Fundamentals of the UCC Purchase Money Security Interest

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Annie: Hello, everyone, and welcome to today's webinar, "Fundamentals of the UCC Purchase-Money Security Interests." My name is Annie Triboletti, and I will be your moderator.

Joining us today is Paul Hodnefield, the associate general counsel for CSC. And with that, let's welcome Paul.

Paul: Thank you, Annie. Yeah, as Annie said, my name is Paul Hodnefield, and it's my responsibility to advise CSC regarding UCC search and filing, electronic recording of real estate documents, motor vehicle liens, and title perfection and other transactional services. And in this capacity, it's my responsibility to monitor legislation, which I do on a daily basis. I monitor case law on a weekly basis. I do a lot of troubleshooting with filing offices, and I'm very involved in the industry. I coach our task force for the American Bar Association on filing office operations and search logic, and I participate with the filing officers through their organization IACA.

Needless to say, I get a lot of information from a lot of different sources, and it's always my pleasure when I can come out and share that with the industry. And today I'm going to be talking about a very important aspect of the UCC search and filing process, and that is the purchase-money security interest.

The purchase-money security interest, or a PMSI as it's sometimes called, is a very powerful risk management tool. It has tremendous benefits for lenders because it reduces their risk and encourages investment, and it allows borrowers better access to credit and oftentimes on more favorable terms. But there are strict requirements that must be met for a lender to obtain purchase-money priority with a purchase-money security interest. Because it is an exception to the general priority rules, that strict compliance with the requirements is necessary.

So what I'm going to do today specifically is I'm going to cover some basic concepts about purchase-money security interests. Then I'll move on and talk about what's required to create a purchase-money security interest, how is a purchase-money security interest perfected, and then talk about some special cases, like purchase-money security interest in inventory, consignments, fixtures, livestock, and some other purchase-money issues. And then we'll wrap up with any time remaining on questions and answers. You can always submit questions too that I can answer later if we don't get time to get to them today.

So with that, I'm going to go ahead and get started with some basic concepts of the purchase-money security interest. The important thing to remember is that a purchase-money security interest, the main advantage to it is priority. The whole purpose of a purchase-money security interest is to get the highest priority possible.

Priority is an important concept under the UCC because it is the way in which competing claims are satisfied, or I should say the order in which competing claims to the same collateral are satisfied. And under Article 9, the general rule for priority is that priority ranks from the earlier time of filing or perfection, whichever is earlier. It is possible to pre-file a notice, for example, or pre-file a financing statement and get priority from the date it was filed because at that point it provides notice to the world that somebody is going to have a claim on the debtor's collateral. So that's when priority ranks, the earlier time of filing or perfection.

Now the purchase-money security interest is an exception to the general rule, and what this does is it creates a security interest in favor of either the seller of goods to secure the price of the goods, in other words if somebody is selling goods on credit, they can get a purchase-money security interest, or a lender who advances funds that enable the debtor to acquire rights in the goods, in the collateral. So it's either the seller of goods or the lender, in both cases, if they advance credit to the borrower.

And what a purchase-money security interest does is it provides a super priority for the purchase-money collateral that the secured party enabled the debtor to acquire. So they get to jump ahead in line over people even with prior security interests that may describe the same collateral.

Now a purchase-money security interest is not available for all types of collateral. It is available for goods, fixtures. Fixtures are a type of good. It is available for consignment transactions, and I'll explain that in more detail later. And it is available to a very limited degree for software that's part of an integrated transaction, where it's embedded in goods.

And as I mentioned earlier, the people that can get a purchase-money security interest are the seller of goods to secure the price or a lender that advances funds that are used to actually acquire the goods. But there's one that I didn't mention earlier, and that's the consignor. Consignments are within the scope of purchase-money security interests, and the consignor of goods can obtain essentially the equivalent of a purchase-money security interest.

Now because a purchase-money security interest is an exception to the general rules of Article 9 for priority, the normal legal concept that exceptions to general rules require strict compliance by the person claiming the exception applies here. And that means that the secured party will have the burden of proof of establishing that they strictly complied with all the requirements to obtain a purchase-money security interest to the extent that they are claiming. So it's important to remember strict compliance and the secured party must be able to prove that they complied. The secured party may very well comply, but if they can't prove it, then that's potentially going to be a problem. Actually, in most cases it is a problem.

