Attachment & Perfection

Question 1

Methods of Perfecting Security Interests

Answer 1

There are three primary ways a SI can be perfected:

1) Filing financing statement — usually filed with state office

Requirements — financing statement must:

i) Identify debtor — name must exactly match (if debtor is business org., name must match Art. of Incorporation)
ii) Identify secured party/creditor
iii) Contain an adequate description of collateral
* Authorization for filing must be obtained from debtor* (usually security agreement itself satisfies this requirement)
* Minor erros will not affect perfection unless it is seriously misleading* (i.e., wrong name is seriously misleading)
* FS lapses after 5 yrs…must file a continuation w/in 6 months before lapse…if lapses perfection is lost*
2) Taking possession (“pledged collateral”) — secured party may perfect a SI in many types of collateral simply by taking possession
- E.g., goods (pawnshop), negotiable documents, instruments
- possession is only way to perfect SI in cash **(double check)

Certain intangible collateral cannot be perfected by possession

• E.g., accounts, certificate of title goods, electronic chattel paper, general intangibles
  3) Automatic perfection & PMSIs — in some transactions, once collateral is attached, perfection occurs automatically
• PMSI = purchase money security interest

Motor vehicles — SIs in vehicles are perfected by notation on the vehicle’s certificate of title

• exception = when vehicle is inventory

Question 2

Automatic Perfection & PMSIs

In some transactions, SIs are perfected automatically once attached; automatic perfection occurs with the following:

Answer 2

1) PMSI in consumer goods — PMSI arises where a creditor sells goods to debtor and/or advances funds to debtor to buy goods, reserving a SI in the goods themselves

E.g., A sells B a TV on credit; once the SI is created and attached (i.e., when B receives the goods), A has a PMSI in goods that is automatically perfected

1a) Consumer goods only — automatic perfection only occurs for PMSIs in consumer goods

• a PMSI in inventory or equipment must be filed to be perfected

1b) Limitation — motor vehicles and fixtures:

• Motor vehicles — notation on the vehicle title is required for perfection
• Fixture filings — consumer goods that are to become fixtures require a fixture filing to obtain priority over an interest in the real property to which fixture is affixed (see card 14)

2) Small assignment of accounts — SI perfects automatically when:

2a) Accounts or payment intangibles are assigned; and
2b) Assignment does not transfer a significant portion of the assignor’s outstanding accounts or intangibles

3) Sale of payment intangibles or promissory notes — automatically perfected

Question 3

Attachment of SI

Answer 3

An SI that is enforceable against the debtor with respect to the collateral is said to have “attached” to the collateral. Attachment requires: (i) value given by the secured party; (ii) the debtor has rights in the collateral; and (iii) the debtor has authenticated a security agreement that describes the collateral, or the secured party has possession or control of the collateral

Question 4

Attachment

what constitutes “value given by the SP?

Answer 4

Value given by the secured party—can be:

i) consideration sufficient to form a contract,
ii) extending credit,
iii) accepting delivery under a preexisting contract, or in satisfaction of a preexisting claim
iv) Future advances—may also be secured by collateral

v) New value—when new value is required to perfect a security interest or have priority, it can consist of:

A. Money;

B. Money’s worth in property, services, or new credit; OR

C. Release by a transferee of an interest in property previously transferred to the transferee.

Question 5

Attachment

what constitutes “debtor’s rights in the collateral?”

Answer 5

1. Generally—the SI attaches only to the rights that the debtor has in the collateral
2. Consignments—if the consignor retains title to the consigned goods, the consignee does not have rights in them

Question 6

Alternatives to a FS

Answer 6

1. Security agreement
2. mortgage

Question 7

Debtor’s name on FS

Answer 7

1. Debtor’s name—the name on the debtor’s current driver’s license or state-issued identification card (most states)

A. Debtor’s trade name—insufficient by itself; not needed if the debtor’s name is correctly provided

B. Registered organization—the name shown on public organic records (e.g., articles of incorporation)

C. Debtor’s change of name—the secured party has four months to amend the financing statement; if not done, collateral acquired by the debtor after the four- month period is not covered by the financing statement

D. Error in debtor’s name—a financing statement is not effective unless a standard search under the debtor’s correct name would disclose the statement

E. Error in secured party’s name—an error in the name of the secured party generally does not affect the perfection of the SI, but could subject the secured party to estoppel in favor of another claimant

Question 8

Financing Statement

Description of the Collateral

Answer 8

1. Description of the collateral: unlike SA, the FS may include a super-generic description of the collateral (“all debtor’s assets”) if the description sufficiently indicates the collateral.

A. After-acquired property and future advances—a financing statement may be effective to cover after-acquired property if such property falls within the collateral described, whether mentioned or even contemplated by the parties at the time the financing statement was authorized.

B. Proceeds—an SI in proceeds is perfected even if not mentioned in the financing statement

C. Error in description—the secured party must prepare a termination statement with respect to the erroneous collateral.

Question 9

Financing Statement

Debtor’s Authorization

Answer 9

1. Debtor’s authorization—required, but the debtor need not sign the financing statement
   i) “Ipso facto authorization”—the debtor’s authentication of the security agreement serves as authorization to file the financing statement.
   ii) The debtor’s consent to the filing is presumed when the secured party seeks to perfect an SI in any identifiable proceeds of collateral by filing.

