Perfection of a Security Interest

Question 1

What is perfection generally?

Answer 1

It secures the creditor’s rights against third parties with rights in the collateral.

Question 2

What are the five methods of perfection?

Answer 2

(1) Filing a financing statement
(2) Possession
(3) Control
(4) Automatic perfection
(5) Temporary perfection

Question 3

Can a security interest be perfected before it attaches?

Answer 3

No.

Question 4

What kinds of collateral may be perfected by filing a financing statement?

Answer 4

All kinds of collateral except deposit accounts and money (unless the deposit accounts or money are proceeds of the original perfected collateral).

Question 5

If filing by financing statement, what does the UCC require?

Answer 5

The UCC requires notice filing of a financing statement (triggering an inquiry by the third party into the particularities of the security agreement). The financing statement must contain:

(1) The debtor’s name and mailing address
(2) The secured party’s name and mailing address
(3) An indication of the collateral covered by the financing statement

Question 6

What additional requirements exist for financing statements covering real property-related collateral (minerals, timber, fixtures)?

Answer 6

(1) Indication that it will be filed in the real property records
(2) A description of the real property to which the collateral is related
(3) Name the real property’s record owner if different than debtor

Question 7

What name should be used for an individual debtor in a financing statement?

Answer 7

Individual debtors should not use a trade name.

The majority of jurisdictions follow the “only if” rule: If the debtor has an unexpired driver’s license issued by the state in which the financing statement will be filed, the financing statement must include the name as indicated on the license. If the debtor does not have that, the UCC says they should use their individual name (undefined in the code) or personal name and surname.

A minority of jurisdictions follow a safe harbor rule in which the financing statement may use any of the above names (unexpired driver’s license, individual name, or personal name and surname).

Question 8

What debtor name should be used if the debtor is a registered organization (corporation, limited partnership, LLC)?

Answer 8

The debtor’s name is insufficient if it does not match the name on the public organic record most recently filed in the jurisdiction of organization. The trade name is insufficient.

Question 9

Will the financing statement be effective if there are errors in the debtor’s name?

Answer 9

An error in the debtor’s name will not invalidate the financing statement if it is not a seriously misleading error. It is not seriously misleading if it would be discovered in a filing office search under the debtor’s correct name, using the filing office’s standard search logic.

Question 10

Will the financing statement be effective if there are errors in the debtor’s name?

Answer 10

Because financing statements are generally not indexed under the secured party’s name, an error in their name is unlikely to make it misleading.

Question 11

What happens if a debtor changes their name after the financing statement is filed?

Answer 11

If a debtor’s name in a financing statement is rendered seriously misleading, it is effective only against collateral acquired by the debtor before the name became insufficient and for four months after. The secured party must refile using the correct name to perfect a security interest in collateral acquired after the four month period.

Question 12

Will a financing statement be effective absent the address of either the debtor or the secured party?

Answer 12

Yes, if accepted by the filing office.

Question 13

When does a filing statement sufficiently indicate collateral?

Answer 13

If it identifies it specifically or by category, type, or any method by which the identity of the collateral is objectively determinable. Unlike descriptions of collateral for purposes of a security agreement, a description saying “all debtor’s assets” or “all debtor’s personal property” is sufficient.

Question 14

How is a financing statement authorized?

Answer 14

The financing statement must be authorized by the debtor in an authenticated record (cannot be oral) to be effective (no signature required).

Exception: financing statements solely for agricultural liens need not be authorized by the debtor.

Question 15

Can authorization occur after filing?

Answer 15

Yes

Question 16

What is ipso facto authorization?

Answer 16

The debtor automatically authorizes a financing statement if they authenticate a security agreement covering the same collateral.

Question 17

May the security agreement itself be filed as the financing statement?

Answer 17

Yes, if it contains all the requirements for a financing statement.

Question 18

Where must the financing statement be filed?

Answer 18

Generally: centrally with the secretary of state

For timber to be cut, minerals or fixtures: Filing is locally, in the office where a mortgage on real property would be filed. If unsure, file both places.

Even though the security interest in a transmitting utility’s poles and towers would otherwise be considered an interest in a fixture, filing should be centrally with the secretary of state.

Question 19

For what period is filing of a financing statement effective?

Answer 19

Five years.

Exceptions:

(1) filings for transmitting utilities continue until terminate
(2) a recorded real property mortgage covering fixtures lasts as long as the mortgage
(3) filings in connection with a manufactured home or public finance transaction is effective for 30 years

Question 20

How may a five year effective period for a financing statement be extended?

Answer 20

During the last six months of the effective period of the filing, a continuation statement may be filed extending it for another 5 years.

Question 21

Does a debtor need to authorize a continuation statement?

Answer 21

No, the secured party is the only one who needs to authorize it.

Question 22

When must a termination statement be filed?