So let's move on and talk about what it takes to create a purchase-money security interest. Well, as a threshold issue, there has to be a security agreement. Just the mere loan on a handshake doesn't create a security interest. There must be a security agreement in place. And there's a couple of cases out there that illustrate this.

One I like to cite is CFB-5 v. Cunningham. What happened here was the debtor ran an art gallery and he wanted to acquire a certain piece of artwork to sell in his gallery. And another party gave him the money to buy that artwork. And the party did go out and buy the artwork, but the art gallery failed and wound up in bankruptcy. And the lender here, who was an individual, went into the bankruptcy court and argued that they provided the funds that enabled the debtor to acquire the particular piece of artwork and therefore the lender should be able to get a priority claim on that artwork. However, the court disagreed because there was no security agreement. There was nothing that established the grant to the security interest. So, as a result, the court, it's kind of a harsh result, but the lender here was not secured and therefore could not claim purchase-money priority in the artwork.

Now when creating a purchase-money security interest, purchase-money security interest applies to the extent that it's a purchase-money obligation and to the extent that the collateral is purchase-money collateral. A purchase-money security interest can mingle both purchase-money obligations and non-purchase-money obligations, and it can also mingle purchase-money collateral with other collateral.

For example, a lender might be financing the purchase of a bulldozer, but the debtor, a construction company might pledge all of its equipment as part of this. Well, the secured party could get a purchase-money security interest in the bulldozer. But if there's other lenders ahead of them that have claimed equipment, they would be subordinate, and the normal priority rules would apply to the other collateral.

So it only applies to the collateral that the debtor acquired under the purchase-money rules and only to the extent the loan was a purchase-money loan. They could lend much more than what was required to acquire particular equipment, and in that case it would only be an obligation to the extent of the acquisition of purchase-money collateral.

And to be a purchase-money security interest, the obligation must be incurred to secure the price. Well, what goes into the price of the collateral? Well, there's a few things that can go into it, and of course one of them is the cost of the goods. So if somebody goes in and buys a bulldozer, it's the cost of bulldozer, right?

Well, there can be more to it than that. For example, there are other price components which sometimes get rolled up into loans. One of them is negative equity. This is what happens where let's say a debtor is trading in a bulldozer to buy a new bulldozer, but they owe more on the old bulldozer than the old bulldozer is worth. Maybe it's worth a thousand dollars less than the outstanding balance of the loan. Well, in order to pay off the loan to finance the new equipment, the new equipment loan may include a thousand dollars to pay off the negative equity. Well, in that case, how do the courts look at that? I mean that negative equity was incurred to obtain the new equipment, and the new equipment couldn't have been acquired without paying off that negative equity.

So how have the courts looked at this? Well, in the Seventh Circuit, negative equity can be part of the purchase price of a purchase-money security interest. And in other courts though, in the Ninth Circuit, negative equity was found not to be part of the price of the collateral. So the courts are split on this.

And there's other types of components that can go into the pricing, like service agreements and insurance requirements and things like that. And again, the courts are split on other types of fees. So really it depends on the particular jurisdiction as to whether other items beyond the simple cost of the goods can be included in the value of the purchase-money obligation and the value of the collateral.

The lender in order to claim a purchase-money security interest must enable the debtor to acquire rights in the collateral. And that means that if the debtor already owns the goods before the loan is issued, that could mean that the debtor won't qualify or at least the loan won't qualify for a purchase-money security interest.

So this can be an issue in certain situations, for example, a sale-leaseback where the debtor owns a bulldozer and they already own it and so they sell it to the secured party, who leases it back to them. In that type of situation, the lender may not be able to claim purchase-money security interest because they didn't enable the debtor to acquire rights in collateral.

There's also a question that sometimes comes up about large down payments. If it's a really large down payment, does it mean that the lender didn't enable the debtor to acquire rights in the collateral? Generally, the courts have looked at that as saying that, well, it's to the extent, so as long as they're financing part of it that's generally good enough.

Tracing loan proceeds, this is an important aspect of a purchase-money security interest because the secured party has the burden of proving that the debtor actually used the loan proceeds to acquire the purchase-money collateral, and because they have the burden, they have to be able to demonstrate it and document it. So the secured party has to prove that the funds were used for the intended purpose.

