PURCHASE MONEY SECURITY INTEREST

 

The Sales Department of your company may ask you to extend credit to a financially unstable business, an upstart company or heavily secured debtor who has already pledged company assets to a creditor. A Purchase Money Security Interest (PMSI) is an alternative that you may want to consider as opposed to denying credit.  This is a unique method whereby your company can obtain a superior, secured position over existing secured creditors to the extent of repossessing your company’s products.  Under a PMSI, your customer would be obligated to pass along the proceeds of any of your merchandise that is sold. The PMSI applies only to your company’s inventory, and such inventory must be distinguishable from that of another creditor. Subsequent purchases by the debtor are automatically covered, thus eliminating any need to repeat the procedure. For a printout of our recommendations, illustrated samples and our detailed explanation of the PMSI procedure, go to our FORMS & TOOLS web page and under Forms find and click to “WWI RECOMMENDED PROCEDURE FOR FINALIZING A PURCHASE MONEY SECURITY INTEREST (PMSI).”

 

MINIMUM REQUIREMENTS OF A PURCHASE MONEY SECURITY INTEREST (PMSI) – Send a “Notice” to all of the creditors on the complete “List” of secured parties.  You then sign a “Financing Statement” (UCC-1). (The debtor need not sign.) Next, record the Financing Statement (UCC-1) with the Secretary of State in the state where the debtor’s “Principal Office” is located. For a detailed step by step of this procedure, please go to the FORMS & TOOLS web page and click “WWI Recommended Procedure for Finalizing A Purchase Money Security Interest (PMSI).”  We will provide the logical reasoning why a PMSI Agreement “must be” a part of the PMSI procedure and why the Conditional Continuing Personal Guaranty “should be” included as an element of the PMSI.

 

PURCHASE MONEY SECURITY INTEREST AGREEMENT – The “procedure” of securing a Purchase Money Security Interest is separate and distinct from a Purchase Money Security Interest Agreement. One is a “procedure” and the other is a “Security Agreement” document.  As with all of the forms associated with this Purchase Money Security Interest explanation, all of the documents should be recorded by the Secretary of State under one filing claim number.  A Purchase Money Security Interest Agreement is a Security Agreement. Any Security Agreement without a complementary Financing Statement (UCC-1) on file with the Secretary of State’s office is, in our opinion, worthless and not recommended.

 

The Purchase Money Security Interest Agreement or any other Security Agreement “defines default,” outlines creditor remedies and specifies costs that the debtor must bear when default occurs.  A recorded Financing Statement without a Security Agreement does not define “default.”  This means without a recorded Security Agreement a creditor can only react, without expense reimbursement, to recover their security when the debtor commits an “Act of Insolvency.”  To eliminate confusion, ambiguity, uncertainty and a “challenge” by the debtor or other secured parties, some type of Security Agreement document should always be filed and recorded together with a Financing Statement (UCC-1). Another reason we recommend the debtor sign a Purchase Money Security Interest Agreement is because this serves as the best form of “authentication” and is definitive confirmation that the debtor knows that a security arrangement exists. With a debtor signed Security Agreement you can immediately act when your definition of breach has occurred. Nothing is left open for interpretation.

 

INFORMATION SEARCH (UCC-11) – This document is also known as “Secured Party Search Record,” “Secured Party Information” and “Secured Parties of Record for A Debtor.”  The County Clerk’s office may be known by another title in different counties. County records will be at the county seat until July 1, 2006, which by that date must all be transferred to the Secretary of State’s office in the state where the debtor is principally located.  County seats are identified by a special symbol on maps.

 

UCC-1 FINANCING STATEMENT – A Financing Statement (UCC-1) eliminates chaos and establishes an exact order of secureds. When used with the PMSI procedure, a PMSI creditor’s position supersedes the position order of pre-existing secureds to the extent of the creditor’s specific inventory and proceeds thereof. With a PMSI you “leapfrog” from the rear of the secureds to the first position relative to your product.

 

DESCRIPTION BOX OF THE UCC-1 FINANCING STATEMENT – Note the enclosed sample, which reads, “All inventory of the (debtor company name) acquired from (your company’s name) or hereafter acquired from (your company’s name), as well as the proceeds and products from the sale of such inventory.  The Purchase Money Security Interest Agreement and a Conditional Continuing Personal Guaranty has also been recorded as a part of this Financing Statement.”  Contrary to our recommendation, should the decision be made to omit the Conditional Continuing Personal Guaranty, then the last sentence in our sample can be modified but note the shortcomings as referenced in our “Out of Trust” explanation.

