Hospital Equipment Financing: What is a Purchase Money Security Interest?

With varying degrees of frequency, all hospitals, clinics and imaging centers enter into purchase and sales agreements for equipment.  Many times, these agreements provide that a hospital (the “Purchaser”) may purchase equipment (for example, an x-ray machine) “on credit” by financing the purchase with either the supplier or a third party financier (the “Seller”).

If a piece of equipment is financed with the Seller, the Purchaser will make monthly installment payments, including interest, until the equipment is paid for in full.

In order to mitigate the credit risk posed by selling equipment “on credit” most Sellers use a relatively simple security device to protect their interest from other creditors: the Purchase Money Security Interest or “PMSI”.

The PMSI provides the Seller with priority over the Purchaser’s other creditors who may or do have a security interest in the same goods.  For example, if a Purchaser has a lending arrangement with a bank, the bank will most likely have a “blanket” security interest in all of the Purchaser’s after-acquired inventory and goods.  Generally, the Uniform Commercial Code dictates that the “first to file” will have a superior security interest.  This means that if a bank has a “blanket” security interest, it will generally trump all other creditors that file behind it (including, in this case, the Seller).  However, the PMSI grants the Seller “priority” if the Seller follows very specific steps to perfect its security interest.  These steps include entering into a security agreement (which is usually contained within the text of the purchase agreement) and filing a UCC-1 with the Secretary of State where the Purchaser is organized.

For institutional clients, PMSIs raise a few issues for consideration:

  • First, clients with bank financing should ensure that the filing of a PMSI will not breach any preexisting covenants with respect to their loans.  Most banks allow for PMSIs in the ordinary course of business; however, some have thresholds or “baskets” that provide monetary limits on non-bank financing.  Clients should periodically review their bank financing documents to ensure that they are compliant with their covenants.
  • Second, clients (generally) may not dispose of the equipment, materially alter it or move it out of state until the Seller has been paid off in full and discharges its security interest.  Clients should review the terms of their security or financing agreements prior to making intercompany transfers and/or disposing of equipment.
  • Third, clients should periodically run UCC-11 searches to ensure that all filings against them are current.  Oftentimes, Sellers will file a UCC-1, the equipment will be paid off and the Seller will fail to discharge the UCC-1.  Generally, a quick email or phone call to the Seller will prompt the Seller to discharge its security interest, but sometimes this requires a bit of chasing on the part of the Purchaser and/or the Purchaser’s counsel.

If you have any questions regarding equipment financing or would like assistance in reviewing your agreements, please contact the Mirick O’Connell Health Law Group.

About Denise Butler

Denise joined the firm in December 2010 as an associate in the Business Group. She represents various types of businesses in all stages, from emerging and developing companies to publicly-held corporations, and provides advice regarding all legal aspects of business, including business formation issues, contract review and preparation, review of public and private offerings and disclosure documents, and bank financings.
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