So as a best practice suggestion, lenders should always transfer the funds directly to the seller of goods if they're to become purchase-money collateral. Now that isn't always possible. So it's always a good idea, in the alternative, to make a check jointly payable to the seller and the debtor, some way to show that the debtor used those funds.

Are there other ways to show? Yeah, there's other ways that a secured party can document. But these are probably the two most common ways and probably the most effective ways to go ahead and do that.

All right. Now let's talk about what's required for perfection of a purchase-money security interest. Let's see. There we go.

Okay, just some general requirements for the financing statement. A purchase-money security interest in general must be financed through the filing of a financing statement. Now the sufficiency of the financing statement is determined under Section 9-502(a), unless it's a fixture filing for a purchase-money security interest in fixtures and that's 9-502(b).

But one thing to know about the requirements under 9-502(a), there's nothing in 9-502(a) that distinguishes a purchase-money security interest financing statement from any other financing statement. The requirements are exactly the same. So what that means is that the general requirements for the sufficiency of a financing statement apply, and that means debtor name, secured party name, addresses, and an indication of the collateral.

And also there is no special requirement for the indication of the collateral in a purchase-money security interest. And one case I like to cite for this proposition is Key Bank v. Huntington Bank. What happened here is that Key Bank had a blanket security interest on all the debtor's assets, and later Huntington came along and financed three specific pieces of equipment for the debtor. Huntington perfected its purchase-money security interest by filing a financing statement that simply said "equipment."

Well, the debtor later defaulted, and it wound up in court for a priority dispute between Key Bank and Huntington Bank in the alleged purchase-money security interest in the three pieces of equipment. Key Bank argued that because Huntington described it as just equipment, that there's no way Key Bank could know from looking at the financing statement which particular pieces of equipment that Huntington claimed to have financed on a purchase-money basis.

Well, after arguments, the court determined that there is no special requirement for a description of the collateral when it's a purchase-money security interest. The UCC after all is a notice filing system, and that means that all that the UCC record does is provide notice that the security interest may exist, and it is up to the interested party, the searcher to make further inquiries to determine the full state of affairs, in other words exactly what's covered.

Now, Article 9 does allow a secured party to describe collateral by a type that's defined in Article 9. Equipment is defined in Article 9. And the court said requiring more than, it just flies in the face of the statute, commentary, and case law, which says that interested parties have to look beyond the public record. And because of that, the court said that the description of equipment was sufficient to cover, for purchase-money security interest purposes, the three particular pieces of equipment, and Key Bank by further investigation could have learned what they were. So there was no harm in doing that.

So bottom line, the normal collateral description and other financing statement requirements apply to a purchase-money security interest financing statement. In fact, the financing statement doesn't even need to indicate that it's filed in connection with a purchase-money security interest. It doesn't have to state it expressly on the financing statement anywhere. The only way to really learn of whether it secures a purchase-money security interest is by contacting the debtor and the secured party to learn the full state of affairs.

In fact, the entitlement of a secured party to a purchase-money security interest and the accompanying super priority that goes with it is established solely by the secured party's compliance with the Article 9 requirements and the secured party's ability to document their compliance with those requirements.

Now there are some deadlines involved in purchase-money security interests, and it's important to understand what they are. The general rule which applies in most situations, with some exceptions that I'll cover further on in the presentation, the general rule is that the secured party must perfect its purchase-money security interest by filing a financing statement either before or within 20 days after the debtor receives possession of the collateral. Now note here that it's when the debtor receives possession. It's not when they sign the delivery certificate. It's not when they make their first payment. It's not when they sign the security agreement. It is when the debtor receives possession of the collateral.

There are some exceptions to the 20-day rule as I mentioned. Purchase-money security interest in inventory has a different deadline. Same with consignments and a purchase-money security interest in livestock. There are a couple of non-uniform state amendments out there. Nebraska and Tennessee went to 30 days rather than going to the 20-day rule. And there's also an exception for consumer goods, and I'll go into more detail on these when I cover the certain exceptions a little later on.

Now one of the questions is when the debtor receives possession. I mean, most of the time it's going to be very clear. It's when the debtor takes physical possession of the goods that are subject to the purchase-money security interest. But that's not always as easy and clear-cut to determine as it may seem on paper.

