contact us today.

Editor’s Note: This content was originally published in May 2014. It has since been updated and revised for 2023.

Blanket Filing or PMSI Filing

Posted on March 9, 2023 by - UCC Financing Statements

Should You Use a Blanket Filing or a PMSI Filing?

There are primarily two types of secured transactions under Article 9 of the Uniform Commercial Code: Blanket Filing and Purchase Money Security Interest (PMSI) Filing. There are other applicable business transactions for a UCC filing, such as consignment, bailment, tooling, warehousing arrangement and installments/promissory notes. Today we are going to focus on Blanket & PMSI filings.

What is a Blanket Filing?

A Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). The UCC filing elevates the status of your accounts receivable to that of a secured creditor.

Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

What is a Purchase Money Security Interest?

A PMSI filing provides the same benefits as the blanket filing with the addition of the priority of repossession of specific identifiable goods, primarily inventory or equipment that your company would provide.

Purchase Money Security Interest in Equipment

Securing collateral that is defined as equipment 9-102(33) – “Equipment” means goods other than inventory, farm products, or consumer goods. The “equipment” is used in the course of the debtor’s business – it is not stocked.

Who would file a PMSI in Equipment? Creditors who supply items like medical exam tables, copy machines and walk-in coolers; equipment your debtor would keep/not re-sell. 

Purchase Money Security Interest in Inventory

Securing collateral that is defined as inventory 9-102(48) – “Inventory” means goods, other than farm products, which: (A) are leased by a person as lessor; (B) are held by a person for sale or lease or to be furnished under a contract of service; (C) are furnished by a person under a contract of service; or (D) consist of raw materials, work in process, or materials used or consumed in a business.

Who would file a PMSI in Inventory? Creditors who supply goods to a debtor for the purpose of the goods being resold; Panasonic sells car stereos to Best Buy who in turn sells them to their customers.

Timely Filing

Much like other credit remedies, there are “deadlines” for filing a timely Financing Statement.

  • Blanket Filing – The filing should be recorded prior to lending or shipping.
  • PMSI in Equipment – To achieve priority in equipment the UCC-1 Financing Statement must be recorded within 20 days of when the debtor receives possession of the collateral.
  • PMSI in Inventory – To achieve priority in the inventory the UCC-1 Financing Statement must be recorded and authenticated notification letters must be sent before the debtor receives possession of the collateral.

Did You Know?

A creditor can file a PMSI and Blanket Filing on the same collateral. Unsure which filing your company should be doing? Contact us today!

Editor’s Note: This content was originally published in February 2015. It has since been updated and revised for 2023.

The Competitive Advantage of UCC Filings

Posted on March 8, 2023 by - UCC Financing Statements

Did You Know UCCs Give You a Competitive Edge when Extending Credit?

UCC Filings Promote Commerce

In 1952, the Uniform Commercial Code (UCC) was created in an effort to promote commerce between states.  Prior to the creation of the UCC, selling between states was similar to how we sell between countries today – there was a great deal of risk involved and little financial security available. Once the UCC was in place, it afforded creditors additional security, therefore enabling creditors to extend more credit aka more sales.

UCC Filing Program is a Team Effort

When implementing a UCC filing program, it’s important to understand the widespread benefits: minimize financial risk, reduce DSO, improve cash flow and increase sales. Wait, “increase sales” – I know you are wondering if you read that correctly – yes, increase sales. UCC filing is more than reducing risk; it’s about the opportunity to expand your market, by providing you with the security needed to sell to marginal accounts and by providing the added security needed to increase existing clients’ credit lines.

In order for a UCC filing program to be successful, there needs to be interdepartmental cooperation. Of course, the credit department will be involved, as UCCs are a means of mitigating your company’s financial risk, but a successful program needs to include involvement from your sales department. After all, it’s quite likely that your sales representatives will be acting as the conduit for signed documentation (i.e. Security Agreement), which means they should have a vested interest in the process.

How UCC Filings Will Benefit Sales

Because your sales team will be involved in the UCC process, it will help if they understand why you’re implementing UCC filings, and how it will benefit them.

