Purchase Money Inventory Security Interests Under U.C.C. Article 9

 
Priorities among Article 9 secured parties holding security interests in the same collateral are normally governed by the first-to-file or perfect rule. Despite the rules obvious merits, the Article 9 drafters recognized that it might hamper the debtors ability to get credit in the future, so the drafters have provided for superpriorities, one of which is a purchase money security interest (PMSI), restricted to goods and software.
 
Professor Livingston writes: Despite the rules obvious merits, the Article 9 drafters recognized that it might hamper the debtors ability to get credit in the future from sources other than the senior secured party. If the debtor wished to procure financing to enable it to purchase a new line of inventory, for example, it might find the senior secured party unwilling to make additional advances and other creditors reluctant to step in because of the senior partys top priority. Acknowledging the debtors difficulties in this situation, the drafters have provided for superpriorities in which later creditors are allowed to step ahead of earlier ones under certain circumstances. One of these superpriorities elevates the holder of a purchase money security interest in inventory over prior inventory secured parties. To avail itself of this superpriority, however, a secured party must establish that (1) its security interest is indeed purchase money under [U.C.C.] section 9-103 and (2) it has fulfilled the special requirements of section 9-324 (b).

A purchase money security interest (PMSI) generally arises in situations in which the value extended by the secured party is used to acquire the collateral securing that value. Article 9 recognizes two types of purchase money secured parties: sellers of collateral and third party lenders that finance collateral acquisition. Purchase money security interests are restricted to goods and software; no other types of collateral are subject to them. A security interest in goods is a purchase money security interest to the extent that the goods are purchase-money collateral with respect to that security interest. Purchase-money collateral in turn is defined as goods or software that secures a purchase-money obligation incurred with respect to that collateral. Finally, a purchase-money obligation consists of an obligation of an obligor 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.

The classic definition of a PMSI poses problems for inventory secured parties that use cross-collateralization clauses in their security agreements. Under such clauses, the value given to enable the debtor to acquire Item #10 of inventory is also secured by Items #1 through 9, and conversely, the value extended to acquire Items #1 through 9 is also secured by Item #10. Under the tradition definition of a PMSI, the security interests not directly tied to the acquisition of a particular piece of collateral would be non-purchase money and thus not eligible for the purchase money superpriority. Thus, by using a cross-collaterization clause, a would-be purchase money secured party would run the risk of greatly limiting or even destroying its chances for the superpriority. Article 9, as amended in 2001, however, makes it clear that the use of cross-collateralization clauses will not harm the purchase money status of the inventory security interest and that, in fact, all of the security interests involved will be deemed purchase money: A security interest in goods is a purchase-money security interest . . . if the security interest is in inventory that is or was purchase-money collateral, also to the extent that the security interest secured a purchase-money obligation incurred with respect to other inventory in which the secured party holds or held a purchase-money security interest.
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