For example, what if the debtor is leasing goods and then at the end of the lease, they decide to buy them on credit? When do they receive possession of the goods? They may have had them for three to five years before the loan goes into effect. Well, in this case, Article 9 does provide some commentary that explains that a buyer generally takes possession when the goods become "collateral" as the term is defined in Article 9 and are subject to the security interest. So while they're leased goods, they're not subject to a security interest, but once they are no longer leased goods, then the security interest arises. So that's one situation that Article 9 is able to deal with.

Another issue that can arise is when the goods are delivered in different shipments and are assembled and tested and go through a series of assembly steps and testing before the goods are ready to be used. Well, this is a little more difficult question. And the way the courts have addressed it and the commentary in Article 9 provides that the buyer takes possession when a hypothetical creditor, after an inspection of the portion of the goods in the debtor's possession, would think it apparent that the debtor had acquired an interest in the goods taken as a whole. In other words, it's kind of an open question and very fact dependent. The solution to avoid getting caught up in a fact-dependent type of determination is when the debtor receives possession is to file as soon as possible, even before the first shipment of goods, and that will help avoid any type of question as to what counts for 20 days.

All right. Now I want to move on and talk about some of the . . . Oh, before I do that, yeah, one example, there is a case that I can cite here that's an example for delivering in stages and testing. That's MASTER SERVICES. And there, the equipment was delivered over a period of time, but it was installed and tested. And once the equipment became fully operational, the court determined it would have become apparent to a potential lender. But it could have happened before that point sometime. There's a gray area in there. So again, to avoid that question, simply file before the first delivery.

Now I want to talk about special cases. Well, a big one is a purchase-money security interest in inventory. Now a purchase-money security interest in inventory is used a lot for floor plans, floor plan financing, and manufacturers financing inventory for a retailer or a dealer. There's lots of situations where purchase-money security interests in inventory can arise and be relevant, but these have some special rules.

First of all, it has to be in inventory, and "inventory" is a defined term in Article 9. It includes goods and doesn't include farm products. But it includes goods that are leased by a person as the lessor. If they are held by a person for sale or lease or to be furnished under a contract of service, in other words the parts that are needed to support a service contract are considered inventory. And likewise, if they're furnished under a contract of service, or raw materials and works in process. So that bin of raw, plastic Styrofoam beads or whatever that are used or consumed in the production of goods, those raw materials would be inventory in most cases.

So if the goods are inventory, there are two requirements — one, the filing of a financing statement, and two the secured party must send a notice to the holder of conflicting security interests. I'll come back to the notice in a minute.

First of all, as far as the perfection requirements go, the deadline is different. The purchase-money security interest must be perfected by filing before the debtor receives possession of the inventory. There is no 20-day grace period in there. It has to be perfected before the debtor receives possession. If it's perfected after, the secured party will still be perfected, but they'll lose that purchase-money priority. So it has to be perfected before the debtor receives possession of the inventory collateral. The rules for when the debtor receives possession are the same as for other types of purchase-money security interests.

Now, when it comes to the notice that I mentioned, it is a multi-step process. A notice is required to be sent to the holder of any conflicting security interests in the inventory collateral. And in order to determine that, as I said, it's a multi-step process.

So the first step really is to conduct a UCC search on the debtor. The purpose of this search is to identify anybody that might require a notice under Article 9. So the best way to do this is to file the financing statement and then do a search afterwards to make sure that anybody who filed right up to that file date is identified. So be sure that the "through date" of the search is after the file date of the financing statement.

When the search comes back, it's necessary to correctly interpret it. It isn't necessary generally to send notice to parties that have financing statements that have lapsed before the file date of the purchase-money security interest. Some searches will provide lapsed financing statements. But once it's lapsed, it generally isn't necessary.

Pay close attention to any amendments to financing statements that show up on the search because it could affect the collateral and therefore who is entitled to receive notice. For example, you may have a financing statement that originally took a security interest in a particular item of collateral that was later amended to be maybe all equipment or all assets, and just that first financing statement might indicate that they don't have a security interest in the same collateral and wouldn't need a notice. But you have to take a close look and see what's happened to the collateral. Any amendments to the collateral can change who might be entitled to a notice.

