Protecting Your Purchase Money Lien Rights

Recently, our firm had the pleasure of handling a file which involved the potential creation of a purchase money lien on personal property. Our client sold a business and took back a lien on the personal property of the business. The lien was to secure the payment of a note. The new business owner was going to pay our client over time for purchasing the business. In addition to the lien by the seller on the buyer’s property, the buyer also obtained an Small Business Administration (SBA) loan to purchase the business. Our client originally thought that he held a first mortgage as a result of his purchase money lien on the sale. In fact, the statutory procedures for the creation of a purchase money security interest were not followed, and as a result, the client holds a second mortgage on the personal property second to the SBA.

A purchase money security interest is defined as a lien or mortgage that is given by the seller of personal property to the buyer to secure payment of the purchase price. Florida Law, prior to changes in 2001, allowed a seller of personal property to perfect a security interest in the personal property being sold as long as a Uniform Commercial Code Financing Statement (UCC1) was filed with the Secretary of State within fifteen (15) days of creation of the debt. Florida Law now states that the interest is perfected as long as the recordation of the UCC1 occurs within twenty (20) days of the creation of the debt. This of course applies only to personal property. If inventory is involved, proper notices must be sent to any other secured creditors who have a claim on the inventory once the product is shipped.

Sellers and lenders must understand these priority issues. If you are selling property and merely put the words “Purchase Money” on the top of your document, you are not protected. You must also file the UCC-1 with the Secretary of State within fifteen (15) days. Lenders must also be careful to ensure that purchase money lien rights do not put the lender in a second lien position.

On other Uniform Commercial Code cases, our firm has successfully prosecuted a reclamation claim in a Chapter 11 Bankruptcy. A reclamation claim is allowable under the Uniform Commercial Code in certain specified circumstances where product is shipped to an insolvent corporation. In such a case, the seller upon discovering that the buyer has received goods on credit while insolvent may reclaim the goods upon demand made within a certain time. The reclamation rights can often be superior to the rights of unsecured creditors in insolvency situations.

For further information on reclamation or purchase money liens please contact our firm.

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