Perfection Flashcards
What is the point of Perfection?
Happens after Attachment and is meant to provide notice to other parties that you have an interest secured.
Six Methods of Pefection
- Filing
- Possession
- Control
- Alternate Perfection Systems
- Perfection Under a State’s Certificate of Law
- Automative Perfection
Perfection by Filing
- Most common way to perfect
- Filing: File a financing statement in the central filing office of the appropriate state. [Go to state where debtor is located. If corporation, state where it is incorporated. If not registered, then where the organization operated its business. Individuals = principal residence.]
EXCEPT: Security Interest in Real-Property Related Collateral file the paperwork in the local county where the property is located (fixtures, oil, gas, timber to be cut)
Works for all collateral EXCEPT
- Deposit accounts
- Money
- Letters of Credit
- Collateral Subject to other Methods of Perfection (Under State Law – Such as Cars)
Required AND Essential Information of Paperwork to File by Perfection
- Name of the Debtor
- Name of the Secured Party
- Description of the Collateral
Real-Property-Related Collateral ADDITIONAL Requirements
- Indicate that the security agreement covers this type of collateral
- Describe the real property to which collateral related
- Name the record owner of the real property
If any information is missing, then NOT PERFECTED
Required Information of Paperwork to File by Perfection
Aside from the essential requirements, there are other requirements that are required. If not present, usually not accepted by filing office
- Address of debtor and secured party
- Indication whether the debtor is an organization
Authorization of Financing Statement in Perfection by Filing
- Debtor must authorize a financing statement in an authenticated record.
- Does not have to sign the financing statement
- Failure to obtain authorization before filing a financial statement can result in the secured party being liable for actual and statutory damages
Debtor’s Name as an Issue with Perfection by Filing
- Name filed must be the correct legal name.
- If a corporation, cannot use trade names (d/b/a).
- For an individual debtor: Majority is to use the non-expired state issued ID for name. Minority is that using the state issued ID is only a safe harbor, but other legal names may be used.
Description of Collateral as an Issue with Perfection by Filing
Two options to describe collateral:
- Use the same types of descriptions used for a security agreement
- Unlike a security agreement, a financing statement can have a generic description. [Statement like “all personal property” or “all assets” are sufficient.
- Financing Statement does not need to mention proceeds/future advances
Description of Collateral
The description of the collateral must MATCH between the Security Agreement and Financing Statement to attach and perfect.
If only described in Security Agreement, then attached and not perfected.
If only described in Financing Statement then NOT attached and NOT perfected.
Errors in the Financing Statement (Perfection by Filing)
General Rule: Errors in a financing statement do not affect perfection unless they make the financing statement “seriously misleading”.
- Error in the debtor’s name is considered “seriously misleading” UNLESS if a search for the correct name would uncover the financing statement with the error (think middle initial was missing, or punctuation was different)
Filing Office Problems and Perfection by Filing
Can refuse to file financing statement if no fee paid, not filed properly, or lacks essential information.
Rule: If a filing office incorrectly refuses (arbitrary or tech error) to file a financing statement then we treat the financial statement as filed properly.
EXCEPT
This type of financial statement will be ineffective against a purchaser or secured party who gave value in reasonable reliance upon the absence of the record from the filing system.
Duration of a Financial Statement
- General Rule: Lapses after 5 years unless a continuation statement is filed.
- A continuation statement must be filed within 6 months before financial statement lapses.
- If lapses occurs, perfection is lost. It may be re-perfected, but could affect their interest in a priority contest.
- A termination statement will void a financing statement.
Perfection by Possession
Must be tangible collateral. Perfection is perfected if the secured party takes possession
Applies to:
- Money
- Goods
- Instruments
- Negotiable Documents (Legal Instrument)
- Tangible Chattel Paper
As soon as secured party had possession it is perfected. Remains perfected so long as possession exists. (Some exceptions allow for temporary perfection if control is given up)
Perfection by Control
Generally, a secured party may perfect a security interest in a specific intangible collateral by taking control over it.
Applies to:
- Deposit Accounts
- Investment Property
- Electronic Documents
- Electronic Chattel Paper
- Letter of Credit Rights
Control is the exclusive method of perfection for:
- Deposit Accounts
- Letters of Credit Rights
Control over a Deposit Account is Proven in 3 Ways
For the purpose of Perfection by Control, a Deposit Account is considered controlled if:
- The secured party is the bank that has the deposit account (the lender and the bank are the same)
- The secured party, the bank, and the debtor agree in an authenticated record that the lender (secured party) has control over account
- The secured party can become the bank’s customer with respect to the deposit account
