14. What is a “purchase money security interest” (PMSI) in consumer goods?
A purchase money security interest (PMSI) arises in situations where the secured party provides the funds necessary to purchase the subject collateral. 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 attaches to collateral that is consumer goods. Consumer goods are goods primarily for personal use by the purchaser — rather than for business use or resale.
• Note: Consumer goods do not include vehicles subject to a certificate of title or fixtures.
• Example: I purchase a refrigerator from Appliance World for my personal use. Appliance World finances the purchase by allowing me to pay over the next 12 months. We undertake the steps necessary for the security interest to attach. Appliance world has an automatically perfected security interest in the refrigerator.
An automatically-perfected PMSI in consumer goods is subject to certain exceptions. These exceptions allow subsequent purchasers of the collateral to take the collateral free of the secured party’s security interest. The purchaser of the consumer goods from the seller will take free in clear if all of the following conditions are met:
• No Knowledge of Security Interest – The buyer cannot know about the security interest in the collateral;
⁃ Note: This means that the security interest is not filed in an appropriate public office, the secured party is not perfected by possession, and the purchaser has not been given notice of the security interest.
• Provide Value – The buyer must provide value for the goods;
⁃ Note: This means that the debtor cannot give me the goods as a gift. If I do not provide value (money or goods) in exchange for the goods, the goods are still subject to the secured party’s security interests.
• Personal Use – Must primarily use the goods for personal, family, household purposes.
⁃ Note: So, the seller-debtor must have originally purchased the goods for personal use and the subsequent purchaser must use the goods for personal use. If either party purchases the goods for business use it will destroy the exemption.
• Discussion: Why do you think it is important to grant automatic perfection to individuals who sell and finance or provide purchase money for consumer goods? Also, why do you think it is important to allow purchasers who meet the above conditions to take the collateral free and clear of an automatically perfected security interest?
• Practice Question: Martha purchases a new vacuum cleaner from ABC Corp and finances it for 12 months. Martha signs a security agreement that grants ABC a security interest and satisfies all of the requirements of attachment. After the purchase, she does not like the vacuum cleaner and sells it to George. Will George receive the vacuum cleaner subject to ABC’s security interest? What information do you need to know to answer this question?