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#613760 - 09/15/06 03:13 PM
Purchase money interest or not?
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New Poster
Joined: Jul 2004
Posts: 12
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Borrower is desiring to buy out a lease agreement on a piece of construction equipment. Another institution has a blanket lien on all assets of business. Would a buy out of a lease agreement be considered a purchase money interest? Also...for the # of days to file within taking possession of the collateral, when would that start?? I'm confused.... Linda
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#613761 - 09/15/06 05:30 PM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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For a PMSI you may file up to 5 years before delivery but no later than 20 days after delivery. If you have not already filed and he as had possession of the leased equipment for over 20 days, it is too late for PMSI. If the company that was leasing the equipment to your customer is willing to assign their position, and if they complied with all requirements for PMSI, there may be a small ray of hope.
It would be much easier to have the other lender, the one with a lien on all assets, agree to subordinate their position on this one piece of equipment. It is safer than cramming PMSI down the other lender’s throat.
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#613762 - 09/15/06 07:52 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
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Tom - Is it possible that this situation could be viewed differenly based on the ownership interest of the borrower. My question is could "possession" be based on the fact that the borrower purchased and now owns the collateral thereby if you file within 20 days of "ownership" it would qualify for PMSI??
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#613763 - 09/15/06 09:08 PM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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The date the debtor has ownership interest in the equipment, which can be an extremely difficult date to determine, does not apply to PMSI. The Conference of Commissioners used the date the debtor receives possession because it is much easier to determine. Note in 9-324 where it covers the 20 day rule, it states that a PMSI has priority over conflicting interest in the same collateral, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.
Date of possession is the key. That is why, in many cases, it is too late to obtain a PMSI when the debtor comes to borrow the money. Many lenders that think they have a PMSI, don’t.
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#613764 - 09/15/06 09:51 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
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Tom - Here is where I'm getting confused (and playing devil's advocate:
"The debtor receives possession" arises when a person acquires possession of goods under a transaction that is not governed by this Article and then later agrees to buy the goods on secured credit. For example, a person may take possession of goods as lessee under a lease contract and then exercise an option to purchase the goods from the lessor on secured credit. Under Section 2A-307(1), creditors of the lessee generally take subject to the lease contract; filing a financing statement against the lessee is unnecessary to protect the lessor's interest. Once the lease is converted to a security interest, filing a financing statement is necessary to protect the seller"s (former lessor's) security interest. Accordingly, the 20-day period in subsection (a) does not commence until the goods become "collateral" (defined in Section 9-102), i.e. until they are subject to a security interest.
Would the refi of the lease be subject to the above because of the ownership interest. Would that be any different when doing a refi as the lessor changing from a lease situation?
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Just working here until I get my letter from Hogwarts.
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#613765 - 09/18/06 12:58 AM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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Okie Banker, 1. How does your comment change the date the debtor receives possession? That date is not a floating date, but a date certain. For example, if I have some equipment delivered to “try it out” and one month later decided to purchase the equipment, what is the date the equipment was delivered. Was it when I took possession of the equipment a month ago, or was it when I decided to purchase the equipment? When did I decide to purchase the equipment? Since it is the burden of the bank claiming a PMSI to prove it, how do you know when I made up my mind to purchase the equipment? It may have been three weeks ago. Does that mean that I received possession three weeks ago? Or was it when I purchased the equipment. How is this date determined in court? Date I paid? Date I signed the bill of sale? The date I issued a Purchase order? The date I called the seller and told them I’m keeping the equipment? The date they invoiced me?
2. If you define the date the COLLATRERAL was delivered as the date that a security interest attaches, there would be no need for the 20 day rule and no lender would ever make a loan secured by goods because someone else could jump ahead with a claim of PMSI. Remember, as you quoted, it isn’t collateral until there is a security interest.
