PMSI Vendors May Be Protected

Lapsed security interest may still prevail

A Purchase Money Security Interest (PMSI) is the most common kind of secured financing. A vendor may find effective protection in a PMSI when selling on credit to a debtor that could be financially shaky. The PMSI may provide additional assurance of payment that permits the sale. This protection is complete only when the PMSI may provide the additional assurance of payment that permits the sale.

A bankruptcy appellate panel for the 8th U.S. Circuit Court of Appeals, which includes the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North and South Dakota, has said that a lapsed security interest in collateral may still take priority over a junior lien, even if state law says otherwise. This was despite a dissenting judge's warning that a later-arriving creditor who may not know of the lapsed lien could find itself in conflict with the other lienholders, thereby allowing for the creation of secret liens.

The customer, a paper distributor, filed Chapter 11. A class of vendors holding prepetition claims agreed to take a junior lien on the same collateral secured by a lender, who was in first position on the debtor's assets. The trustee discovered that lender's UCC-1 had expired making the lien avoidable under Bankruptcy Code's avoidance powers. The vendors' subordinate lien would have supplanted the lender's lien, allowing the suppliers to foreclose on the debtor's assets. However, the court found that the confirmed plan of reorganization subordinated the suppliers' lien permanently.

Blakeley & Blakeley LLP - Trade Vendor Monthly News Flash - November 2002. This information is not intended to constitute legal advice, nor a substitute for legal advice. once again link Blakeley & Blakeley LLP.