Purchase Money Security Interest

Color Leasing 3, L.C. v. Federal Deposit Insurance Corporation, 975 F. Supp. 177 (D.R.I. 6/30/97). PURCHASE MONEY SECURITY INTEREST – As we have noted many times, it is crucial that the secured party providing purchase money security financing for equipment file its UCC-1 within the statutory grace period in order to obtain priority over existing blanket liens and intervening creditors. In most cases, this means that a lessor in a direct finance lease or a secured lender must file within 20 days (10-15 days in some states) or be subject to a "floating lien" in favor of the lessee's/debtor's bank.

Keeping this in mind, the Color Leasing case illustrates an important point: The grace period begins to run when the lessee/debtor receives POSSESSION of the collateral, but only possession under a claim of ownership. In Color Leasing, the lessee was leasing the collateral and then exercised a purchase option, executing a promissory note in favor of the lessor. Physical "possession" started long before the lessor filed its UCC-1; however, "possession" as a debtor/owner of equipment did not occur until just before the UCC was filed.

The court ruled in favor of the lessor and against a bank which had a floating lien against the assets of the lessee/debtor. This case is consistent with Commerce Union Bank v. John Deere Industrial Equipment Company, 387 So.2d 787 (Ala. 1980).