3. Now, whether or not a lease is an attempt to create a security interest (which is subject to Article 9) would take hours of discussion. BOL is not the proper forum. If you have the time and don’t mind taking a little Tylenol to suppress your headache, review Section 1-201 and locate the definition of “security interest.” Also read the two pages of comments regarding this subject. You will discover that a lease may be an attempt to create a security interest and therefore Article 9 priority rules would apply. On the other hand, it may be, just a lease. The terms of the lease agreement could control. Does a lessor ever file a UCC1 financing statement? Look at the form, item5, first box.
4. Article 9 requires that the debtor have some rights in the collateral. That does not always mean ownership rights. This confuses many who study Article 9. Did you notice the requirement of Article 9 when property is consigned goods? The owner of the property files a financing statement and lists their name as the secured party and the one in possession of the goods as the debtor. They may or may not check the second box on a UCC1 in item 5. Is there a security interest between the consignor and the consignee? Yet Article 9 applies. It is best, when referring to the debtor having rights in the collateral, to think of these rights as rights to possess and not necessarily ownership rights. There is much case law on this subject. Conclusion: For Linda O, it is too late for PMSI. No big deal if you get the other lender to subordinate this one item. I keep telling people that PMSI is not the best way to go unless there is no alternative. First to File or Perfect (FtFoP) is the best rule of priority. If I am not and can’t become the FtFoP, then I work on a subordination agreement with the lender who is the FtFoP. If that doesn’t work then, if I still want to make the loan: (a) I check to see if I can meet the filing requirements for PMSI, (b) I review to see if there is a purchase involved that I can prove, (c) I make certain to claim PMSI in the security agreement, (d) I describe the collateral using a specific listing with no errors, and (e) I make certain that the bank can prove that the debtor used the loan proceeds to purchase the equipment. If PMSI is your desire, then go after it. But for me, I prefer “First to File or Perfect” and if that is impossible, use the subordination agreement. PMSI is the last alternative I would select.
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#613766 - 09/18/06 08:18 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Nov 2004
Posts: 3,260
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FWIW Tom, I like where you end up but not how you get there. Okie Banker's example is from Official Comment 3 of 9-324. It's pretty clear from the Official Comment that when the lessee exercises an option to purchase on credit from the lessor, the lessor has 20 days from the date the option is exercised (the date it becomes collateral) to perfect and retain PMSI status. I don't see any reason why this logic would not extend to Linda O's scenario. Assuming the original lease is a true lease, the 20 days begins to run from the day the equipment becomes collateral. They could advance the funds now, perfect within 20 days, and have PMSI priority.
Two problems with that idea make it a far better decision to get the subordination agreement: 1) if the original lease is not a "true lease," then Linda O may not have a PMSI at all; and 2) even if Linda O has a PMSI, if the other lender wants to dispute the issue, it will take time and money to resolve. Why not avoid that possibility.
Regarding your point #2, I don't think that's really a huge problem. Remember, someone can only "jump ahead" with a PMSI claim if: a) they are selling new goods to the debtor or financing the debtor's purchase of the new goods; or b) they are financing the purchase of goods the debtor was previously leasing or borrowing from someone else. Thus, a prior lender with a blanket lien never had a first priority security interest in the goods, either because the debtor never had them or because the blanket security interest is automatically subordinate to the lessor's interest. Either way, the blanket lienholder was never counting on a first priority security interest in those specific goods.
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Nobody's perfect, not even a perfect stranger.
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#613767 - 09/18/06 09:02 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
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Quote:
FWIW Tom, I like where you end up but not how you get there. Okie Banker's example is from Official Comment 3 of 9-324. It's pretty clear from the Official Comment that when the lessee exercises an option to purchase on credit from the lessor, the lessor has 20 days from the date the option is exercised (the date it becomes collateral) to perfect and retain PMSI status. I don't see any reason why this logic would not extend to Linda O's scenario. Assuming the original lease is a true lease, the 20 days begins to run from the day the equipment becomes collateral. They could advance the funds now, perfect within 20 days, and have PMSI priority.
