Purchase Money Security Interests (PMSI): How to Spot One on a UCC Filing

Sooner or later a UCC search turns up two liens on the same equipment - and the smaller, newer one is the one that gets paid first. The usual reason is a purchase money security interest (PMSI), a special kind of lien with its own priority rules. Here's what a PMSI is, why it matters, and how much of it you can actually tell from a filing (less than you'd hope).

What a PMSI is

Under UCC § 9-103, a purchase money security interest is a lien on goods that secures all or part of the price of those goods, or value given to let the debtor acquire them - as long as that value is actually used for the purchase. The classic examples are a dealer or manufacturer financing the equipment it just sold, a lender funding a truck or machine purchase directly, and a floor-plan lender financing a retailer's inventory. What makes it a PMSI is what the money was for, not how the paperwork looks.

Why it matters: PMSI priority

The default rule (§ 9-322) is first to file or perfect wins. A PMSI is the main exception. For equipment and other non-inventory goods, § 9-324(a) lets a PMSI lender take priority over an earlier-filed lender on that specific collateral if it perfects - usually by filing - when the debtor receives the goods or within 20 days after. For inventory the rule is stricter: § 9-324(b) also requires the PMSI lender to send written notice to the earlier secured parties before the debtor receives the goods.

In practice that means a bank with a blanket lien on "all assets" filed years ago can still sit behind an equipment lender that filed last month on one machine. If you're relying on a blanket lien for value, or clearing liens before a closing, that's the difference between a first-position claim on an asset and none at all.

A UCC-1 has no "this is a PMSI" box. Whether a lien is a purchase money interest depends on what the loan paid for - a filing can only give you clues.

Clues on the filing itself

The standard UCC-1 form has boxes for things like a transmitting utility, a manufactured-home transaction, a public-finance transaction, an agricultural lien, and lessor/lessee or seller/buyer designations - but nothing for purchase money status. So you're reading between the lines:

• Specific collateral. A description that names particular items - serial numbers, VINs, make and model, or "the equipment described in the attached invoice or schedule" - fits a purchase money lien. A blanket "all assets" description is a general lien, though the same lender can hold both.
• The words themselves. Many filers write "purchase money security interest" or "PMSI" into the collateral field. It's not required, and its absence doesn't rule one out, but it's the most direct hint you'll get.
• Who the secured party is. A dealer, a manufacturer, a captive finance company, or an equipment finance company is more likely to hold a PMSI than a bank with a general working capital line. Watch for a blind filing, where the real lender isn't named.
• Timing. A filing made right around the purchase date is consistent with the 20-day window; one made months after delivery is not. The filing shows its own date, but not when the debtor actually took possession - you'll need the invoice or closing documents for that.
• Stacked filings on the same equipment. A specific-collateral filing dated after a blanket lien is exactly the situation where the PMSI question comes up.

What a filing can't tell you

• Whether the loan actually funded the purchase of that collateral.
• When the debtor received the goods, and so whether the 20-day window was met.
• For inventory, whether the required notice to earlier lenders was ever sent.
• Whether the lien has been cross-collateralized or amended in a way that affects its status - a later UCC-3 amendment can change what's covered.

Cases where there may be no filing at all

A PMSI in consumer goods is perfected automatically (§ 9-309(1)), with no filing needed. Cars, trucks and other titled vehicles are generally perfected by noting the lien on the certificate of title rather than by a UCC filing (§ 9-311). So an empty UCC search doesn't prove that no purchase money lien exists on a titled vehicle or on consumer goods.

What to do in diligence

• Pull the filing and read the collateral description before anything else.
• Ask the debtor for the security agreement and the purchase invoices, and match them to the filing.
• Compare the filing date to the delivery date on the invoice.
• Check for earlier blanket liens, and whether an intercreditor or subordination agreement exists.
• For titled vehicles, check the title records as well as the UCC.
• Bring in counsel for anything where priority decides who gets paid.

Perfecta shows the collateral description on a filing in states where the state publishes it (Colorado today), which is the first place to look. For the rest of the pre-closing checklist, see clearing UCC liens before an M&A closing; for reading a filing generally, start with what is a UCC filing.

This is general information, not legal advice. Purchase money status and priority turn on the facts of each transaction and the law of the relevant state, and a UCC search - including Perfecta's - is a starting point, not a final answer. An official certified search from the relevant Secretary of State confirms what's actually on file.