Perfection

Question 1

Perfection defined and 4 ways to do it

Answer 1

Perfection establishes the secured party's rights to the collateral against third parties.  An interest is perfected if it has attached and the requirements for perfection are met.  Requirements can be met before attachment, meaning perfection will occur at the time of attachment
Most commonly done by:
 - filing
 - possession
 - control
 - automatic perfection

Question 2

Filing

Answer 2

Public filing of a financing statement is the most common way to perfect a security interest. Usually filed in Secretary of State’s office, or County Clerk for fixtures. Adds to publicly searchable database

RULE: debtor’s jx is the one that controls perfection.

Financing statement must include:

• name of debtor
• name of secured party or their rep
• description of the collateral. supergeneric OK
• authorized by debtor (but authorized security agreement is transferable to the statement)

Can be filed BEFORE security agreement is made or interest otherwise attaches! This is important to priority

Question 3

Filing: special rules for fixtures

Answer 3

Fixtures are goods so related to real property that interest in them passes with the land.
Financing statement for fixtures must also:
- indicate it covers fixtures
- indicates it’s to be filed in real property records
- describe property to which fixture is realted
- provide real property owner’s name, if different from the debtor

Question 4

Effectiveness of financing statements

Answer 4

Financing statements that are filed in the wrong place, are missing required info, or are not authorized by debtor are INEFFECTIVE - do not perfect a security interest
Minor errors don’t prevent perfection unless they make it SERIOUSLY MISLEADING

Failure to provide debtor’s name is seriously misleading
- RULE: if a search of the records under debtor’s correct name, using office’s standard search logic, would
find the statement, the statement isn’t misleading by virtue of incorrect name.

Question 5

Changes that can affect effectiveness of a financing statement

Answer 5

Filed statement remains effective even if collateral sold/exchanged/leased/etc even if secured party knows or consents

PROCEEDS: perfected interest automatically extends to proceeds unless security agreement exempts - HOWEVER, automatic perfection for proceeds continues only 20 days after attachment (i.e. receipt of proceeds by debtor), UNLESS:
- filed statement covers original collateral, proceeds are coverable by filing in same office (check fixtures
or vehicles), and proceeds not acquired with cash proceeds;
- the proceeds are identifiable cash proceeds;
- security interest in proceeds is OTHERWISE perfected, either at attachment or w/in 20 days after

Financing statements can be amended!

Question 6

Name changes and moves

Answer 6

If debtor changes name such that filed statement becomes seriously misleading, statement only effective for security interest in collateral acquired within FOUR MONTHS, unless statement amended within four months of name change

If debtor changes states, secured party must refile in the new state within FOUR MONTHS. If they do, it relates back to filing date in original state. Otherwise, entire interest is unperfected

Question 7

Financing statement duration

Answer 7

Filed statements are effective for FIVE YEARS after filing date. Must file a continuation statement WITHIN A SIX MONTH WINDOW BEFORE it lapses or ALL security interests perfected by it become unperfected

Continuation statements extend by another 5 years and can be daisy-chained

Question 8

Perfection by possession

Answer 8

Only applies to tangible negotiable docs, goods, instruments, money, or tangible chattel paper. In other words, stuff you can physically and exclusively possess

Normally, secured party perfects just by taking possession of collateral itself. However, can also perfect by possession by third party, if third party authenticates a record saying that it is doing so

Possessor must use reasonable care in custody and preservation, and can charge reasonable expenses to the debtor

Question 9

Perfection by control

Answer 9

Works for:

Investment securities

• If certificated, need physical possession, and endorsement if it’s registered (not for bearer form)
• if uncertificated, need possession (i.e. on the books of the issuer) or agreement of issuer

Letter-of-credit rights
- issuer consents to assignment of the proceeds of the letter of credit

Deposit accounts (ONLY by control)

• secured party IS the bank that maintains the account;
• debtor, secured party, and bank have agreed in authenticated record; or
• secured party becomes bank’s customer w/r/t deposit account

Electronic chattel paper

Question 10

Automatic perfection

Answer 10

If security interest is a PMSI in consumer goods, it perfects upon attachment and stays effective permanently (excluding motor vehicles and fixtures)

Some jx also have grace periods (20 days or 4 months) where a party can fix perfection when one method has expired/failed. in essence, the interest is automatically perfected for the duration of the grace period