What Your Sales Reps Should Know about UCCs

No cost to your customer: The core of properly perfect UCC filing is the security agreement. Your customer doesn’t have to pay to sign a security agreement – it’s like signing any credit agreement. The costs associated with the UCC filing will be paid for by your company (and those costs are minimal).

**UCC filings are NOT reported to credit bureaus**

In the unlikely event that your customer files for bankruptcy protection, a properly perfected UCC elevates your company to a secured creditor position.

If your customer never files bankruptcy and never defaults on payment, then it will seem as though the UCC doesn’t even exist – it’s like an invisible shield: it’s there to offer protection if you encounter harm, but completely unnoticeable in a world of fiscal harmony. If your customer does file bankruptcy and you have properly perfected a UCC filing, you may be able to recover goods and/or funds extended to your customer.

BONUS: If your customer defaults on payments, the Security Agreement can be used as leverage for breach of contract. In every Security Agreement, there are payment terms written into the agreement. Therefore if your customer defaults (i.e. doesn’t pay timely), they are breaching the terms of a signed agreement.

Your company is not the only company securing its accounts receivable through the UCC process. Financial institutions and your competitors are filing UCCs as well. Trust me – your company is not the only company mitigating risk through UCC filings. Hundreds of thousands of companies throughout the country (even in Canada, Mexico, Australia and New Zealand) are securing receivables through the UCC process. Did you know that mortgages, car loans and secured lines of credit often have security language written right into the document? And, when you sign that document, the security language allows those companies to file a UCC. UCCs are a simple part of everyday business.

Minimized Risk = Fewer Write-Offs (If customer write-offs are factored into your compensation/bonus, you may want to pay attention) It’s simple: fewer write-offs lower the costs associated with your product > lower costs mean you can sell at a lower price while maintaining profit margins > selling at a lower price makes your company more competitive, opening the doors to a larger market share > more sales with stable profit margins = a happy boss!

UCC filings create sales opportunities: Sounds counterintuitive – an extra step will result in more sales opportunities? The UCC offers additional security, which means you may be able to sell to marginal accounts that were previously out of reach.  How many times have you had the sale lined up only to hear your credit rep tell you “Well, they are going to need to put more money down, based on their financials we can’t justify extending the credit.”? The UCC may substitute for monies down or compromised credit limits.

UCC Filings Create a Competitive Advantage

As you know, the business world is aggressively competitive. Many companies are securing their accounts receivable and those who aren’t are placing themselves at a competitive disadvantage.  Take the opportunity to minimize losses and to create opportunities.

NCS Credit Is Your UCC Filing Expert

We are UCC experts and we can help you implement a full service UCC Filing Program. Need help with a single filing? We do that too! Contact us today.

Editor’s Note: This content was originally published in March 2015. It has since been updated and revised for 2023.

Will Safe Harbor Ever Exist for Florida UCC Filings? Zero Tolerance

Posted on October 31, 2022 by - UCC Financing Statements

Safe Harbor Can’t Save This Creditor’s UCC Filing or Any UCC Filed in Florida: Sorry, Your UCCs Are Seriously Misleading

Florida is serious about UCC filings. A recent Court of Appeals decision left a creditor with an unperfected security interest, when its UCC Financing Statements were deemed Seriously Misleading because it identified its debtor as “1944 Beach Blvd., LLC” instead of “1944 Beach Boulevard, LLC.”

We previously reviewed this case (you can read our original post), hoping that perhaps Safe Harbor could rescue the creditor’s security interest. Unfortunately, in Florida, you must strictly comply with Article 9-503(a), or your security interest is toast.

Yep, You Know the Importance of Complying with Article 9-503(a)

You file UCCs. So, I know you already know how critical it is to strictly comply with Article 9, and you know Article 9-503(a) dictates how the debtor’s name should appear on the UCC Financing Statement. And yet, you and I watch as creditors lose their security because they fail to comply.

The difference between Boulevard and Blvd. may seem minor. It’s a common abbreviation, right? Sure, maybe in the context of a street address. But, when it’s an organization’s name and you are filing a UCC on that organization, you’re best served to list the organization’s name exactly as it appears on the public organic record.

Article 9-503(a) of the Uniform Commercial Code dictates how the debtor’s name should appear on the UCC Financing Statement.