Question 10

Who may file a FS?

is there signature required?

Answer 10

any person may do so

the signature of the filer is not required

Question 11

Financing Statement

Filing location

Answer 11

1. Collateral related to real property—the office for recording a mortgage on the related real property; local filing
2. All other collateral—the secretary of state of the state of the debtor’s location; central filing
   i) Individual debtor—the state in which the debtor maintains his principal residence
   ii) Nonregistered organization (partnership) debtor—the state in which it maintains its place of business and, if it has more than one place of business, at its chief executive office
   iii) Registered organization (corporation)—the state in which it is organized

Question 12

Financing Statement

Effective date of filing

Answer 12

1. Effective date of filing—upon delivery to the filing office and tender of the filing fee
   i) Filing office’s refusal to accept

A. Justified refusal (e.g., failure to pay fee)—the financing statement is treated as having not been filed

B. Unjustified refusal—the financing statement is treated as having been filed; the statement is effective except as to a purchaser of the collateral who gives value in reasonable reliance upon the absence of the record from the files

ii) Filing office’s incorrect indexing of a statement—

• does not affect the effectiveness of a filed statement;
• the risk of a filing-office error rests on those who search files, not those who file the statement

Question 13

Who bears the risk of a filing-office error?

Answer 13

Those who search the files

The risk of a filing-office error rests on those who search files, not those who file the statement

Question 14

How many years is a financing statement effective?

Answer 14

A financing statement is generally effective for five years.

• Effective during this period, even though there is no obligation secured by the collateral and no commitment to make an advance, unless a termination statement has been filed.

Question 15

How long does a continuation statement extend perfection?

Answer 15

Effective to extend perfection for an additional five years;

no need for the debtor’s signature;

If not filed, the SI is treated as never having been perfected as against a purchaser of the collateral for value.

Question 16

Amendment of FS

Answer 16

Filed to add or delete collateral covered by the statement.

Effective from the date of filing

Does not extend period of effectiveness of the financing statement

Question 17

Perfection of a SI

What goods are perfected by possession and how long does the perfection last?

Answer 17

An SI in goods, instruments, negotiable documents, money, tangible chattel paper, and certificated security may be perfected by possession.

Perfection exists only during the period of possession.

Question 18

Perfection of SI

Control

Answer 18

1. Control—perfection exists only while secured party retains control

A. Collateral perfected by control—only an SI in investment property, deposit accounts, letter-of-credit rights, electronic chattel paper, or electronic documents

B. Letter of credit rights—generally, control is the only method of perfection, unless such rights are a supporting obligation for other collateral

C. Deposit account—control is the only method of perfection.

Question 19

Automatic Perfection

Answer 19

1. Indefinite period of perfection

• PMSI in consumer goods—automatically perfected upon attachment; a secured party does not need to file a financing statement

2. Temporary perfection
   i) New value—if new value is given under an authenticated security agreement, an SI in certificated securities, negotiable documents, or instruments is automatically perfected for 20 days from attachment
   ii) Delivery of collateral to debtor—if the collateral is delivered to the debtor for the purpose of selling or exchanging it, the SI in the collateral remains temporarily perfected for 20 days
   iii) Interstate movement of collateral or debtor
   a) Movement of the debtor to another state—four-month grace period for a perfected SI
   b) Movement of collateral to debtor in another state—one-year grace period for a perfected SI
   c) Perfected possessory SI—no effect on perfection when the SI is perfected under the new state’s laws
   d) Effect of a lapse of perfection—the SI generally ceases to be perfected upon the expiration of the temporary perfection period
3. Proceeds
   i) Temporary perfection—if SI in original collateral perfected, SI in proceeds perfected for 20 days from attachment
   ii) Indefinite automatic perfection
   a) Pursuant to financing statement—if the original financing statement is broad enough to cover proceeds or the secured party amends the financing statement to cover proceeds within 20 days, then the SI in proceeds continues to be perfected
   b) Cash proceeds—if the SI in the original collateral is perfected, then the SI in the identifiable cash proceeds is perfected indefinitely
   c) Same office—if a filed financing statement covers the original collateral and the proceeds are collateral in which an SI may be perfected by filing in the office in which the financing statement has been filed, then a perfected SI in proceeds may continue indefinitely

• Does not apply to proceeds acquired with cash proceeds
• Limitation—if the original filing ceases to be effective after the 20-day period, the SI in proceeds also ceases to be automatically perfected

Question 20

Non-Article 9 rules

Notation for Vehicles

Answer 20

A non-Art. 9 statute controls the manner of perfection

Filing is not sufficient if a statute requires a notation of the SI on the certificate of title

Question 21

Timing of Perfection

Answer 21

Perfected pon (i) attachment of the SI and (ii) compliance with a method of perfection;

If there is a change in the method of perfection without a lapse, then the perfection dates from the date on which the SI is first perfected.