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Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY
Purchase Money Security Interests in Consumer Goods
A purchase money security interest (PMSI) arises in certain situations where the secured party provides the funds necessary to purchase the subject collateral. 9-103. This can arise through a loan for identified collateral or when the secured party sells and then finances the collateral for the purchaser. A PMSI is automatically perfected when the security agreement establishes a security interest and the collateral is consumer goods (other than vehicles subject to certificate of title or fixtures). 9-309(1). Consumer goods means that the goods are for personal use by the purchaser (rather than for business use or resale).
A PMSI in consumer goods provides the secured party priority in interest above other secured parties and lien creditors. The only limitation to an automatically perfected security interest under 9-309(1) is that certain types of purchasers of the collateral from the secured party may take the collateral free of the security interest. 9-320(b). The purchaser of the consumer goods from the seller:
- Cannot know about the security interest in the collateral;
- Must provide value for the goods (it cannot be a gift);
- Must primarily use the goods for personal, family, household purposes.
The purchaser of the consumer goods will not take the goods free of the security interest if the secured party has filed a financing statement to perfect its security interest.