J: Hi, Maria. Thanks for meeting with me.
M: No problem. So how can I help?
J: I wanted to go over the problem handed out in class today.
M: Okay. Did you bring it with you?
J: Yeah, I have it right here.
M: Great. Let’s review the facts first.
J: Okay. Here’s how I understand it. A consumer named Barbara Walsh bought a laptop for her own personal use from TechSmyth, a company that manufactures and sells computers. TechSmyth gave Barbara financing for the purchase, and took back a security interest in the laptop.
M: Mm Hmm.
J: Four months later, Northeast Savings Bank loaned Barbara $50 000 for her small business. They took a security interest in all of her business assets and personal property, including her laptop.
J: Barbara’s business subsequently failed. The bank wants to repossess the office equipment, including the laptop from TechSmyth.
M: Right. But what about TechSmyth?
J: Of course they want to repossess the laptop too.
M: So that’s the problem—they both want to replevy the laptop.
J: Replevy? Oh, yeah, that just means “repossess,” right?
M: Yes, that’s right. A creditor can bring an action of replevin to recover possession of collateral. They can then sell it to satisfy the outstanding debt. Okay, so back to our problem. The first question is whether TechSmyth’s security interest qualifies as a “PMSI,” a purchase money security interest.
J: Okay, so a PMSI is created when a debtor gets a loan and uses the proceeds to make a particular purchase. If the lender takes back a security interest in the item purchased, then that is called a purchase money security interest, right?
M: That’s right. So does TechSmyth have a PMSI?
J: I think so. Barbara used the proceeds from TechSmyth’s financing to purchase the laptop, and TechSmyth took back a security interest in the laptop.
M: Exactly. What about the bank? Does it have a PMSI, also?
J: No, I don’t think so. Barbara didn’t get the bank loan to purchase the laptop. In fact, she bought the laptop before she asked for the bank loan. The bank loan here was just to help pay for the expenses of running her small business, and wasn’t used to buy the laptop.
M: Right. So that wouldn’t qualify as a PMSI. So, now the second part of the question. Does TechSmyth’s PMSI prime—that is, have priority over—the bank’s security interest?
J: I think so. PMSIs in consumer goods have superpriority—they prime all other security interests.
M: Very good. But now let’s change the facts a little. What if Barbara had taken out the bank loan first, and then bought the laptop with financing from TechSmyth? In that case, would TechSmyth’s PMSI still prime the bank’s security interest?
J: Hmm…Yes, of course, because superpriority means that PMSIs in consumer goods prime all other security interests, even prior secured interests.
M: Exactly! You’ve got it.
J: Whew! That was pretty technical stuff. Let’s take a break. Can I get you a coffee?
M: Sure. That’d be great.