Two problems with that idea make it a far better decision to get the subordination agreement: 1) if the original lease is not a "true lease," then Linda O may not have a PMSI at all; and 2) even if Linda O has a PMSI, if the other lender wants to dispute the issue, it will take time and money to resolve. Why not avoid that possibility.
Regarding your point #2, I don't think that's really a huge problem. Remember, someone can only "jump ahead" with a PMSI claim if: a) they are selling new goods to the debtor or financing the debtor's purchase of the new goods; or b) they are financing the purchase of goods the debtor was previously leasing or borrowing from someone else. Thus, a prior lender with a blanket lien never had a first priority security interest in the goods, either because the debtor never had them or because the blanket security interest is automatically subordinate to the lessor's interest. Either way, the blanket lienholder was never counting on a first priority security interest in those specific goods.
Yeah - what he said! ![](/images/graemlins/grin.gif)
_________________________
Just working here until I get my letter from Hogwarts.
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#613768 - 09/18/06 09:01 PM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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Quote:
the 20-day period in subsection (a) does not commence until the goods become "collateral" (defined in Section 9-102), i.e. until they are subject to a security interest.
My comment was concerning the above quoted statement. Remember, the referenced 20-day rule only applies to PMSI With this logic, if the 20-day period does not being until “they are subject to a security interest,” then any subsequent lender, taking a security inertest, would have 20 days to file and claim a PMSI. It doesn’t fly.
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#613769 - 09/18/06 09:22 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
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With this logic, if the 20-day period does not being until “they are subject to a security interest,” then any subsequent lender, taking a security inertest, would have 20 days to file and claim a PMSI. It doesn’t fly.
Couldn't that apply to only that transaction that actually finances the transition from a lease to a purchase?
(Tom - I'm not being argumentative - I'm still the devil's advocate on an interesting discussion)
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Just working here until I get my letter from Hogwarts.
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#613770 - 09/18/06 09:22 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Nov 2004
Posts: 3,260
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I'm not following. You can't claim a PMSI unless you advance funds to allow the debtor to acquire rights in the collateral. You can't make the debtor a loan on collateral already owned, perfect within 20 days and claim PMSI.
The quoted statement you're referring to is taken verbatim from the Official Comments to UCC 9-324, regarding how that section applies to a transaction like the one Linda O asked about.
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Nobody's perfect, not even a perfect stranger.
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#613771 - 09/18/06 09:19 PM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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Regarding the official comments to 9-324, in part 3, the last paragraph you referenced, that rule applies to “filing a financing statement [that] is necessary to protect the seller’s (former lessor’s) security interest.” This does not apply to a lender but a seller.
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#613772 - 09/18/06 09:25 PM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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There is a good chance that if the lease is a lease to purchase, as you stated, then it may not be a true lease anyway and subject to Article 9.
And about you arguing. I like it any time someone places a comment in the Article 9 forum. Argue away.
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#613773 - 09/18/06 09:35 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Nov 2004
Posts: 3,260
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We won't resolve this here, but I'll make one last comment. The official comment refers to the situation of the situation of the lessee exercising a purchase option to buy from the lessor, but it does not state that it is limited to that situation only. If it works that way for the lessor/seller, there's no reason it shouldn't work the same way for another lender that makes a purchase money loan to fund the debtor's exercise of the purchase option.
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Nobody's perfect, not even a perfect stranger.
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#613774 - 09/18/06 09:36 PM
Re: Purchase money interest or not?
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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Quote:
but it does not state that it is limited to that situation only. If it works that way for the lessor/seller, there's no reason it shouldn't work the same way for another lender that makes a purchase money loan to fund the debtor's exercise of the purchase option.
Yes, that could be an argument you use in front of the jury (that hates banks and bankers) and you may win, on the other hand……
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#613775 - 09/19/06 03:09 PM
Re: Purchase money interest or not?
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Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
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Quote:
you may win, on the other hand……
'Nuf said. That will always stop an argument with me. Ambiguity has no place in loan documentation!
_________________________
Just working here until I get my letter from Hogwarts.
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