 

PRINCIPAL PLACE OF BUSINESS – The debtor’s principal place of business usually is but is not necessarily the original state in which the debtor incorporates.  It is a specific “declared” address. 

 

AUTHENTICATE – The PMSI requires “authentication,” which is the debtor’s knowledge that a PMSI arrangement exists.  This is accomplished in the illustrated Purchase Money Security Interest Agreement and the Conditional Continuing Personal Guaranty that are provided as samples in this explanation.  Although not advisable for many reasons mentioned in this explanation of a PMSI procedure, should a creditor decide to eliminate the PMSI Agreement and the Conditional Continuing Personal Guaranty; some type of “authentication” is recommended to fend off a challenge by the debtor or a secured that your PMSI arrangement is defective.  This can be a Certified Return Receipt Requested letter directed to the debtor or the same “Certified Notice” that is sent to secured parties of record.  It may also take form by means of a signed letter from the debtor whereby the debtor acknowledges the existence of the Purchase Money Security Interest arrangement.  Another example might be a signed credit application with a Security Agreement provision indicating the creditor’s option to record the credit application as a Security Agreement. These would have to be kept as part of your records if you choose to exclude the PMSI Agreement and Conditional Continuing Personal Guaranty from the PMSI arrangement.  Authentication is not a substitute for a Security Agreement; however, a signed recorded Security Agreement is proof of Authentication.

 

“ THE CONDITIONAL CONTINUING PERSONAL GUARANTY” and “SOLD OUT OF TRUST” – Many years ago if merchandise was “Sold Out of Trust,” meaning that a debtor did not pass along the proceeds of the sale of your product, which is still required under a Financing Statement, the principals would automatically become personally liable for missing proceeds and also unaccounted inventory. This is no longer the case if the secured party is an LLC or Corporation. Our recommended Conditional Continuing Personal Guaranty covers this deficiency and makes the principals personally liable for “Out of Trust” situations.  Under a UCC-1 Financing Statement, the debtor must account for all inventory and direct the proceeds thereof on any sale to the creditor.  The personal guaranty is conditional and only kicks in when the provisions of the Financing Statement and Purchase Money Security Interest Agreement are not followed.  There are provisions contained in the PMSI Agreement, which serve to reimburse the creditor for interest, collection costs, inventory retrieval costs and attorney fees. If your customer raises an objection about the guaranty the appropriate response is that if the provisions of the PMSI are followed, the guaranty will not have to be enforced.  Make sure the Purchase Money Security Interest Agreement and Conditional Continuing Personal Guaranty are filed together with the Financing Statement (UCC-1), as all of our sample-illustrated documents cross-reference each other.  Deleting the Conditional Continuing Personal Guaranty will not jeopardize a properly recorded secured position consisting of the combination of a Financing Statement (UCC-1) and a PMSI Security Agreement.

 

SUBSEQUENT DEBTOR PURCHASES – There is no need to repeat the PMSI procedure, on additional purchases, as you are covered so long as the PMSI remains valid.

 

RECORDING FEES – All of the (illustrated) samples provided were constructed with the intent of the Financing Statement, Purchase Money Security Interest Agreement, and the Conditional Continuing Personal Guaranty being all filed together at the same time at the Secretary of State’s office.  Be sure to call ahead and ask the respective Secretary of State’s office what the additional per page cost is to record the Purchase Money Security Interest Agreement and the Conditional Continuing Personal Guaranty. Also, ask about the standard fee to record the Financing Statement (UCC-1). 

 

CONTINUATION STATEMENTS – Continuation Statements are readily available and to make it easy, you should reference your original filing claim number previously assigned by the Secretary of State when the UCC Financing Statement, Security Agreement and the optional Guaranty were initially recorded.

 

TERMINATION STATEMENTS – A form used to terminate all secured transactions of record.

 

CENTRAL FILING OFFICE – The term “Central Filing Office,” unless otherwise specified by a state, is the Secretary of State.  Thus, the Central Filing Office and the Secretary of State’s office are one and the same. 

 

LOCAL FILING OFFICE – The term “Local Filing Office” is sometimes referenced as the County Clerk’s office. They are one and the same.

 

SAMPLE FORMS – For all interactive sample forms, notices and documents go to the FORMS & TOOLS web page and click “WWI RECOMMENDED PROCEDURE FOR FINALIZING A PURCHASE MONEY SECURITY INTEREST.” UCC-1 and UCC-11 forms can also be found over the Internet, specifically at the Secretary of State websites.  We have assisted many clients in the PMSI procedure and we invite you to call us for any needed clarification.