Perfect of Security Interest

Question 1

How do you perfect a SI?

What does perfection do?

Answer 1

The SI is perfected upon attachment of that interest AND compliance with one of the methods of perfection.

Perfection creates superior rights in the collateral for secured party over third parties’ rights in the collateral.

Question 2

What are the methods of perfection?

Answer 2

Filing of a financing statement
Possession
Control
Automatic Perfection

Question 3

What does filing of a financing statement do?

Answer 3

Gives interested parties notice of the existence of the SI.

It is a notice filing in essence.

Question 4

What type of collateral is not perfected upon filing of a financing statement?

Answer 4

Filing is a method of perfection for any SI EXCEPT a deposit account, money, or letter-of-credit rights.

Question 5

What is a financing statement?

Answer 5

Must contain the
-> debtor’s name
-> the secured party’s name
AND
-> a description of collateral

Question 6

What are two alternatives to a financing statement?

Answer 6

Security agreement generally requires more information than a financing statement, so can be filed in lieu of the financing statement to act as a financing statement.

Mortgage can act in lieu of a financing statement as long as it has the required information and is recorded.

Question 7

What are the rules of the debtor’s name for a financing statement?
-> what satisfies the name requirement
-> what doesn’t satisfy the name requirement
-> what if the debtor is a registered organization

Answer 7

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

Debtor’s trade name -> insufficient by itself; not needed if the debtor’s name is currently provided

Registered organization -> the name shown on public organization records (e.g., articles of incorporation)

Question 8

What happens if the debtor’s name changes after the filing of a financing statement?

Answer 8

Debtor’s change of name -> the secured party has 4 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

Question 9

What happens if there is an error on the financing statement regarding the debtor’s name? Error in the secured party’s name? Does either impact perfection?

Answer 9

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 (so the error can be minor and would still be fine, but if major then no perfection).

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 that was correctly filed.

Question 10

What are the rules of the description of the collateral for the financing statement?

Answer 10

Unlike security agreement, the financing statement may include a super-generic description of the collateral (“all debtor’s assets”) if the description sufficiently indicates the collateral

Question 11

Can a financing statement apply to after-acquired collateral? Does it need to list it in the description?

Answer 11

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 or not mentioned or even contemplated by the parties at the time the financing statement was authorized

Question 12

Can a financing statement apply to proceeds? Does it need to list it in the description?

Answer 12

Proceeds -> a SI in proceeds is perfected even if not mentioned in the financing statement

Question 13

What happens if there is an error in the financing statement with regards to the description?

Answer 13

Error in description
-> the secured party MUST prepare a termination statement with respect to the erroneous collateral and can then refile a new financing statement.

Question 14

Is the debtor’s authorization needed on the financing statement?

What if the debtor has authenticated the financing statement (happens with a signature)?

Answer 14

Required, but the debtor need not sign the financing statement (which would be authenticating)

Ipso facto authorization -> the debtor’s authentication of the security agreement serves as authorization to file the financing statement

Question 15

When is the debtor’s authorization (aka consent) to file a financing statement simply presumed?

Answer 15

The debtor’s consent to the filing is presumed when the secured party seeks to perfect a SI in an identifiable proceeds of collateral by filing the security interest.

Even if the financing statement does not state anything regarding proceeds in the description.

Question 16

Who are the persons entitled to file financing statement?

Answer 16

Any person may do so; the signature of the filer is not required

Question 17

Where is the correct filing location for collateral related to real property?

What about all other types of collateral? What are the nuances at play in determining the correct location to file the financing statement?
-> Individual debtor vs. non registered organization vs. registered organization

Answer 17

Collateral related to real property -> the appropriate office for recording a mortgage on the related real property is the local office that handles such affairs (local filing format)

All other collateral -> the secretary of state of the state of the debtor’s location (central filing format), but there are a few nuances:
-> individual debtor - the state in which the debtor maintains his principal residence
-> non registered 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
-> registered organization (corporation) - the state in which it is organized

Question 18

When is the effective date of filing?