Whether the debtor is a registered entity or an individual, Article 9 says:

  • Registered Entity: list the name on the Financing Statement as it appears in the public organic record
  • Individual: Alternative A or Alternative B
    • Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license.
    • Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Now, there may be occasions where a minor error can be overlooked: enter Safe Harbor.

What Is Safe Harbor? Look to Article 9-506

Even if there are minor errors or omissions on your UCC filing, you may still have a valid filing. How? Safe Harbor essentially saves your UCC filing, if a search of your debtor’s name, using a filing office’s “standard search logic,” discloses the UCC – even with minor errors.

Now, the tricky thing here is although International Association of Commercial Administrators developed standard search logic rules, “standard search logic” is actually dictated by the filing office (not really standard, right?).

Case Recap & Decision

1944 Beach Boulevard, LLC (Beach Boulevard) filed for Chapter 11 bankruptcy and later filed a complaint to avoid Live Oak Banking’s (Live Oak) UCCs because Live Oak abbreviated Beach Boulevard’s name on the Financing Statements.

Live Oak listed Beach Boulevard’s name as “1944 Beach Blvd., LLC” and claimed the abbreviation of Boulevard to Blvd. was a minor error and didn’t unperfect its security interests.

While contemplating its decision, the Court of Appeals reviewed two different cases. The first case says “Hey, if the UCC doesn’t show on the first page of search results, it’s seriously misleading. End of story.” The second case says “Well, you know, the website says to view additional search results you can click previous or next. So really, the search on prior pages or subsequent pages, should be reviewed by the searcher, as long as it’s within reason.”

But, before the Court of Appeals could issue a decision on the fate of Live Oak’s security interest, it needed the Supreme Court to answer three questions:

(1) Is the “search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic,” as provided for by Florida Statute § 679.5061(3), limited to or otherwise satisfied by the initial page of twenty names displayed to the user of the Registry’s search function?

(2) If not, does that search consist of all names in the filing office’s database, which the user can browse using the command tabs displayed on the initial page?

(3) If the search consists of all names in the filing office’s database, are there any limitations on a user’s obligation to review the names and, if so, what factors should courts consider when determining whether a user has satisfied those obligations?

The Supreme Court only needed to address one: “Is the filing office’s use of a ‘standard search logic’ necessary to trigger the safe harbor protection of section 679.5061(3)?” The answer, much to the dismay of Live Oak, is “Yes.”

In short, since the filing office doesn’t use “standard search logic” the creditor’s security interests can’t be saved by Safe Harbor.

Will Safe Harbor Ever Exist for Florida UCCs? Zero Tolerance

Safe Harbor is dependent on the filing office using a “standard search logic.” Since Florida’s registry doesn’t have a “standard search logic” that means Safe Harbor can’t save your UCC.

“Because the Registry lacks a “standard search logic,” the search contemplated by section 679.5061(3) is impossible, which means that filers are left with the zero-tolerance rule of section 679.5061(2).” 1944 Beach Boulevard, LLC v. Live Oak Banking Co., No. SC21-1717, 13 (Fla. Aug. 25, 2022)

Zero Tolerance.

A stark reminder to ALWAYS correctly identify your debtor on the UCC Financing Statement and complete a reflective search to ensure your UCC has been correctly filed.

Failure to Use the Proper Forms Can Prevent Perfecting Your Security Interest

Posted on September 19, 2022 by - UCC Financing Statements

A Seemingly Minor Error Cost One Creditor $4,153,137.79

When preparing documentation to perfect a UCC filing, the requirements may not be too complex, but you must strictly follow the requirements. Precise compliance with federal and state requirements is necessary to prevent a secured debt from being treated as unsecured during bankruptcy and to protect a secured creditor’s priority position.

You may only discover your UCC filing is unperfected when it is treated as unsecured debt during a bankruptcy.  UCC perfection prior to a debtor filing bankruptcy is essential because of the bankruptcy trustee’s strong-arm powers under Section 544(a)(1) of Title 11.  The debtor or trustee can avoid an obligation that is not perfected and treat it as an unsecured obligation.

