We are pleased to welcome attorney, Bennett L. Cohen of Cohen, Salk and Huvard, P.C., as a special guest blogger. Please read on for the third installment of Bennett’s seven-part blog series on Purchase Money Security Interest in Equipment and Inventory.

Frequently Asked Question # 4: Does a Holder of a PMSI in Inventory Prime an Earlier Perfected Security Interest in Accounts?  

First, it is important to recognize a basic Code priority rule involving accounts and inventory.  As noted in the examples below, a security interest in accounts can be perfected not only by a blanket filing on accounts, but also by a blanket filing on inventory alone (since the secured party, in such case, would also automatically pick up accounts as “proceeds” of the inventory).  Thus, the first secured party to file against all accounts or all inventory will have priority in the accounts.

Under former Article 9, a secured party who qualified for a purchase-money security interest in inventory obtained a priority in the inventory financed and in identifiable cash proceeds received on or before the delivery of the inventory to the buyer.  Section 9-324(b) of the Code expands such rights by giving a qualifying secured party a priority in the inventory financed, in identifiable cash proceeds received on or before the delivery of the inventory to the buyer, and in certain cases, in the proceeds of the inventory constituting chattel paper, instruments, and proceeds of chattel paper.

Like former Article 9, the purchase-money priority in inventory under the Code clearly does not carry over into proceeds consisting of accounts.  This means that a prior secured party holding a prior perfected security interest in a debtor’s present and future accounts cannot be primed as to accounts constituting proceeds of inventory financed by a qualifying purchase-money lender.

Be sure to check back next week when Bennett L. Cohen discusses the application of priority rules in three detailed examples from the Uniform Commercial Code official comments!

Looking for more educational resources? Visit the First Corporate Solutions resource library here  to download documents relating to Corporate Transactions, UCC Filing, Lien Searching and more!

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