FAQs on Purchase Money Security Interest (PMSI)
Contact our law firm by telephone at 403-400-4092 / 905-616-8864 or email Chris@NeufeldLegal.com
Debt Financing - Attachment - Perfection - Registration - PMSI - PPSA - UCC - Bank Financing
What is a Purchase Money Security Interest, and how does it differ from a standard security interest?
A Purchase Money Security Interest (PMSI) is a specific type of security interest that arises when a lender provides the funds necessary for a debtor to acquire specific personal property or when a seller finances the purchase price of the goods themselves. It differs from a standard security interest by granting the secured party a "super-priority" status, allowing their claim to take precedence over previously registered security interests in the same collateral, provided strict registration requirements are met.
What specific steps must a secured party take to properly "perfect" a PMSI in inventory versus non-inventory collateral?
To perfect a PMSI in inventory, a secured party must register a financing statement before the debtor receives possession and provide written notice to all prior-registered secured parties. For non-inventory collateral, such as equipment, the secured party typically only needs to register the financing statement within 15 days of the debtor taking possession to achieve super-priority status.
How does the "super-priority" status of a PMSI allow a creditor to jump ahead of prior-perfected blanket liens?
A Purchase Money Security Interest achieves "super-priority" by enabling a creditor to secure specific, newly acquired collateral that was financed by that creditor’s loan or credit. By strictly following the perfection requirements under the applicable provincial Personal Property Security Act/i>,, this interest takes precedence over earlier-perfected blanket liens that would otherwise claim the asset under a general after-acquired property clause.
What is the impact of the "20-day rule" on the perfection and priority of a PMSI in equipment?
In both Ontario and Alberta, the "20-day rule" allows a Purchase Money Security Interest in equipment to take priority over a prior-registered general security agreement if the interest is perfected within 20 days of the debtor obtaining possession. Failure to register within this strict window results in the loss of super-priority status, meaning the interest will instead be ranked based on the standard "first-to-register" priority rules.
In what circumstances can a PMSI be lost or "transformed" into a regular security interest under the transformation rule?
A PMSI can be lost or "transformed" into a regular security interest when the collateral is used to secure additional debt beyond its own purchase price, often referred to as cross-collateralization. This transformation typically occurs under the "transformation rule" if the security agreement fails to clearly distinguish between the original purchase money debt and subsequent non-purchase money obligations, causing the interest to lose its super-priority status.
What are the specific notification requirements when a lender claims a PMSI in inventory that is already subject to a conflicting security interest?
To perfect a PMSI in inventory that ranks ahead of an existing security interest, the PMSI-holder must provide a written notice to any prior secured party who has filed a financing statement covering the same items or types of inventory. This notification must be received by the conflicting secured party before the debtor takes possession of the inventory and must explicitly state that the person giving the notice has, or expects to acquire, a PMSI in the debtor's inventory.
When you or your business requires the legal services of a financing lawyer to secure and advise upon the financial transactions that you are engaging in, contact our law firm in strict confidence, by telephone at 403-400-4092 [Alberta] or 905-616-8864 [Ontario], or via email at Chris@NeufeldLegal.com.
IMPORTANT NOTE: This website is designed for general informational purposes. The site is not designed to answer specific questions about your individual situation or entitlement. Do not rely upon the information provided on this website as legal advice in respect of your individual situation nor use it as substitute for individual legal advice. If you want specific legal advice, you need to engage a lawyer under established legal engagement procedures that have been specifically agreed to by that lawyer.