Perfection

Question 1

OVERVIEW

Requirements for perfection

Answer 1

The security interest must attach, PLUS one of these four things:

1. Filing
2. Possession
3. Automatic Perfection
4. Control

Question 2

OVERVIEW

Which state’s law applies to perfection?

Answer 2

While a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection.

Question 3

FILING

What is the default way of perfection?

Answer 3

Filing is the default way to perfect a security interest.

Question 4

FILING

Primary place to file a financing statement

Answer 4

The primary place to file a financing statement is the office of the Secretary of State, except when the security interest is in land, as-extracted collateral (oil and gas to be sold immediately), timber to be cut, and fixture. (With those exceptions, you would file in the office where mortgages and deeds are filed).

Question 5

FILING

How to determine which state an individual debtor is located

Answer 5

Individual debtors are located at their principal residence—i.e., where they live. “Individual” debtors are human beings. They are not part of any organization, but rather are on their own (either as a consumer debtor, or as a business that is a sole proprietorship).

Question 6

FILING

How to determine which state a non-registered organization is located

Answer 6

Organizations (Non-Registered) are located at the place of business (or chief executive one if there’s more than one). “Organizations” are collections of two or more people or entities. A partnership is probably the simplest kind.

Question 7

FILING

How to determine which state a registered organization is located

Answer 7

Organizations (Registered) are located in their state of registration. Registered organizations are organizations whose formation requires registration in their State of creation. The 9–102(a) definitions clarify that “registering” means filing a “public organic record” with a State in order to be formed or organized under that State’s laws. In other words, you can’t just form a registered organization on a handshake. The most common type of registered organization is a corporation, which is created by filing a record called articles of incorporation with the state (along with a filing fee). An LLC would be another common example.

Question 8

FINANCING STATEMENT

Authorization to file a financing statement

Answer 8

• A financing statement can only be filed naming a debtor if the debtor in fact authorized the financing statement. There are a couple of ways that such authorization can be obtained.
• First, the debtor can expressly authorize the filing in a signed (authenticated) record. This is the most straightforward way, and secured parties will commonly have debtor sign such an authorization as part of the paperwork involved in the closing of any secured loan transaction.
• The second primary way that a debtor is deemed to authorize the filing of a financing statement is by authenticating a security agreement. In other words, by simply agreeing to be bound to a security agreement, a debtor is automatically deemed to have authorized the filing of any financing statement that covers the collateral described in the security agreement.

Question 9

FINANCING STATEMENTS

3 requirements within the contents of a financing statement

Answer 9

A financing statement is sufficient only if it:

1. provides the name of the debtor;
2. provides the name of the secured party; and
3. indicates the collateral covered by the financing statement

Question 10

FINANCING STATEMENTS

What is required for the “name of the debtor” financing statement requirement for corporate debtors?

Answer 10

Corporate debtors (and other registered organizations like LLCs) should use the “real” corporate name—i.e., the one on the articles of incorporation (the UCC calls this the “public organic record”)

Question 11

FINANCING STATEMENTS

What is required for the “name of the debtor” financing statement requirement for partnership debtors?

Answer 11

Partnerships (or other typical entities that are not registered) should use the “real” partnership name, if there is one (as recited in a partnership agreement); otherwise, the financing statement should just list the names of the individual partners.

Question 12

FINANCING STATEMENTS 
Majority view (Alternative A) for what is required for the “name of the debtor” financing statement requirement for individual debtors

Answer 12

Alternative A, which the vast majority of states have adopted, requires mandatory use of the name on an individual’s driver’s license, if one is issued. Otherwise, the UCC essentially just says to use the debtor’s “individual name.” If there’s no driver’s license, things can get tricky (what if the name is different on the birth certificate vs. tax returns vs. other legal documents?).

Question 13

FINANCING STATEMENTS
Minority view (Alternative B) for what is required for the “name of the debtor” financing statement requirement for individual debtors

Answer 13

Alternative B allows use of the driver’s license name, but does not require it if a different name may be applicable (such as the name on the debtor’s birth certificate)

Question 14

FINANCING STATEMENTS

What is required for the “name of the secured party” financing statement requirement?

Answer 14

The full, formal name of the secured party, usually a retailer or lender, must be provided.

Question 15

FINANCING STATEMENTS

What is a sufficient indication of the collateral for purposes of a financing statement?

Answer 15

An indication of the collateral in a financing statement is sufficient if it

(1) “reasonably identifies” the collateral (i.e., specifically name the collateral or use “UCC Categories”) OR
(2) if it is an indication that the financing statement covers all assets or all personal property of the debtor.

Question 16

FINANCING STATEMENTS

Supergeneric descriptions and financing statements

Answer 16

• Unlike security agreements, supergeneric descriptions ARE allowed in financing statements.
• The reasoning behind this:
• – The security agreement is about the contract between the Debtor and the Secured Party, and it’s important to ensure that the contract is precise and accurate, to identify the parties’ rights and obligations.
• – But, the financing statement, remember, is just for notice purposes.
• – So, the UCC says that simply putting “all assets” in the financing statement is generally sufficient for filing and perfection purposes because it gives notice to subsequent creditors that a security interest exists.
• – Subsequent creditors can then investigate further to determine the scope of that security interest.

