Legal Question in Business Law in Washington

Security Interests: The Purchase Money Security Interest

Lucky for you the law has taken an aim at protecting businesses like your own. Taking the risk to sell your goods in the unknown is frightening - but its business.

Banks have always had the power to maintain control over a debtor's assets after a default. This is typically what you hear of in a bankruptcy - the bank comes in, takes everything and tells you as a lower level creditor, good bye. They are able to do this because their lending agreements provide them with a right to retain security interests in "after-acquired" goods, equipment, and inventory. Guess what applies as "after-acquired"- your goods.

Well, producers/sellers/suppliers have the same rights-they just need to be savvy enough to know how to use them. You have been given a tool called the Purchase Money Security Interest (PMSI). This is a UCC (Uniform Commercial Code) tool (UCC �9-103) which provides the seller of goods with a trump card over all other creditors, including banks with an "after-acquired" provision in their lending instruments.

A PMSI arises when the seller sells the goods to the debtor/buyer on credit. The sale results in your retaining an automatic security interest in the goods for all or part of the purchase price. This is a right, but by itself, a subordinate right to that of a bank.

The PMSI MUST be perfected in a manner devised by the UCC. A seller will need a Security Agreement (UCC �9-203) and a Financing Statement, (�9-310/312). Your lawyer can assist with the drafting of these instruments.

Generally, a PMSI perfects automatically - but only in consumer goods. For items which are classified as equipment and inventory (check the UCC or consult your attorney for the definitions of various goods) you will need to perfect the PMSI by filing in accordance with state law.

Filing in WA takes place in the Department of Licensing, located in Olympia. In other states, filing may be accomplished through the Secretary of State.

In order to file, you will need to have a fully-executed Security Agreement and Financing Statement, illustrating the rights preserved by the PMSI and then have those documents filed TIMELY. There are strict time requirements and your attorney can assist you with ensuring that filing is done properly.

A final step requires the filer to notify those with present interests. Typically, this means the bank that has a line of credit with your customer. You can access the bank's, or other creditor's, filings through your state's Secretary of State or applicable office (WA's UCC @ http://www.dol.wa.gov/business/UCC/). Once again there are time requirements for delivery of this notice. Please ensure that the notice is sent timely.

The task of fighting for your goods in bankruptcy may be a dead-end road. But taking the time to use valid security instruments may help you to save your goods from the bankruptcy heap - saving you from your own financial troubles.