Perfection of Secured Transactions Flashcards
Perfection
Perfection establishes a secured party’s rights in the collateral against 3rd parties
- The process by which the secured party gives notice to the entire world of its security interest, which is key to determining priority
A security interest is perfected if it has attached, and if all of the requirements for perfection have been met
- If the requirements are met before attachment, then upon attachment the security interest is perfected.
- Perfection of a security interest is most commonly done by:
- filing;
- possession;
- control; or
- automatic perfection.
Perfection - Filing
Filing a financing statement in a public office is the most common way to perfect a security interest
Filing can be done:
- usually in the Secretary of State’s Office; or
- in limited circumstances (when the collateral consists of fixtures), in the Office of the County Clerk (land records) in the county where the land to which the collateral is attached is located
If the secured party is perfecting by filing a financing statement, the security interest is perfected only if the financing statement is filed in the correct office in the correct state
The law governing perfection of a security interest is the law of the jurisdiction where the debtor is located
- A debtor who is an individual is located at the individual’s principal residence
- A debtor that is a non-registered organization is deemed to be located at its place of business
- If the debtor has more than one place of business, it is deemed located at its chief executive office
- A debtor that is a registered organization is deemed to be located in its state of organization
- A registered organization is one as to which a state must maintain a public record showing the organization to have been organized
In certain instances, a mechanism other than a financing statement is required for perfection
- The most common instance is notation on a certificate of title to perfect a security interest in motor vehicles
Perfection - Filing (financing statement)
A filing must provide notice that a person may have a security interest in the collateral indicated
The security agreement itself need not be filed; instead, the financing statement is filed
A financing statement must include [§ 9-502(a)]:
- the name of the debtor;
- the name of the secured party or the secured party’s representative; and
- a description of the collateral covered by the financing statement.
- A financing statement sufficiently describes the collateral it covers if it provides [§ 9-504]:
- a description of the collateral that reasonably identifies what is described; or
- an indication that the financing statement covers all assets or all personal property.
- A supergeneric collateral description in a financing statement is sufficient.
- A financing statement must be authorized by the debtor.
- A security agreement is authorization for the financing statement
Perfection - Filing (fixtures)
In addition to the requirements of a financing statement, a fixture filing must also:
- indicate that it covers fixtures;
- indicate that it is to be filed in the real property records;
- provide a description of the real property to which the fixture is related; and
- provide the real property owner’s name, if different than the Article 9 debtor
Perfection - Filing (effectiveness)
If a financing statement is filed in the wrong place, does not include the required information, or is not authorized by the debtor, it is ineffective
- An ineffective financing statement does not perfect a security interest.
- A financing statement containing minor errors will still be effective, unless the errors make the financing statement seriously misleading
- Failure to sufficiently provide the name of the debtor is seriously misleading.
- Standard Search Logic Exception: If a search of the records of the financing office under the debtor’s correct name, using the office’s standard search logic, would disclose a financing statement that fails sufficiently to provide the name of the debtor, the financing statement is not misleading
Perfection - Filing (timing)
A financing statement may be filed before a security agreement is made or a security interest otherwise attaches
Perfection - Filing (changes)
A filed financing statement remains effective even if the collateral is sold, exchanged, leased, or otherwise disposed of, and in which a security interest continues, even if the secured party knows of or consents to the disposition
Perfection - Filing (proceeds)
Proceeds: A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered
- Automatic perfection for proceeds continues for only 20 days after attachment (i.e., receipt of the proceeds by the debtor), unless:
- a filed financing statement covers the original collateral, the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed, and the proceeds are not acquired with cash proceeds;
- the proceeds are identifiable cash proceeds; or
- the security interest in proceeds is otherwise perfected when the security interest attaches to the proceeds or within 20 days thereafter
Perfection - Filing (name changes)
If the information in the financing statement becomes seriously misleading only after the financing statement is filed, the financing statement will remain effective unless the debtor changes its name or the original collateral is exchanged for proceeds.
- If a debtor changes its name, resulting in a financing statement that is seriously misleading, the financing statement will only be effective to perfect security interests in collateral acquired within four months of the name change, unless an amendment to the financing statement correcting this is filed within four months of the name change
Perfection - Filing (debtor moves)
A financing statement can also become ineffective if the debtor moves
If the debtor moves to another state, the secured party must file a new financing statement in the new state within four months of the debtor’s move
- If the secured party does so, it is continuously perfected, and its priority will relate back to the date it filed in the debtor’s original state
- If the secured party does not file in the debtor’s new state within four months of the debtor’s move, the secured party becomes unperfected in all of the collateral covered by the financing statement
Perfection - Filing (lapse)
A filed financing statement is effective for five years after the date of filing
- If the financing statement expires without a continuation statement being filed, the financing statement will lapse
- Upon lapse, the financing statement becomes ineffective, and any security interest that was perfected by the financing statement becomes unperfected
- A continuation statement must be filed within six months before the expiration of the five-year period.
- A continuation statement extends the effectiveness of the original filing statement for another five-year term from the date the financing statement would have become ineffective absent the filing of the continuation statement
- Continuation statements may be filed repeatedly to extend the effectiveness of the financing statement.
Perfection - Possession
A secured party may also perfect a security interest by taking possession of the collateral
Perfection by possession only applies to the following types of collateral:
- tangible negotiable documents;
- goods;
- instruments;
- money; or
- tangible chattel paper.
The secured party normally perfects by taking possession of the collateral itself
- Code provides for the secured party to have a 3rd party possess the collateral on its behalf, so long as the third-party authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit
A secured party who has taken possession of collateral must use reasonable care in its custody and preservation
- Reasonable expenses incurred in the custody and preservation of the collateral may be charged to the debtor
Perfection - Control
A secured party may also perfect a security interest by taking control of the collateral
Taking control of the collateral applies only to:
- investment securities;
- A secured party has control of a certificated security in bearer form if he has possession of the security
- A secured party has control of a certificated security in registered form if he has possession of the security, and the certificate is endorsed to the secured party or registered in the name of the secured party
- A secured party has control of an uncertificated security if he has possession of the security or the issuer agrees that it will comply with instructions from the secured party.
- letter-of-credit rights;
- A secured party has control of a letter-of-credit right if the issuer has consented to an assignment of proceeds of the letter of credit.
- deposit accounts; and
- A security interest in a deposit account is perfected only by control. Such perfection is effective only when, and for as long as, the secured party has control
- A secured party has control of a deposit account if:
- the secured party is the bank with which the deposit account is maintained;
- the debtor, secured party, and bank have agreed in an authenticated record that the bank will follow the secured party’s instructions directing the disposition of the funds in the deposit account without further consent by the debtor; or
- the secured party becomes the bank’s customer with respect to the deposit account.
- electronic chattel paper
Perfection - Automatic
There are limited instances in which perfection is automatic
The most common is when the security interest is a PMSI in consumer goods, which perfects upon attachment
- automatic as soon as the security interest attaches and remains effective permanently (excluding motor vehicles and fixtures)
- Automatic perfection also sometimes occurs in other situations, including the assignment of accounts or payment intangibles that does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles
- The Code sometimes provides for grace periods in various instances of 20 days, or sometimes for four months, in which a secured party has a grace period in which to take further perfection steps
- These grace periods, in a sense, provide a type of automatic perfection during the grace period, albeit a temporary granting of automatic perfection
Perfection - Multiple Methods
If a security interest is perfected by one method, and later perfected by another method without an intermediate period of being unperfected, the security interest is perfected continuously
