Perfection of Security Interest

Question 1

What is Perfection?

Answer 1

Attachment establishes the secured party’s right to the collateral as against the debtor. HOWEVER, other parties may also rights in the collateral (for example, subsequent purchasers, unsecured creditors, other priority creditors). To acquire maximum priority in the collateral over most such third parties, the secured party must “perfect.”

• Time of Perfection: A security interest is NOT enforceable against anyone until it has attached to the collateral. If all of the steps for perfection are taken before the security interest has attached, perfection will occur upon attachment.

Question 2

What are the Main Ways that a Party can Perfect a Security Interest?

Answer 2

1. Perfection by Filing
2. Perfection by Taking Possession
3. Perfection by Taking Control
4. Automatic Perfection
5. Temporary Perfection

Question 3

How is Perfection by Filing done?

Answer 3

A secured party may obtain perfection by filing (either in writing or electronically) a financing statement.

Question 4

What are the Main Content Requirements for a Financial Statement?

Answer 4

The financing statement must contain:

1. The debtor’s name and mailing address
2. The secured party’s name and mailing address
3. A description of the collateral covered by the financing statement

Question 5

What Kinds of Goods CANNOT be Perfected by Filing?

Answer 5

1. Deposit Accounts
2. Money

Question 6

What is the Effect of an Error in the Debtor’s Name in a Financial Statement?

Answer 6

Minor errors in the debtor’s name won’t invalidate a financing statement, but seriously misleading errors will. A financing statement 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.

Errors by Filing Office: The failure of the filing office to correctly index a financing statement DOES NOT impact its effectiveness.

Question 7

What happens if the Debtor Changes Their Name that is Listed on the Financial Statement?

Answer 7

If the debtor’s name as indicated on a filed financing statement becomes insufficient and thus seriously misleading (for example, because the debtor changed their name), the financing statement is effective only against collateral acquired by the debtor before the name became insufficient and within 4 months after.

For collateral acquired after the 4-month period, the secured party must refile using the debtor’s correct name.

Question 8

Does a Financing Statement Need to Mention After-Acquired Property?

Answer 8

The financing statement need not mention after-acquired property to perfect a security interest in such property if the description in the financing statement is broad enough to cover the after-acquired property.

Question 9

What are the Additional Requirements for Real Property-Related Financial Statements?

Answer 9

In addition to the normal requirements, financing statements that cover real property-related collateral (minerals, timber to be cut, and fixtures) must also contain:

1. A description of the related real property
2. The name of the record owner (if not the debtor)
3. An indication that it is to be filed in the real property records

Question 10

What is the General Rule for the Place to File the Financial Statement?

Answer 10

Generally, filing must be done “centrally” in the office of the secretary of state.

Question 11

What is the Exception to the General Rule for the Place to File the Financial Statement?

Answer 11

If the collateral is timber to be cut or minerals, or if the collateral is or is to become a fixture and the filing is a fixture filing, filing is in the county where a mortgage on real estate is filed (“locally”).

• Fixture Filing — In the case of fixture filing, it is safest to file both in the real estate records and at the place that would be proper if the goods were not fixtures.

Question 12

What is Perfection by Taking Possession of the Collateral?

Answer 12

Security interests in most types of collateral can be perfected simply by taking possession of the collateral.

Question 13

When is the Time of Perfection, when Dealing with Perfection by Taking Posession?

Answer 13

Where the secured party takes actual possession of the collateral, the security interest is perfected from the moment of possession and continues as long as possession is retained.

Question 14

When is the Time of Perfection, when Dealing with Collateral in Hands of Bailee and with Perfection by Possession?

Answer 14

Where the collateral (other than certificated securities and goods covered by a document) is in the hands of a bailee, the secured party is deemed to be in possession from the moment the bailee authenticates a record acknowledging that it is holding the collateral for the secured party’s benefit.

Question 15

What Kinds of Collateral CANNOT be Perfected by Possession?

Answer 15

Security interests in:

1. General Intangibles
2. Deposit Accounts
3. Nonnegotiable Documents
4. Electronic Chattel Paper
5. Certificate of Title Goods and
6. Accounts

Question 16

What is Perfection by Control?

Answer 16

Security interests in most types of collateral can be perfected simply by taking possession of the collateral.

Question 17

TRUE or FALSE: Security interests in nonconsumer deposit accounts can ONLY be perfected by control.

