PMSI does not transfer When Original Security Interest Is Terminated and collateral is used for New Financingt by a new debtor

“A Purchase Money Security Interest Is Not Refinanced When the Original Security Interest Is Terminated and New Financing Is Used By a New Debtor to Acquire the Same Collateral”

The case of Lewiston State Bank v. Greenline Equipment, LLC, 147 P.3d 951, 61 UCC Rep. Serv. 2d 195 (Ut. App. 2006), holds that a purchase money security interest (pmsi) does not survive its termination when the same collateral is used by a different debtor to obtain new financing.

What happened: a secondary loan company (bank B) paid off the loan with the first bank (Bank A) that held the PMSI lien on farming equipment. This in effect satisfied the original loan, releasing the PMSI security interest. Debtors subsequently pledged the collateral to a 3rd company (Bank C), who’s lien was perfected. Therefore, the court concluded that Bank C has a priority claim over bank B, since bank B never perfected their new security interest.

What’s the short of it? A bank that wants to take over an existing PMSI should satisfy the existing debt and obtain an assignment of the existing lender’s security interest for it to survive subsequent liens that may be recorded under the UCC thereafter.

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Terrance Leeders

Chicago Bankruptcy Attorney, husband, father, Cubs fan.

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