David Lutz Attorney: Understanding Purchase Money Priority Under the UCC

Despite careful lien searches and financing statements, many secured creditors are surprised to learn that their “first-filed” security interest does not always have priority. One of the most common—and most misunderstood—exceptions to the general first-to-file rule under Article 9 of the Uniform Commercial Code (UCC) is purchase money priority.

Understanding how purchase money security interests (PMSIs) work, and how priority can be gained or lost, is critical for lenders, vendors, and businesses seeking to protect their collateral position.

What Is Purchase Money Priority?

A purchase money security interest (PMSI) arises when credit is extended to enable a debtor to acquire specific collateral, and the credit is in fact used for that purpose. In exchange, the creditor receives a security interest in the acquired collateral.

Common examples include:

• A lender financing equipment for a borrower

• A vendor selling goods on credit while retaining a security interest

• Floor plan financing arrangements

Under UCC § 9-103, a PMSI may receive super-priority over earlier-filed security interests—but only if strict statutory requirements are met.

Why PMSIs Can Defeat Earlier Liens

Article 9 generally follows a first-to-file or perfect rule. However, the UCC favors parties who directly enable the acquisition of collateral. As a result, a properly perfected PMSI can take priority over an existing blanket lien that otherwise covers “all assets” of the debtor.

This priority is not automatic. Courts strictly enforce the statutory conditions, and even minor errors can result in loss of priority.

PMSI Priority in Goods Other Than Inventory

For equipment and most goods, PMSI priority is governed by UCC § 9-324(a).

To obtain priority:

1. The creditor must have a valid PMSI.

2. The PMSI must be perfected within 20 days after the debtor receives possession of the collateral.

If these conditions are satisfied, the PMSI will have priority over conflicting security interests—even those perfected earlier.

Common pitfall: Filing on day 21 instead of day 20 results in complete loss of PMSI priority.

PMSI Priority in Inventory

Inventory PMSIs are subject to significantly stricter requirements under UCC § 9-324(b) because inventory turns quickly and affects multiple creditors.

To obtain PMSI priority in inventory, the secured party must:

1. Perfect the PMSI before the debtor receives possession of the inventory;

2. Send an authenticated written notice to all secured creditors who have filed financing statements covering inventory;

3. Ensure the notice states that the sender expects to acquire a PMSI in the debtor’s inventory; and

4. Deliver the notice before the debtor receives possession of the inventory.

Failure to satisfy any of these steps eliminates PMSI priority.

Proceeds and PMSI Priority

PMSI priority may extend to identifiable proceeds, but the rules vary depending on the type of collateral and proceeds involved.

• For non-inventory goods, proceeds are generally protected if identifiable.

• For inventory, proceeds priority is limited and often subordinate to other claims, especially cash proceeds deposited into commingled accounts.

Careful tracing and control agreements are often necessary to preserve proceeds priority.

Conflicts With Blanket Liens and After-Acquired Property

Most commercial lenders rely on broad security agreements covering:

• All assets

• After-acquired property

• Proceeds

While these clauses are effective, they do not defeat a properly perfected PMSI. However, many disputes arise when:

• PMSI filings are late

• Inventory notices are defective

• The collateral description is inaccurate

• The transaction does not actually qualify as purchase-money financing

Courts analyze substance over labels. Calling a loan “purchase money” does not make it so.

Common PMSI Mistakes That Cost Priority

Some of the most frequent errors include:

• Missing the 20-day perfection window

• Failing to send inventory notices to all competing secured creditors

• Sending notices with incorrect debtor names

• Inadequate collateral descriptions

• Financing non-purchase expenses with PMSI funds

• Assuming vendors automatically receive PMSI status

These mistakes often surface only after a default—when priority matters most.

Best Practices for Lenders and Vendors

To preserve PMSI priority:

• File financing statements immediately

• Use closing checklists tied to delivery dates

• Conduct UCC searches before inventory deliveries

• Send inventory notices early and document receipt

• Segregate PMSI financing from other credit extensions

• Review security agreements for after-acquired property conflicts

Early legal review is far less costly than litigating priority disputes after a borrower fails.

Conclusion

Purchase money priority under the UCC offers powerful protection—but only for creditors who strictly comply with Article 9’s requirements. Courts apply these rules rigidly, and technical missteps can eliminate priority entirely.

For lenders and businesses, understanding PMSI rules is essential to protecting collateral, managing risk, and avoiding costly surprises in insolvency or enforcement proceedings.

About the Author

David Lutz is an attorney and owner of Lutz Law Firm in Minneapolis, Minnesota. He represents financial institutions, businesses, and individuals in banking law, secured transactions, real estate matters, and commercial litigation. He advises lenders on UCC Article 9 compliance, lien priority disputes, and collateral enforcement.

He can be reached at david@lutzlawfirm.com or 612-424-2110.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. The information is general in nature and may not apply to specific situations. No attorney-client relationship is created by reading this article or contacting the author. Legal counsel should be consulted for advice regarding particular circumstances.