Answer 22

When there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, upon receipt of an authenticated demand by the debtor, the secured party must, within 20 days, provide the debtor with a termination statement. If the collateral includes consumer goods, then within 1 month after there is no outstanding obligation, or 20 days after authenticated demand, a termination statement must be filed.

Question 23

What is the consequence of a secured party’s failure to comply with requirements to file a termination statement?

Answer 23

The secured party is liable to the debtor for $500 and any loss caused.

Question 24

What happens if no termination statement is filed?

Answer 24

The financing statement remains effective for the entire five years, even if the original obligation has been satisfied.

Question 25

How are security interests in motor vehicles perfected?

Answer 25

Under a state’s certificate of title law, security interests in motor vehicles required to be titled (except security interests created by dealers who hold the motor vehicles for sale or lease) are perfected by notation on the certificate of title issued by the state. No filing or possession is required.

Question 26

How are security interests created by dealers in leased motor vehicles or motor vehicles held in inventory for sale or lease perfected?

Answer 26

By filing under the ordinary code rules.

Question 27

How are security interests in domestic aircraft and railroad rolling stock perfected?

Answer 27

By filing with appropriate federal agencies.

Question 28

What kinds of collateral cannot be perfected by possession by the secured party?

Answer 28

Accounts, certificate of title goods, deposit accounts, nonnegotiable documents, electronic chattel paper, general intangibles

Question 29

When does perfection by actual possession occur and for how long does it last?

Answer 29

Perfection occurs from the moment of possession without relation back to the time of attachment and continues only so long as possession is retained.

Question 30

When does perfection by possession of collateral in the hands of a bailee occur?

Answer 30

The secured party will be deemed in possession from the moment the bailee authenticates a record acknowledging that it is holding the collateral for the benefit of the secured party.

Question 31

What kind of security interest can only be perfected by possession?

Answer 31

A security interest in money.

Question 32

What security interests may be perfected by control?

Answer 32

Investment property, nonconsumer deposit accounts, and electronic chattel paper

Question 33

What security interests can only be perfected by control?

Answer 33

Security interests in nonconsumer deposit accounts

Question 34

Under which circumstances does a security interest automatically perfect on attachment?

Answer 34

(1) Purchase money security interests in consumer goods
(2) Small scale assignments of accounts or payment intangibles
(3) sales of payment intangibles or a promissory note
(4) security interest created by assignment of a beneficial interest in a decedent’s estate
(5) Some investment property

Question 35

When does a PMSI in consumer goods perfect?

Answer 35

Automatically on attachment EXCEPT a motor vehicle constituting consumer goods or a consumer good that is or is to become a fixture.

Question 36

When do small-scale assignments of accounts or payment intangibles perfect?

Answer 36

Automatically where they do not alone, or in conjunctions with other assignments to the same assignee, transfer a significant part of the assignor’s outstanding accounts of payment intangibles

Question 37

In which cases is a security interest in investment property automatically perfected?

Answer 37

(1) Debtor is a securities intermediary
(2) The debtor purchased the asset through a securities intermediary and has not paid – the intermediary-creditor has an automatically perfected interest in the purchase price
(3) Someone who deals in securities or similar instruments purchases a certificated security from another dealer under an agreement calling for delivery against payment – the deliverer has an automatically perfected interest in the payment of the price

Question 38

Which state do you file a financing statement in where multiple states are involved in the transaction?

Answer 38

The state where a debtor is located. For individuals, this is the state of principal residence. For registered organizations, this is the state of organization. For unregistered organizations, this is the place of business (the chief executive office if more than one place of business). For farm products, the agricultural lien should be filed in the state where the farm products are located.

Question 39

What if a debtor moves states after a financing statement is properly filed?

Answer 39

The security interest will become unperfected 4 months after the debtor’s move unless a financing statement is filed in the new state.

Question 40

What if the collateral is transferred to a new debtor in a different state after a financing statement is properly filed?

Answer 40

The security interest will become unperfected 1 year from the move unless a financing statement is filed in the new state.

Question 41

When does a secured party perfect their security interests in proceeds for collateral?

Answer 41

If a secured party has a perfected security interest in collateral, their security interest in proceeds from that collateral will automatically perfect and that perfection will last for 20 days. The secured party must take new action to continue the perfection before that time expires, unless

• • (1) the proceeds are identifiable cash proceeds, or
• – (2) [the same office rule]
  (a) the security interest in the original collateral was perfected by filing a financing statement,
  (b) a security interest in the type of collateral constituting proceeds would be perfected by filing in the same place as the financing statement for the original collateral, and
  (c) the proceeds were not purchased with cash proceeds of the collateral

Question 42

Does a financing statement need to be amended if the debtor changes their use of the collateral (e.g., changes from equipment to inventory)?

Answer 42

No, the secured creditor has no duty to monitor the collateral or amend the financing statement even if it knows that the debtor’s use has changed.