To perfect a purchase money security interest (PMSI) in inventory, we know that the Uniform Commercial Code (UCC) requires us to send an “authenticated notification” to other creditors with a conflicting security interest in the same inventory. What is an “authenticated notification”? What is the appropriate delivery method for the authenticated notification? Also, we know that the notification must be received “within five years before the debtor receives possession of the inventory.” Under this language, can a single financing statement and authenticated notification apply to all inventory that the borrower may purchase during that five-year period? Or do we need to file a separate financing statement and send a separate notice for each new piece of equipment the borrower purchases for resale during that five-year timeframe?

Dec 11, 2017

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Under the UCC, to “authenticate” a document generally means to sign it. With respect to delivering the authenticated (i.e., signed) notification, the UCC comments clarify that “either registered mail, return receipt requested, or the personal delivery of such notice, with receipt acknowledged in writing by the holder of the conflicting security interest, is obviously a satisfactory method of insuring receipt of notice.”

As you stated, the holder of the conflicting security interest in the same collateral (such as the holder of a blanket security interest in the debtor’s inventory) must receive the notification within five years before the borrower receives possession of the inventory. The notification must state that you have or expect to acquire a purchase-money security interest in the debtor’s inventory and describe the inventory.

We are not aware of any Illinois courts that have expressly addressed whether a single notification (and a single financing statement) applies to all inventory purchased during this five-year timeframe. However, we believe the plain language of the UCC supports this interpretation. Consequently, we believe that you may file one financing statement and send one authenticated notice regarding your PMSI in all of the borrower’s inventory purchased within five years after the holder receives the notification.

To ensure that your security agreement, financing statement and authenticated notification adequately describe the inventory, please consult with bank counsel.

For resources related to our guidance, please see:

Uniform Commercial Code, 810 ILCS 5/9-102(7) (“‘Authenticate’ means: (A) to sign; or (B) with present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process.”)
Illinois Uniform Commercial Code Comments, § 9-324, Comment 5 (“Paragraph (3) continues the requirement that the holder of the conflicting security interest receive the notification (see § 1-202(e)) given by the purchase money secured party. Either registered mail, return receipt requested, or the personal delivery of such notice, with receipt acknowledged in writing by the holder of the conflicting security interest, is obviously a satisfactory method of insuring receipt of notice.”)
Uniform Commercial Code, 810 ILCS 5/1-202(e) (“Subject to subsection (f), a person ‘receives’ a notice or notification when: (1) it comes to that person’s attention; or (2) it is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications.”)
Uniform Commercial Code, 810 ILCS 5/9-324(b) (“Inventory purchase-money priority. Subject to subsection (c) and except as otherwise provided in subsection (g), a perfected purchase-money security interest in inventory has priority over a conflicting security interest in the same inventory . . . if: (1) the purchase-money security interest is perfected when the debtor receives possession of the inventory; (2) the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest; (3) the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory; and (4) the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.”)
Uniform Commercial Code, 810 ILCS 5/9-324(c) (“Holders of conflicting inventory security interests to be notified. Subsections (b)(2) through (4) apply only if the holder of the conflicting security interest had filed a financing statement covering the same types of inventory: (1) if the purchase-money security interest is perfected by filing, before the date of the filing; or (2) if the purchase-money security interest is temporarily perfected without filing or possession under Section 9-312(f), before the beginning of the 20-day period thereunder.”)
Uniform Commercial Code, 810 ILCS 5/9-324(g) (“Conflicting purchase-money security interests. If more than one security interest qualifies for priority in the same collateral under subsection (a), (b), (d), or (f): (1) a security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or the use of collateral; and (2) in all other cases, Section 9-322(a) applies to the qualifying security interests.”)