## Facts

- Bobby Lee Daniels owned and operated a marine sales business through Daniels Marine, Inc.
- Daniels Marine obtained financing from ITT Diversified Credit Corporation (ITT) to purchase boats, motors, and related accessories for resale.
- To secure repayment, ITT took a security interest in Daniels Marine’s inventory and certain equipment.
- ITT perfected its security interest by filing the required financing statements.
- After ITT’s financing was in place, the Small Business Administration (SBA), acting through the American Bank of Commerce (ABC), extended additional credit to Daniels Marine and took a purchase-money security interest (PMSI) in Daniels Marine’s inventory and equipment.
- SBA/ABC sent ITT a written notice stating that ABC had taken or intended to take a security interest in certain inventory and equipment owned or thereafter acquired by Daniels Marine, but the notice did not use the words “purchase money.”
- Daniels later filed for bankruptcy.
- Under a bankruptcy court order, SBA conducted a foreclosure sale of certain property that ITT claimed was covered by ITT’s earlier security interest.
- ITT moved in the bankruptcy court for a determination that ITT’s prior perfected security interest had priority over SBA/ABC’s claimed PMSI and that ITT was entitled to the proceeds from the foreclosure sale.

## Issues

1. Does an inventory purchase-money secured party lose PMSI priority over a prior perfected secured creditor when its pre-possession written notice describes the collateral and states that a security interest “has been or will be taken,” but does not expressly say the interest is “purchase money”?

## Decision

- The court ruled against ITT’s “magic words” argument.
- The court held that SBA/ABC’s written notice satisfied the U.C.C. inventory PMSI notice requirement even though it did not contain the words “purchase money.”
- Because the notice requirement was met (and the PMSI requirements otherwise applied), SBA/ABC’s PMSI had priority over ITT’s earlier-filed security interest to the extent of the purchase-money collateral.
- ITT was not entitled to the foreclosure-sale proceeds attributable to collateral subject to SBA/ABC’s superior PMSI claim, and ITT’s requested priority determination was denied to that extent.

## Legal Principles

- Article 9 generally gives priority to the secured party that first files or perfects, unless a specific statutory priority rule applies.
- A purchase-money security interest in inventory can take priority over a conflicting, earlier-perfected security interest if statutory conditions are satisfied, including timely written notification to the holder of the conflicting security interest before the debtor receives possession of the inventory.
- The inventory PMSI notification requirement focuses on whether the prior secured creditor received written notice that the later creditor “has or expects to acquire” a security interest in the described inventory; the statute does not require the notice to contain the phrase “purchase money” or to announce “PMSI priority.”
- A notice that identifies the collateral and alerts the earlier secured creditor to a newly taken or expected security interest in that collateral can be sufficient, even if it does not label the interest as purchase-money.
- The notice requirement serves to inform the prior secured party that another creditor is financing inventory that may conflict with the prior lien, allowing the prior secured party to respond in its own credit relationship with the debtor.

## Conclusion

The court held that SBA/ABC did not forfeit inventory PMSI priority merely because its written notice to ITT omitted the words “purchase money”; because the notice communicated that SBA/ABC had taken or expected to take a security interest in the described inventory and equipment, SBA/ABC’s PMSI obtained priority over ITT’s earlier filing as to the purchase-money collateral, and ITT was not entitled to the related foreclosure-sale proceeds.


In re Daniels, 35 B.R. 247 (1993)