Regions Bank – Should Have Done It Right

The case In Re Camtech Precision Mfg. Inc. v. Regions Bank, 443 B.R. 190 (2011) provides a concise example of how the incorrect use of forms, when perfecting a UCC, can have devastating consequences.  The debtors in the jointly administered cases were R & J National Enterprises, Inc. (“R&J”), Avstar Fuel Systems, Inc. (“Avstar”) and Camtech Precision Manufacturing, Inc. (“Camtech”), collectively (“Debtors”).

Through a series of finance agreements, the Debtors owed Regions Bank (“Regions”) $4,153,137.79 at the time of the bankruptcy filing.  Regions claimed it was protected by a security interest that had been properly perfected.

Although Florida had an approved addendum for listing additional debtors, the attorney who prepared the UCC filings provided an affidavit that he did not use the approved form. Instead, the attorney listed Camtech and Avstar on a separate attachment.

There was nothing noted in the additional debtor box of the UCC form referencing an attachment for additional debtor information. Because the approved addendum for additional debtors was not used and there was no indication on the UCC-1 form in the additional debtor box to review the attachment for other debtors, the court ruled that the security interests were, in fact, not perfected.

It’s Seriously Misleading

Failure to indicate other debtors on the approved addendum or to reference them on the unapproved attachment meant the UCC filings were not indexed properly and therefore determined by the court to be “seriously misleading.”  It was deemed that Regions failed to have perfected its security interest in the assets of Camtech and Avstar, relegating the bank’s status to that of an unsecured creditor.

Correct use of the approved form would have ensured that searches would have revealed the additional debtor names.

The Takeaway

Although few states still require the use of a “paper” form, this seemingly minor error cost Regions $4,153,137.79.  This case illustrates how a subtle deviation from the appropriate procedures in perfecting a security interest can eliminate the protections provided by the security interest in collateral.

This type of mistake can be avoided simply by hiring experts to complete, review and file your UCC Financing Statements. NCS has the industry’s greatest UCC experts – contact us today!

*Originally published April 2014, updated September 2022.

UCC Filings: Does DBA Matter?

Posted on August 22, 2022 by - UCC Financing Statements

computer with a lightbulb on the screen

Does “d/b/a” Really Make a Difference in UCC Filings?

One of the most common — and most preventable — mistakes creditors make when creating a security interest via a UCC filing, is inaccurately or incorrectly identifying their customer on the Financing Statement.

Errors in identifying your customer may include the wrong legal name, spelling and spacing errors or omissions. Seemingly trivial deviations in the name of the debtor can prevent a security interest from being perfected.

When these errors occur, the filing may be deemed “seriously misleading.” What constitutes “seriously misleading”? According to UCC Article 9-506(b), a Financing Statement is seriously misleading if a search for the debtor’s legal name does not reveal the filing.

Correctly Identify Debtor

You may assume it is enough to simply conduct an online search to determine the correct spelling of your customer’s legal name. However, UCC Article 9-503 (a) states that the registered entity’s name will be the name as it is found in the organic public record.

§ 9-503. NAME OF DEBTOR AND SECURED PARTY.
(a) [Sufficiency of debtor’s name.]
A financing statement sufficiently provides the name of the debtor:
(1) except as otherwise provided in paragraph (3), if the debtor is a registered organization, or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record of most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name

Here’s an Example

Let’s say your customer is commonly known as, “Z & Y, Inc. d/b/a ABC Company.” However, when you review the organic public record you see your customer’s name is “Z & Y, Inc.” The name you should list on the Financing Statement is “Z & Y, Inc.” (no d/b/a), just as it appears on the organic public record.

To that end, the answer to the question “Does d/b/a really make a difference in UCC filings?” is “Yes, it certainly does.”

Real Life: “Insufficient due to the addition of d/b/a”

In Nebraska, the case of EDM Corporation, doing business as EDM Equipment, doing business as NOVI, LLC, Debtor Hastings State Bank, Plaintiff-Appellant v. Thomas D. Stalnaker, Chapter 7 Trustee of EDM Corporation, went before the Court of Appeals in 2010 (pre-2010 Amendments).

The court affirmed the bankruptcy court’s ruling that the creditor’s Financing Statement was “insufficient due to the addition of d/b/a” as part of the debtor’s name. When the creditor identified its debtor on the UCC filing they listed both the debtor’s public record name and the debtor’s d/b/a name.  Ultimately, when subsequent UCC searches were done, the creditor’s Financing Statement was not revealed, because the name on corporate record was simply “EDM Corporation.”

