A purchase money security interest (PMSI) under the Uniform Commercial Code (UCC) provides for an exception to the general “first in time, first in priority” financing statement filing structure for perfecting a security interest, since a PMSI will have priority over previously perfected security interests in the same collateral. See UCC Section 9-324. Specifically, Section 9-324 provides that a PMSI in goods has priority over a conflicting prior perfected security interest in the same goods so long as the lender complies with the UCC’s rules for filing, timing and notice (for inventory financing).

There is no question as to the validity and super-priority of a PMSI in favor of a lender that provides 100% of the acquisition financing to a borrower for goods at the time of the acquisition of the goods. However, often a down payment is paid by the borrower to the supplier prior to the funding of the loan. The open question is the impact of the down payment on the PMSI, i.e., does the borrower’s down payment cause the loan to lose its PMSI status, resulting in the lender not having a first priority security interest in the financed equipment or inventory? (We note that this question was discussed previously in “It’s a Bird … it’s a Plane … it’s a SUPER-Priority Purchase Money Security Interest!!!”, Dispatches from the Trenches, available at https://www.bakerdonelson.com/Its-a-Birdits-a-Planeits-a-SUPER-Priority-Purchase-Money-Security-Interest-11-01-2011, and we agree with their comments and conclusions.)  This question is quite important to equipment and inventory finance lenders especially when a no interest or subordination letter from the prior perfected secured lender is unavailable or the lender does not want to or is unable to negotiate an inter-creditor agreement.

Since the courts have not provided a dispositive answer to the question, a prudent approach is to assume that any down payment by the borrower may detrimentally impact the PMSI and its super-priority over other, conflicting perfected security interests in the same goods.

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