Answer 17

TRUE. Security interests in nonconsumer deposit accounts can only be perfected by control (unless they’re perfected as proceeds of collateral)

Question 18

What are the Main Methods of Obtaining Control for Perfection by Control?

Answer 18

1) Nonconsumer Deposit Accounts: The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account.

If the secured party is NOT such a bank, it may obtain control over a nonconsumer deposit account by either:

• Putting the deposit account in the secured party’s name
• Agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party’s orders regarding the deposit account without requiring the debtor’s consent

2) Investment Property: Basically, a secured party has control of an item of investment property when the secured party has taken whatever steps are necessary to be able to have the investment property sold without further action from the owner.

3) Electronic Chattel Paper: A party has control over electronic chattel paper when a system put in place to show the transfer of interests in chattel paper reliably establishes the secured party as the assignee.

Question 19

What is Automatic Perfection?

Answer 19

In certain situations, a security interest is automatically perfected upon attachment.

The most common such situation is a purchase money security interest in consumer goods. A PMSI in consumer goods is perfected as soon as it attaches.

• Limitations — Automobiles: A security interest in motor vehicles can be perfected only by notation on the vehicle’s certificate of title, and a PMSI in fixtures will have priority over an encumbrancer of the real estate only if the PMSI holder files a fixture filing

Question 20

What is the Rule for Perfection of Motor Vehicles?

Answer 20

Under the state’s certificate of title law, security interests in motor vehicles required to be titled **can only be perfected by notation on the certificate of title **issued by the state. Perfecting by another method won’t work.

• Exception — Dealers: Security interests created by dealers in vehicles held in inventory for sale or lease are perfected by filing a financing statement under the ordinary Code rules, even if a certificate of title covering the vehicle is outstanding.

Question 21

What are the Two Main Areas of Temporary Perfection?

Answer 21

1. **Perfection for Proceeds **
2. Temporary Perfection for Instruments, Negotiable Documents, and Certificated Securities

Question 22

What are the Rules for Temporary Perfection for Proceeds?

q

Answer 22

If a secured party has a perfected security interest in collateral, the secured party automatically has a perfected security interest in any proceeds of the** collateral for 20 days** after receipt of the proceeds.

The security interest in proceeds will continue to be perfected beyond the 20 days if:

A) The proceeds are identifiable cash proceeds (this is sometimes called the “cash proceeds” rule)

B) The security interest in the original collateral was perfected by filing:

1. A financing statement;
2. A security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for the original collateral AND
3. The proceeds were not purchased with cash proceeds of the collateral (this is sometimes called the “same office” rule)

C) The security interest in the proceeds is perfected within the 20-day period

Question 23

What are the Rules for Temporary Perfection of Instruments, Negotiable Documents, and Certified Securities?

Answer 23

New Value: Where new value is given under an authenticated security agreement for instruments, negotiable documents, or certificated securities, perfection is valid for 20 days after attachment; neither filing nor possession is necessary

Delivery of Collateral to Debtor for Disposition: Where the creditor who has perfected their security interest by possession delivers instruments, negotiable documents, certificated securities, or goods in the possession of a bailee to the debtor for disposition (for example, where the creditor gives the debtor a promissory note, which is serving as collateral, so that the debtor can present the note to its maker for payment), perfection is valid for 20 days, after which the creditor must reperfect (by filing or taking possession) or lose their perfection.

Question 24

What happens if there is a Chance in Use of the Collateral?

Answer 24

If the debtor changes its use of the collateral (for example, from equipment to inventory), the filed financing statement (with the description of “equipment”) remains effective to perfect the security interest. The secured creditor has no duty to monitor the collateral or to amend the financing statement, even if the creditor knows that the description is seriously misleading.

Question 25

How Long is a Financial Statement Valid for Generally?

Answer 25

A financing statement is valid for 5 years.

Question 26

How can a Financial Statement be Renewed?

Answer 26

A financing statement is valid for 5 years. A continuation statement may be filed, good for an additional 5 years. The continuation statement can only be filed within 6 months before the lapse of the filed statement. The authorization of the debtor is not required for a continuation statement; the secured party may authorize it.

Question 27

What is a Termination Statement?

Answer 27

Generally, a secured party is not obligated to terminate a financing statement. However, if there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, or if the debtor didn’t authorize the filing of the initial financing statement, the secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor.

Question 28

What is the Timing for Termination Statement for Consumer Goods?

Answer 28

In the case of consumer goods, the secured party must file the termination statement within 1 month after there is no obligation or commitment, or if the debtor demands it, within 20 days of the demand.