## Facts

- In May 1985, Michael and Pamela McAllister (Debtors) granted First Southeast Bank (Bank) a security interest in all equipment they owned and would later acquire.
- The Bank perfected by filing a financing statement in 1985 and maintained perfection through continuations.
- On January 16, 1998, Debtors entered into an Agricultural Security Agreement with Ag Services of America (Ag Services) granting a security interest in crops and in “all” of Debtors’ equipment and related items, whether then owned or later acquired; the agreement also provided for future advances.
- Ag Services perfected by filing a financing statement on January 23, 1998, and later amended the filing on January 11, 1999.
- On November 22, 1999, Debtors signed a promissory note to Ag Services increasing the principal balance to $112,000 at 21% interest, due January 15, 2001; the note stated it was secured by (among other documents) the January 16, 1998 security agreement.
- The parties stipulated that Ag Services advanced funds enabling Debtors to purchase specific farm equipment (the subject equipment): an auger in November 1999 and a planter and trailer in January 2000.
- The parties stipulated the equipment values: the auger at $2,500, and the planter and trailer together at $3,500.
- On December 14, 2000, Debtors signed another promissory note to Ag Services, increasing principal to $119,000 at the same 21% interest, due January 15, 2002; it likewise referenced the January 1998 security agreement as collateral.
- Debtors later filed bankruptcy in the U.S. Bankruptcy Court for the Northern District of Iowa.
- In the bankruptcy case, Debtors filed motions seeking to determine lien priority and the secured status/value of the Bank’s lien as to the subject equipment; the dispute turned on whether Ag Services had and retained a purchase-money security interest (PMSI) that would defeat the Bank’s earlier-filed blanket lien.

## Issues

1. Did Ag Services obtain a PMSI in the auger, planter, and trailer based on advances that enabled Debtors to acquire that equipment?
2. If Ag Services had a PMSI, did the December 2000 refinancing/increase in principal eliminate (or “transform”) the PMSI so that the Bank’s earlier perfected blanket equipment lien became senior as to the subject equipment?

## Decision

- The court held Ag Services had a PMSI in the auger, planter, and trailer “to the extent” its advances enabled Debtors to acquire that equipment and the funds were in fact used for those purchases.
- The court concluded Ag Services satisfied the PMSI superpriority timing requirement because its previously filed financing statement covering equipment perfected the later PMSI when Debtors acquired the equipment.
- The court rejected the Bank’s argument that refinancing and cross-collateralization automatically destroy PMSI status in this non-consumer equipment setting.
- The court determined Ag Services’ PMSI survived the December 2000 refinancing at least to the unpaid purchase-money portion traceable to the subject equipment.
- As a result, Ag Services’ PMSI had priority over the Bank’s earlier-filed security interest in the auger, planter, and trailer, making the Bank junior as to that specific equipment.

## Legal Principles

- Iowa’s Article 9 follows a notice-filing system: between competing perfected security interests in the same collateral, priority generally goes to the first to file. Iowa Code § 554.9312(5).
- A PMSI exists “to the extent” a lender gives value enabling the debtor to acquire rights in collateral and that value is actually used for the acquisition. Iowa Code § 554.9107(b).
- A perfected PMSI in non-inventory goods has priority over a conflicting security interest if the PMSI is perfected when the debtor receives possession or within twenty days thereafter. Iowa Code § 554.9312(4).
- An earlier-filed financing statement can perfect a later-arising PMSI when the financing statement covers the type of collateral and gives notice that the creditor may claim a security interest in it.
- Refinancing, consolidation, future-advance features, and cross-collateralization do not necessarily eliminate PMSI status; courts may preserve PMSI priority to the extent the purchase-money obligation and collateral remain identifiable and traceable, rather than treating the PMSI as fully converted to a non-PMSI.

## Conclusion

In In re McAllister, the bankruptcy court ruled that Ag Services’ advances used to buy Debtors’ auger, planter, and trailer created a PMSI that remained effective despite a later refinancing that increased the principal balance, and that Ag Services’ PMSI was entitled to superpriority over First Southeast Bank’s earlier perfected blanket lien as to that specific equipment.


In re McAllister, 267 B.R. 614 (2001)