Answer 18

Upon delivery to the filing office and tender of the filing fee

Question 19

What are the types of refusal the filling officer can have?

Answer 19

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

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

Question 20

What happens when a filing office incorrectly indexes a statement?

Answer 20

Does not affect the effectiveness of a filed statement, because the risk of a filing-office error rests on those who search files, not those who file the statement.

Question 21

What is the length of perfection (duration)? How can it be terminated early?

Answer 21

A financing statement is generally effective for 5 years.

Effective during this period, even though there is no obligation scored by the collateral and no commitment to make an advance, UNLESS a termination has been filed

Question 22

What is a continuation statement? What happens if it isn’t filed?

Answer 22

Used to effectively extend perfection of 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 after the financing statement expires

Question 23

How do you amend a financing statement?

Answer 23

File an amendment statement 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 24

How do you terminate statement?

Answer 24

File a termination statement which terminates effectiveness of a financing statement.

Question 25

What types of SIs can be perfected via possession? How long does the perfection last?

Answer 25

A 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 26

What types of SIs can ONLY be perfected via control? How long does the perfection last?

Answer 26

A SI in
-> investment property,
-> deposit accounts,
-> letter-of-credit rights,
-> electronic chattel paper,
AND
-> electronic documents can be perfected via control (no other way).

Perfection exists only while secured party retains control

Question 27

When is it that letters credit rights don’t need to be exclusively controlled in order to be considered as perfected?

Answer 27

Letter of credit rights
-> generally, control is the only method of perfection, UNLESS such rights are a supporting obligation for other collateral then you need to perfect in the manner appropriate for the other collateral.

Question 28

What type of goods can be automatically perfected for an indefinite period of time?

Answer 28

PMSI (purchase money security interest) in consumer goods
-> automatically perfected upon attachment; a secured party does not need to file a financing statement as PMSI for consumer goods is money lent to specifically buy that consumer good.

Question 29

How do you achieve temporary perfection automatically?

Answer 29

1. New value - if new value is given under
   -> an authenticated security agreement,
   -> a SI in certificated securities,
   OR
   -> negotiable documents or instruments
   THEN
   It is automatically perfected for 20 days from attachment.
2. 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.
3. Interstate movement of collateral or debtor:
   -> movement of the debtor to another state - THEN four-month grace period for a perfected SI
   OR
   -> movement of collateral to debtor in another state - THEN one-year grace period for a perfected SI

Question 30

What happens when collateral moves to a new state and the new state has the same perfection rules as the prior state?

What happens if the state has different laws for perfection and there is no perfection in the new state?

Answer 30

-> perfected possessory SI - no effect on perfection when the SI is perfected under the new state’s laws (remains continuously perfected)

-> effect of a lapse of perfection (happens when the collateral isn’t perfected in the period needed to perfect because the new state laws are different)
-> the SI generally ceases to be perfected upon the expiration of the temporary perfection period (tends to be four months or one year)

Question 31

How are proceeds temporarily perfected?

Answer 31

If SI in original collateral perfected, SI in proceeds perfected for 20 days from attachment

Question 32

How are proceeds indefinitely automatically perfected?

Answer 32

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

Cash proceeds
-> if the SI in the original collateral is perfected, then the SI in the IDENTIFIABLE cash proceeds is perfected indefinitely

Same office
-> if a filed financing statement covers the original collateral
AND
-> the proceeds are collateral in which a SI may be perfected by filing in the office in which the financing statement has been already 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 proceed also ceases to be automatically perfected

Question 33

What is the non-article rule regarding notation for vehicles?

Answer 33

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.

This tends to be mainly for vehicles.

Question 34

How does timing of perfection work?

Answer 34

Upon:
-> attachment of the SI
AND
-> compliance with a method of perfection

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