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Purchase Money Grace Period for Secured Parties

15. What is a “purchase-money grace period” for a purchase-money security interest in non-consumer goods?

Sellers of non-consumer goods receive temporary automatic perfection of an attached PMSI in the collateral sold. As the name applies, the security interest is temporary in nature. The seller has a 20-day grace period for filing a financing statement following the attachment of the purchase money security interest in the collateral. If the financing statement is filed during this 20-day period, the date of permanent perfection dates back to the date the security interest attached to the collateral. If the secured party fails to file a financing statement during the 20-day grace period, the temporary automatic perfection is lost.

•    Note: In that event the automatic PMSI is lost, the first secured party to perfect her security interest has priority in the collateral.

•    Discussion: Why do you think it is important to allow a grace period for a secured party to permanently perfect her security interest in non-consumer goods? Does this create a risk to any subsequent purchaser of the goods from the original purchaser? Should such risk be balanced against the interests of the secured party? Why or why not?

•    Practice Question: ABC Corp sells 123 Corp a piece of equipment. ABC finances the purchase over 12 months and attaches a purchase money security interest. What must ABC do to perfect its security interest?

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