In secured lending, lien priority determines outcomes. When a borrower defaults or enters bankruptcy, priority dictates which creditor gets paid first—and which may recover little or nothing. One of the most powerful, and most misunderstood, priority tools under Article 9 of the Uniform Commercial Code (UCC) is the purchase money security interest (PMSI).
While PMSIs can override earlier-filed blanket liens, they do so only if strict statutory requirements are satisfied. For lenders and businesses, understanding how purchase money security interests work—and how easily priority can be lost—is critical to managing risk.
What Is a Purchase Money Security Interest?
A purchase money security interest arises when credit is extended to enable a debtor to acquire specific collateral, and the lender takes a security interest in that collateral.
Under UCC § 9-103, a PMSI generally exists in two situations:
- A lender advances funds that are actually used to purchase specific goods, or
- A seller finances the sale of goods and retains a security interest in those goods
Unlike general secured loans, PMSIs are transaction-specific. The funds must be directly traceable to the acquisition of the collateral.
Why PMSIs Are an Exception to Normal Priority Rules
Article 9 generally follows a first-to-file or first-to-perfect priority system. A lender who files first typically has priority over later lenders, even with respect to after-acquired property.
PMSIs are a statutory exception. When properly perfected, a PMSI can take priority over an earlier-filed blanket lien that would otherwise cover the same collateral. This exception exists to encourage asset acquisition and commercial activity—but it comes with exacting compliance requirements.
PMSI Priority in Equipment
For equipment, the UCC provides a relatively straightforward path to priority:
- The lender must perfect its security interest, usually by filing a financing statement
- Perfection must occur within 20 days after the debtor receives possession of the equipment
If these conditions are met, the PMSI will have priority over conflicting security interests, including previously filed blanket liens.
Missing the 20-day perfection window is one of the most common—and costly—errors lenders make.
PMSI Priority in Inventory
PMSIs in inventory are subject to stricter rules because inventory frequently turns over and is often financed by multiple creditors.
To achieve priority in inventory, the PMSI lender must:
- Perfect before the debtor receives possession of the inventory
- Send authenticated written notice to all secured creditors with conflicting interests in the same inventory
- Ensure the notice states that the lender expects to acquire a PMSI in inventory
- Deliver the notice before the inventory is received
Failure to satisfy any of these requirements defeats PMSI priority, regardless of intent or good faith.
Common PMSI Priority Mistakes
PMSI disputes frequently arise from avoidable errors, including:
- Filing financing statements too late
- Failing to identify existing blanket lienholders
- Sending PMSI notices after inventory delivery
- Misclassifying collateral as equipment instead of inventory
- Inadequate documentation tying loan proceeds to the purchased collateral
Courts strictly enforce Article 9. “Substantial compliance” is often insufficient to preserve priority.
Lien Priority Disputes and Enforcement
PMSI priority issues most often surface during:
- Borrower defaults and workouts
- Foreclosure and receivership proceedings
- Bankruptcy cases
- Asset sales and liquidations
In these contexts, lien priority determines leverage, recovery, and litigation outcomes. Even a technically valid security interest may be economically worthless if priority is lost.
Best Practices for Lenders and Creditors
To protect PMSI priority, lenders should:
- Identify collateral classification early in the transaction
- Conduct comprehensive UCC searches
- Calendar all filing and notice deadlines
- Use precise loan documentation tying funds to specific collateral
- Confirm filing acceptance and accuracy
- Retain proof of notice delivery to competing creditors
Borrowers should also understand PMSI structures, particularly when negotiating intercreditor agreements or managing multiple lenders.
Conclusion
Purchase money security interests offer powerful priority rights under the UCC—but only when lenders comply precisely with Article 9 requirements. Small timing or notice errors can eliminate priority entirely and expose lenders to significant losses.
For banks, private lenders, and businesses, PMSI compliance should be treated as a core risk-management issue. Early legal guidance can prevent costly disputes and protect secured positions before enforcement becomes necessary.
About the Author
David Lutz is an attorney and owner of Lutz Law Firm in Minneapolis, Minnesota. He represents financial institutions, businesses, and individuals in secured transactions, banking law, real estate matters, and commercial litigation. With more than 25 years of experience, David advises lenders on UCC Article 9 compliance, lien priority disputes, and creditor rights.
Contact:
[email protected]
612-424-2110
Disclaimer:
This article is provided for informational purposes only and does not constitute legal advice. The information is general in nature and may not apply to your specific circumstances. Reading this article or contacting the author does not create an attorney-client relationship. For legal advice regarding your situation, consult a qualified attorney.