Question 17

FINANCING STATEMENTS

The relationship between after-acquired collateral or future advances with financing statements

Answer 17

There is NO need to include any after-acquired collateral or future advance clauses in a financing statement because the statement is for purposes of NOTICE.

Question 18

FINANCING STATEMENTS

Effect of errors or omissions in a financing statement

Answer 18

A financing statement substantially satisfying the requirements of this subchapter is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.

Question 19

FINANCING STATEMENTS

Special error rules for a debtor’s name

Answer 19

A financing statement that fails sufficiently to provide the name of the debtor is seriously misleading.

EXCEPTION: If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor, the name provided does not make the financing statement seriously misleading

Question 20

POST-FILING EVENTS

For what period of time is an initial financing statement valid?

Answer 20

Initial financing statements are generally valid for five years.

Question 21

POST-FILING EVENTS

Effect of lapse on perfection

Answer 21

Once the financing statement lapses, the security interest is not perfected anymore (unless the secured party did something else to get perfected).

Question 22

POST-FILING EVENTS

When must a continuation statement be filed to extend a financing statement for five more years?

Answer 22

A continuation must be filed only within six months before the end of the five years of the initial filing statement.

Question 23

POST-FILING EVENTS

What is the impact of a debtor changing her name after the financing statement is filed?

Answer 23

The financing statement becomes seriously misleading (because the debtor’s name is wrong) if it is not amended within four months. The date the debtor changes her name triggers this four-month timer. Within these four months, the financing statement MUST be amended, otherwise the perfected security interest lapses. This four-month period is somewhat of a grace period—it is only invalidated at the END of the time period, so it remains a perfected interest up until the end of the four months.

Question 24

POST-FILING EVENTS

What is the impact of a debtor moving to a different state after the financing statement is filed?

Answer 24

The secured party must file in the new state within four months of the date the debtor moved or the perfected security interest lapses.

Question 25

POST-FILING EVENTS

How is a security interest in proceeds perfected?

Answer 25

A security interest in proceeds is perfected automatically, BUT it becomes unperfected on the 21st day after the security interest attached UNLESS the following conditions are met:
1. a filed financing statement covers the original collateral;
2. the proceeds are collateral in which a security interest may be perfected by filling in the office in which the financing statement has been filed; AND
3. the proceeds are not acquired with cash proceeds
OR one of the following is true:
(A) the proceeds are identifiable cash proceeds or
(B) the financing statement already identified the proceeds as collateral/it is amended within 20 days to include the proceeds as collateral

Question 26

POSSESSION

Types of collateral in which a security interest may be perfected by possession

Answer 26

A secured party may perfect a security interest in tangible negotiable documents, goods, instruments, money or tangible chattel paper by taking possession of the collateral

Question 27

POSSESSION

Timing and duration of perfection with possession

Answer 27

If perfection of a security interest depends upon possession of the collateral by a secured party, perfection occurs no earlier than the time the secured party takes possession and continues only while the secured party retains possession.

Question 28

POSSESSION

The one good that cannot be perfected by possession

Answer 28

Motor vehicles

Question 29

POSSESSION

Impact of continuous perfection using multiple perfection methods

Answer 29

• A security interest is perfected continuously if it is originally perfected by one method under this chapter and is later perfected by another method under this chapter, without an intermediate period when it was unperfected.
• Thus, as long as there’s no “gap” in between methods of perfecting the security interest, it remains perfected.

Question 30

POSSESSION

Requirements of third party possession for perfection

Answer 30

• For third-party possession to work for perfection of a security interest, the third party must authenticate (i.e., sign) a written record (document) that it is possessing for the secured party.
• It also has to be a legitimate, independent third party.
• So, not the debtor (or anyone substantially controlled by the debtor), and not the secured party (well, of course, the secured party can possess, but then it’s not “third-party” possession).

Question 31

AUTOMATIC PERFECTION

When does a PMSI automatically perfect?

Answer 31

A PMSI automatically perfects when it attaches if it is a purchase-money security interest in consumer goods, except [for motor vehicles which must be perfected by notation on the certificate of title for most security interests where a single car or truck is the collateral].

Question 32

AUTOMATIC PERFECTION

What are the two other primary ways of automatic perfection?

Answer 32

1. an assignment of accounts which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts; [and]
2. a security interest created by the assignment of a health-care-insurance receivable to the provider of the health-care goods or services

Question 33

CONTROL

Requirements for automatic perfection of deposit accounts

Answer 33

A secured party has control of a deposit account if:

1. the secured party is the bank with which the deposit account is maintained;
2. the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or
3. the secured party becomes the bank’s customer with respect to the deposit account.

NOTE: A secured party that has satisfied these requirements has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.