If the financing statement has been terminated, but it's unlapsed, as a searcher, the searcher simply cannot tell whether a financing statement was effectively terminated unless they conduct further inquiry to verify that the secured party no longer has a claim on the collateral and that they did in fact authorize the filing of the termination statement. This can be an issue with unauthorized termination filings, which do happen out there for a number of reasons. It can also be an issue when there are multiple secured parties on the financing statement and one of them has filed the termination, but the other didn't authorize it. In that case, the financing statement can remain fully effective even after the filing of a termination.

So be sure to pay close attention to the lapsed versus unlapsed status, and also don't disregard terminated financing statements without first conducting further inquiry. Many secured parties that are conducting purchase-money security interest searches will just automatically send the notices to everybody that shows up, even on unlapsed terminated financing statements because it's cheaper than conducting the further inquiry. It takes far less time and money to do so.

When reviewing the financing statements and determining who is entitled to notice, obviously it has to go to the current secured party or parties that hold the conflicting security interest. If an amendment has been filed to delete a secured party, again the searcher doesn't know for sure whether that amendment was authorized by the secured party, and the searcher can then either conduct further inquiry to determine whether that's secured party no longer has a claim on the collateral, or they can just send them a notice. It's oftentimes cheaper to just send the notice anyway.

If a secured party is listed as collateral agent or representative of the secured party, they should receive a notice, but it isn't necessary to look beyond that. It's not necessary to identify the entire syndicate of lenders for example and send to them as well.

If the financing statement has been assigned at some point, if there's a UCC3 assignment that's been filed, the best practice is to send a notice both to the assignor and assignee secured parties because an assignment does not remove the assignor as a secured party of record, and as such they are entitled to a notice. And the risk is not sending the notice to somebody that's entitled to receive it. So send them to both the assignor and the assignee.

There is a case out there on that. It is critical that everybody who's entitled to a notice receives it, and failure to send a notice, when it's required, means that it doesn't satisfy the requirements for a purchase-money security interest in inventory. And that means the general priority rules apply, and instead of being in first priority for the goods that they enabled the debtor to acquire, the secured party winds up being behind everybody else that has filed a financing statement on those goods.

So remember, when it comes to an assignment, the assignor may remain a secured party of record who has authority to enforce that financing statement or at least the underlying security interest, and that means that they should get the notice as well. An assignment really does nothing more than add a secured party of record. It merely assigns the right to amend the collateral.

There are some issues when it comes to notice. How do you calculate the deadline for receipt of collateral? Remember the debtor must actually receive the notice before it receives possession of the goods. Rules are the same for filing, for determining when the debtor receives possession of the goods.

There is one case where constructive possession can trigger the notice deadline. In one case, a third party received possession of the goods and they were doing some work on them on behalf of the secured party, but it was determined that that was a constructive possession by the secured party. So be aware of that.

Again solve the problem and send it so it's received before even shipping the goods if at all possible.

Strict compliance with the notice requirements is always necessary. I mean, any deviation, no matter how small, could result in the loss of purchase-money priority. Now the secured party is still perfected, but it'll have lower priority, which can be just as bad as being unperfected, which can be just as bad as being unsecured.

So how does the secured party send notice? Well, the best practice is, because the secured party has that burden of proof to show when the notice was received, it should be sent by a method that demonstrates when it was received by the addressee. So that's typically going to be certified mail or overnight express, like FedEx, UPS overnight, something like that. Remember the secured party has to prove each and every element of a purchase-money security interest, and if they don't get it right and can't prove the time of delivery, that's going to be a problem.

As far as the timing of the notice goes, again it must be before the delivery date, before the debtor receives possession of the collateral as calculated following the general purchase-money security interest rules.

Now once it's received, the notice is effective for five years. So it covers all collateral that's delivered within five years after receipt of the notice. Now if the financing statement needs to be continued, it's likely that the notice will have to be resent as well. Now there is no six-month window for the notice. They are not logically connected. There's no limitation on how early the notice could be sent.

So just because one is continuing the financing statement doesn't mean that they have to wait to send the notice at the time of the continuation. A secured party could send the notice every year if they want, and it'll cover for the next five years. So there is no six-month window and not tied to the same issue as filing continuation statements.

