Also known as: purchase money obligation · purchase-money obligations · purchase money obligations
Written by attorneys · grounded in primary & secondary sources — see below
An obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.
Pulse Media supplies smartphones on consignment to TechHub. TechHub later grants Pulse Media a security interest in the phones to secure payment for a prior shipment of tablets that TechHub already sold. When TechHub defaults, Pulse Media claims the phones secure both the current and prior obligations. The phones qualify as purchase-money collateral for the tablet obligation under the inventory cross-collateral rule.
Premier Manufacturing sells specialized equipment to Prosperity Investments. Prosperity separately borrows from Premier to acquire software that operates only with the equipment. Prosperity grants Premier a security interest in the software. The loan obligation qualifies as purchase-money because it was incurred to enable acquisition of the software.
Select any source to read its text and confirm it supports the definition.
Patriot Insurance finances Parker Phillips's purchase of diagnostic machines. Parker grants Patriot a security interest in the machines to secure the loan. The machines constitute purchase-money collateral because they secure the obligation incurred to acquire them.
Priya Prasad places medical devices on consignment with Paul Peterson's clinic. Peterson incurs an invoice obligation only when it uses a device in surgery. The invoice is a purchase-money obligation because it represents the price of the device Peterson acquired and used.
An obligation qualifies when it is incurred as the price of specific collateral or as value that in fact enables the debtor to acquire rights in or use of that collateral. Invoices arising upon use of consigned goods meet this test because the obligation directly reflects the price of the items acquired and consumed.
A consignor's retained interest in consigned goods is treated as a purchase-money security interest in inventory. The underlying obligation to pay the consignor for goods sold or used satisfies the definition because it arises as the price of the collateral.
A purchase-money obligation retains its character even if the collateral also secures non-purchase-money debt or if non-purchase-money collateral secures the purchase-money obligation. The definition focuses on the origin of the obligation rather than later mixing of collateral.
The secured party must show that the collateral secures an obligation incurred as all or part of the price of that collateral or for value given to enable acquisition of rights in or use of that collateral, and that the value was in fact so used.