 “…it is clear from the language of the statute itself that § 9-503 requires that, as to registered organizations, the debtor’s name (as listed in the name field on the form) must be “the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization.”[19] Viewed with § 9-503(b)(1), which provides that “[a] financing statement that provides the name of the debtor in accordance with subsection (a) is not rendered ineffective by the absence of… a trade name or other name of the debtor,” and § 9-503(c), which provides that “[a] financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor,” we interpret the comment to mean that trade or other names may be added as other or additional names on a financing statement, but not in place of, or as part of, the debtor’s organizational name.”

(Today, one could argue it is possible that the creditor would maintain their security interest, if the public organic record identified the debtor as “EDM Corporation d/b/a EDM Equipment”.)

A similar case in Texas also determined the d/b/a was too much: JIM ROSS TIRES, INC.; dba HTC Tire Pro; dba HTC Tires & Automotive Centers, Debtor(s). On the UCC Financing Statement, the creditor listed the debtor by including both the debtor’s legal name and d/b/a – “Jim Ross Tires Inc. DBA HTC Tires and Automotive.”

The creditor argued their security interest was perfected, because their filing could be located using a “non-standard wild card search.” Unfortunately for the creditor, the court did not agree with their argument.

“Accordingly, the Court finds that the Financing Statements are ineffective to grant security interests in Debtor’s collateral. Although this result is harsh, the Court must examine the result in the context of claims between competing creditors.”

Since the hearing of these two cases, standard search logic and wild card searches have been streamlined, minimizing human error. Although there have been improvements, it is vital to your security interest that the Financing Statement lists your customer’s name as it appears in the public organic record.

UCC Collateral Descriptions – Don’t Be Too Specific or Too Vague

Posted on July 18, 2022 by - UCC Financing Statements

intellectual property illustration

Avoid Being Too Specific or Too Vague in UCC Descriptions of Collateral

The Case: IN RE PROVIDERX OF GRAPEVINE, LLC – BANKR. COURT, ND TEXAS, 2013.

A UCC Financing Statement must provide the name of the creditor, the name of the debtor and the description of property serving as collateral. The following case involved the description of collateral in a UCC-1 Financing Statement which expressly covered “patent applications.”

The court determined that this language did not cover other intellectual property (“IP”) of the debtor, which is unfortunate because intellectual property often constitutes a company’s most valuable asset.

In ProvideRX, CERx (“Creditor”) and PM (“Debtor”) entered into a number of loan agreements and security agreements related to a principal loan amount of $8.92 million.

One of the security agreements executed between the parties was a Patent Application Security Agreement that included a description of collateral in language nearly identical to that in the Creditor’s UCC filing.  However, the UCC filing did not contain the broader phrase “IP assets” that was contained in the loan documents.

What Did the Court Say?

Although the court acknowledged that the description of collateral must be more precise in a security agreement than a UCC Financing Statement, it still found the UCC collateral description inadequate to cover intellectual property other than patents.

The court noted that the description of collateral in a UCC filing only needs to put a prospective creditor on notice so that prospective creditors have reason to inquire further about existing security interests.

“…The primary issue remaining before this Court is whether the language in the loan and security documents entered into by and among the various parties was sufficient to grant CERx a security interest in all of PM’s intellectual property assets owned immediately prior to a December 13, 2012 foreclosure sale (collectively, the “IP Assets”). For the reasons detailed below, this Court concludes that (1) the loan documents are unambiguous and, as a matter of law, PM did grant CERx a security interest in all of its IP Assets; (2) although CERx’s security interest attached to PM’s IP Assets, the collateral description contained in the UCC-1 financing statement filed by CERx with the Texas Secretary of State was insufficient to perfect CERx’s security interest in PM’s IP Assets, other than the Patent Applications (defined on p. 17); (3) pursuant to its Notice of Disposition of Collateral, CERx only foreclosed upon PM’s Patent Applications; (4) thus, as of its bankruptcy petition date, PM held title to all of its IP Assets, other than the foreclosed-upon Patent Applications, subject to CERx’s unperfected security interest; and (5) because CERx failed to perfects its non-Patent Application security interests, such interests were unperfected when PM filed its bankruptcy case and are subject to avoidance pursuant to 11 U.S.C. § 544(a)(1)…”

The Decision

The court found that the language of the financing statement was insufficient and pointed out that the UCC Financing Statement specifically mentioned patent rights but failed to mention other forms of intellectual property like trademarks, source codes, copyrights and other IP related assets.