In fact, the effective date or the termination date of the notice may be different and may even be earlier than the lapsed date of the financing statement depending on when it was sent and received. So pay close attention to that.

But that notice will have to be resent at least every five years and maybe even in shorter periods just to be sure that the holder of the conflicting security interest receives that notice before the expiration of the five-year period or the debtor receives possession of the collateral.

So whenever the updated notice is sent, it's a good idea to conduct a new UCC search, and that will allow the secured party to purge any holders of conflicting security interests that may have lapsed off. So if their financing statement is lapsed, there's no need to send them a re-notice. And then be sure to send the notice so it is received before the fifth anniversary of the date the addressee received the original notice. That means it's necessary to track the date on which these were received, not just the lapsed state of the financing statement.

So what about what goes into one of these notices? It's actually fairly straightforward in Article 9. It has to state that the debtor expects to acquire a purchase-money security interest in the debtor's inventory. It has to describe the inventory, and it has to be authenticated by the secured party claiming the purchase-money security interest.

As far as the description of the inventory goes, it only has to reasonably describe the collateral. The rules appear to be the same as they would for describing the collateral in a financing statement. And a specific description of the inventory is generally not required. Although it oftentimes can say things like all inventory purchased from XYZ Co. or something along that line. One example of this, First Financial Bank described the collateral as "new and used boats," and the court said, yeah, that reasonably identified the collateral.

It has to be authenticated, but that doesn't necessarily mean a signature. It's not necessarily required. In that same case, First Financial v. Commercial Distribution Finance, the purchase-money notice was sent on the secured party's letterhead. It listed the name and address and the relevant department of the secured party, but it didn't list a particular person. It wasn't signed by a particular person. It didn't even have a title or anything on it. Nevertheless the court held that the secured party did send a sufficient notice, that that was enough relevant information to allow for authentication of the notice.

As far as the contents go, there is no form in Article 9 for the notice. It can be done any way that the secured party feels that they want to do it.

This is an example template that I put together based on a number of different purchase-money security interest notices that have been sent to CSC over the years. And this isn't intended to be held out as being sufficient, but it's more of an example of what we see a lot of. They get sent to us because they're trying to be safe rather than sorry. So they send it to the party listed in the Return To on the financing statement. So we do see a lot of these.

But this is an example. This has all the elements. It tells why it's being sent. It's informing the holder that the sending secured party expects or has a purchase-money security interest in inventory and provides a source for the collateral description and maybe some contact information of the secured party if anybody has questions.

Now I want to move on and talk about another situation, that of consignments. Some consignments anyway fall within the scope of Article 9. And what Article 9 says is that the consignor's interest in the consigned goods, this is where a consignor turns over goods to another party to sell on their behalf, if a consignor turns over the goods, their interest in those goods in the hands of the consignee is a purchase-money security interest in inventory according to Article 9. And the consignee, once they have the goods, they have the right to sell the goods with good title, just as if the consignor was selling their own goods. And that also makes the goods subject to the claims of creditors and purchasers for value from the consignee.

So in order to protect against creditors and other claimants against the goods, the consignor can file a financing statement and perfect a purchase-money security interest. But because it's a purchase-money security interest in inventory, they have to file to perfect before the debtor receives possession of the goods. They have to send the notice that's required for a purchase-money security interest in inventory, and that notice has to be received before the consignee receives possession of the consigned goods.

Now I'll move on to some other less common purchase-money security interest issues. One is purchase-money security interest in livestock. A purchase-money security interest in livestock is actually very similar to a purchase-money security interest in inventory. There is no 20-day window. The purchase-money security interest must be perfected before the debtor receives possession of the livestock, and an authenticated notice must be sent out to holders of conflicting security interests before the debtor receives possession of the livestock.

So that authenticated notice has to go out to the holders of any conflicting security interest in the livestock, and the recipient must receive the notice within six months before the debtor receives possession of the livestock. What that means is the notice is only effective for six months, unlike a purchase-money security interest in inventory where the notice is effective for five years. If the purchase-money security interest is in livestock, the notice is only effective for six months.

Again the best practice is to go ahead and send the notice by FedEx overnight delivery, other overnight delivery service, like UPS or U.S. Postal Service overnight or certified mail even. But the secured party needs to prove when it was received.

And it simply must state, like a purchase-money security interest in inventory, that the sender has or expects to acquire a purchase-money security interest in livestock, and it must include a description of the livestock following the Article 9 collateral description rules.

There's some special rules for purchase-money security interest in fixtures. The debtor must have an interest of record or possession of the real property for a purchase-money security interest in fixtures to apply. The security interest must be perfected by a fixture filing, which means filing in the real estate records. It cannot be perfected by filing in the central index of the state where the debtor is located. It has to be in the real estate records where the goods will become fixtures, and it has to be filed before the goods become fixtures or within 20 days thereafter. So it's not the date of delivery that's the trigger for the 20-day window. It's the date on which the goods become fixtures, which is again the fact-specific requirement. Best practice send the notice at an earlier stage before the fixtures are even delivered.

Now a fixture filing is a record that's filed in the real estate records and satisfying the requirements of 9-502(a) and (b). It has to be filed, as I said, in the real estate records where a mortgage would be recorded on the affected real property.

Oh, before I move on, I should add that 9-502(b) has the requirements that it has to indicate that it covers fixtures, and it has to indicate it is to be filed in the real estate records. So it is important to get that on there. And it also has to have a description of the affected real property.

Purchase-money security interest is available for consumer goods. But filing is not required to perfect the security interest in consumer goods, other than titled property anyway, like in an automobile. So it's automatically perfected when the security interest attaches without filing.

And it is critical to know whether they are consumer goods or not because if no filing is required, that's great. But if it turns out they're not consumer goods and a filing was required, the secured party will not have priority. They'll be treated as if they have an unperfected security interest, and again that's about the same as being unperfected or unsecured.

So if they are consumer goods, no filing is required. If there's a question, it oftentimes might be a good idea to file a financing statement.

But one question is what happens if the debtor buys it as consumer goods but uses it for a business? Well, generally the courts have said that it depends on what the buyer held out of what the intended use was.

And there was a case out there where a debtor bought like a garden tractor, and the loan agreement specifically said it was intended for personal, family, or household uses and was intended to be consumer goods. And the debtor promptly took that tractor and took it right to their business location and began using it there, and that's where it was always used.

The characterization as consumer goods was critical in this case because if it was not consumer goods, a financing statement was required to perfect the security interest, and the secured party didn't do that. And in that case, the court said that the debtor's affirmative representation is something that the secured party can rely on. But remember that the secured party has the burden of proof. So it probably would be a good idea to make sure that it is in writing, and in this case, in the Troupe case it was.

Oftentimes I'm asked about what happens if something happens later, like an assignment of the security interest or a re-fi or something like that? Does that affect the purchase-money security interest?

Well, generally a purchase-money security interest doesn't lose its status if it's been renewed, refinanced, consolidated, or restructured. These terms weren't defined in Article 9. So the courts figure out whether, based on the nature of the transaction, a purchase-money security interest will survive. Generally, if it's the same transaction, it does.

There is a case out there, Lewiston State Bank v. Greenline. And what happened here is that the borrower, a farmer had purchased a couple of tractors, and they purchased them on credit from one manufacturer. And the equipment company later offered to refinance. And what they did is they paid off the equipment lender and then issued a new loan to the debtor.

The issue was though that because they issued the new loan entirely and had paid off the old loan first, it was determined to be two separate transactions, and because the debtor already had the rights in the collateral at the time of the second transaction, it could not be a purchase-money security interest. So if the secured party in this case had bought the loan from the original lender, then it probably would have survived the transaction. But because they went ahead and made it two separate transactions, they were not entitled to a purchase-money security interest.

Now there are some non-uniform purchase-money rules out there in some jurisdictions. Florida omitted purchase-money provisions from their version of 9.334, which deals with purchase-money security interest in fixtures.

Kansas doesn't have a distinction between consumer goods and non-consumer goods in purchase-money transactions. In other words, filing is always required.

In Louisiana, a purchase-money security interest in fixtures must be perfected before the goods become fixtures. Also it's not filed in the real estate records. They're filed in the central UCC index through the parish, not in the parish real property records. So there is no 20-day window for fixtures in Louisiana.

And I already mentioned that there are a couple of states that have extended perfection windows up to 30 days.