Because of this failure (to include a broad category like “IP asset” or to list specific types of IP assets), the court concluded that creditors reviewing the financing statement would assume that the debtor had not given a security interest in its IP assets beyond those related to patents.

The language describing collateral must be specific enough to put creditors on notice of the need to inquire further while being general enough not to omit property that is contemplated as collateral but not expressly enumerated.  A delicate balance indeed!

Protect Your Purchase Money Security Interest in Goods

Posted on June 27, 2022 by - UCC Financing Statements

question mark

What is a Purchase Money Security Interest (PMSI)?

Section 9-103 of the UCC defines a PMSI as a security interest in goods that are collateral for an obligation that arises in connection with the sale of the goods. When the required steps are met a PMSI can give a creditor a first or priority security interest in the goods even if other secured parties hold prior perfected security interests in the same collateral.

How Does the Creditor Stay Compliant with PMSI Requirements?

Article 9-324 (b) outlines the requirements for a secured party to obtain a PMSI in inventory:

  • the purchase-money security interest is perfected when the debtor receives possession of the inventory;
  • the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;
  • the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory; and
  • the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.

An Example of How a Secured Party Can Lose Priority

Secured parties must strictly comply with the Article 9 PMSI requirements. This process is an exception to the “first to file” priority rule. Let’s use the case of T. Gluck & Co., Inc. v. Craig Drake Mfg., Inc., 2013 N.Y. Misc. LEXIS 2384 (N.Y. Sup. Ct. June 4, 2013) to demonstrate how a secured party can lose priority if it does not comply with the requirements.

Craig Drake Mfg., Inc. (the “Debtor”), a jewelry manufacturer, entered into a revolving credit agreement in 1989 with a lender that later sold the loan and security interest to Sovereign Bank (collectively, the “Bank”).

The revolving credit agreement granted the Bank a security interest in the current and future accounts and inventory.

On July 27, 1989, the Bank perfected its security interest in the Debtor’s assets by filing a financing state­ment. The bank protected its security interest in 1994, 1999, 2004 and 2009 by filing continuation state­ments.

T. Gluck & Co. (“Gluck”) contracted to supply diamonds to the Debtor on consignment in 1997. Gluck sent a notice to the Bank later in 1997 to protect its interest in the consigned goods and filed a financing state­ment soon after.

12 years later in 2009, the Debtor retained a firm to manage a going-out-of-business sale. The sale lasted several months with most of the proceeds going to the bank. Gluck was not paid for a portion of the goods consigned to the Debtor.

Gluck then brought a lawsuit against the Bank at the end of 2009, alleging that it held the priority interest in the consigned goods. The bank disputed Gluck’s allegations. The court determined that under the UCC, Gluck’s interest in the consigned goods was a PMSI in inventory. Gluck had to prove it complied with the PMSI requirements to have the priority interest in the goods.

Gluck originally sent The Bank a PMSI notice in 1997. Unfortunately for Gluck, they never sent another notice of its claimed security interest in the consigned goods.

The court concluded that the PMSI notice expired in 2002 and was never re-sent and Gluck was not entitled to PMSI priority. The general rule of “first to file”, “first in line” would be applied. The Bank had first priority because it was the first to file in 1989.

Lesson Learned: Always re-send a PMSI notice.

Steps to Comply with Article 9 PMSI Requirements

It is very important, as we learned in the case above, that a secured party that claims a PMSI in inventory must re-send the authenticated notification every five years. The general priority rules state that failure to resend a notice renders the secured party’s security interest subordinate to prior perfected security inter­ests.

The best practice is for the secured party to resend its PMSI notices prior to the time it continues the financing statement every 5 years to avoid the result found in the case of T. Gluck & Co., Inc. v. Craig Drake Mfg., Inc. 

Have you successfully perfected your Purchase Money Security Interest? NCS is here to help!