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Secured Transactions > PERFECTION OF SECURITY INTEREST > Flashcards

PERFECTION OF SECURITY INTEREST Flashcards

1
Q

IN GENERAL

A
  • Attachment establishes secured party’s rights to the collateral as against the debtor.
  • However, other parties may also have rights in the
    collateral (ex. subsequent purchasers, unsecured
    creditors, other priority creditors).
  • To acquire max priority in collateral over most such 3rd parties, secured party must “perfect.”
  • 5 methods of perfection:
    (1) filing;
    (2) taking possession of the collateral;
    (3) control;
    (4) automatic perfection; and
    (5) temporary perfection.
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2
Q

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 b/f security interest has attached, perfection will occur upon attachment.
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3
Q

Tip

A
  • A key point to remember about perfection is that a security interest can’t be perfected b/f it attaches to the collateral. Ex. if creditor has filed a financing statement but has not yet given value to debtor, perfection is not complete until attachment is complete (when value is given). Thus, attachment & perfection can occur simultaneously.
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4
Q

AUTOMATIC PERFECTION—PMSI IN
CONSUMER GOODS

A
  • In certain situations, a security interest is automatically perfected upon attachment.
  • The most common such situation is a PMSI in consumer goods.
  • A PMSI in consumer goods is perfected as soon as it attaches
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5
Q

Example

A

D borrows money from S Loan Company for the purpose of buying a new dining room set for D’s home. D uses the money from S Loan Company to buy the dining room set. S obtains a security interest in the dining room set. The security interest is automatically perfected upon attachment.

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6
Q

Limitations

A
  • A security interest in motor vehicles can be perfected only by notation on vehicle’s title, & a PMSI in fixtures will have priority over an encumbrancer of the real estate only if PMSI holder files a fixture filing
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7
Q

Tip

A

Remember that the only type of PMSI that is automatically perfected is a PMSI in consumer goods.

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8
Q

PERFECTION BY TAKING POSSESSION
(PLEDGE)

A
  • Security interests in most types of collateral can be perfected simply by taking possession of the collateral.
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9
Q

Time of Perfection

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

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

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10
Q

Collateral that Cannot Be Pledged

A
  • Security interests in general intangibles, deposit accounts, nonnegotiable docs, electronic chattel paper, certificate of title goods, & accounts cannot be perfected by possession.
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11
Q

Tip

A

Note that taking possession can simultaneously satisfy the requirements for attachment & perfection; that is, possession may be the last thing needed for attachment, and attachment plus possession results in perfection.

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12
Q

PERFECTION BY CONTROL

A
  • Security interests in investment property, nonconsumer deposit accounts, & electronic chattel paper may be perfected by “control.”
  • Note that security interests in nonconsumer deposit accounts can only be perfected by control (unless they’re perfected as proceeds of collateral).
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13
Q

Methods of Obtaining Control: Nonconsumer Deposit Accounts

A
  • The bank in which a nonconsumer deposit account is maintained automatically has control over the deposit account.
  • If secured party is not such a bank, it may obtain control over a nonconsumer deposit account by either:
    (1) Putting deposit account in secured party’s name,
    or
    (2) Agreeing in an authenticated record w/ debtor & bank in which deposit account is maintained that bank will comply w/ secured party’s orders regarding the deposit account w/o requiring debtor’s consent
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14
Q

Methods of Obtaining Control: Investment Property

A
  • Secured party has control of investment property when secured party has taken necessary steps allowing investment property to be sold w/o further action from owner.
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15
Q

Methods of Obtaining Control: Electronic Chattel Paper

A
  • Party has control over electronic chattel paper when a system for showing transfer of interests in chattel paper reliably establishes secured party as assignee.
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16
Q

Example

A

An example of a system that meets this standard is one in which secured party has the authoritative copy of the records constituting the electronic chattel paper (ex. computer file), that copy identifies the secured party as assignee of record, & any other copy of/amendments to the records are marked as such.

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17
Q

PERFECTION FOR MOTOR VEHICLES

A
  • Under the state’s certificate of title law, security interests in motor vehicles required to be titled can only be perfected by notation on title issued by the state.
  • Perfecting by another method won’t work.
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18
Q

Exception—Dealers

A
  • Security interests created by dealers in vehicles held in inventory for sale/lease are perfected by filing a financing statement, even if a certificate of title covering vehicle is outstanding.
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19
Q

PERFECTION BY FILING: Records to Be Filed

A
  • Secured party may obtain perfection by filing (writing/electronically) a financing statement.
  • Financing statement must contain:
    (1) Debtor’s name & mailing address,
    (2) Secured party’s name & mailing address, and
    (3) Description of collateral covered by financing
    statement
  • Security interest may be perfected by filing as to all kinds of collateral EXCEPT deposit accounts & money.
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20
Q

Debtor’s Name

A
  • Financing statements are indexed under debtor’s
    name.
  • In most states, if debtor is an individual w/ an unexpired driver’s license issued by the state where financing statement is to be filed, debtor’s name on financing statement must match license.
  • If debtor doesn’t have such a license, then financing
    statement may include debtor’s individual name/ debtor’s personal name & surname.
  • If debtor is a registered org (ex. corp/LP), debtor’s
    name must match its most recent public organic record (publicly available record that forms/organizes org).
  • Note: Use of debtor’s trade name is insufficient
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21
Q

Effect of Error in Debtor’s Name

A
  • Minor errors in 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 debtor’s correct name, using filing office’s standard search logic.
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22
Q

Errors by Filing Office

A
  • Failure of filing office to correctly index a financing statement does not impact its effectiveness
23
Q

Debtor Name Change

A
  • If debtor’s name as indicated on a filed financing statement becomes insufficient & thus seriously
    misleading (ex. debtor changed their name), financing statement is effective only against collateral acquired by debtor b/ name became insufficient & w/in 4 months after.
  • For collateral acquired after 4-month period, secured party must refile using debtor’s correct name.
24
Q

Tip

A

Although Article 9 provides specific rules for how a
debtor’s name must be listed on a financing statement, remember the financing statement becomes invalid only if name is seriously misleading. If the filing easily could be found despite the error, financing statement will stand.

25
Q

Description of Collateral

A
  • As w/ an authenticated security agreement, description of collateral in a financing statement is sufficient if it reasonably identifies collateral, which can be broadly by category/type (ex.“equipment”) or specifically (ex. by serial number).
  • However, unlike requirements for an authenticated security agreement, a financing statement may contain a supergeneric description of collateral, such as “all assets.”
26
Q

After-Acquired Property

A
  • Financing statement need not mention after acquired property to perfect a security interest in such property if description in financing statement is broad enough to cover the after-acquired property.
27
Q

Secured Party’s Name

A
  • Because searches aren’t conducted under secured
    party’s name, an error in secured party’s name will not make financing statement seriously misleading.
28
Q

Real Property-Related Financing Statements

A
  • In addition to requirements discussed above (names & addresses of debtor & secured party & description of collateral), financing statements that cover real property-related collateral (minerals, timber to be
    cut, & fixtures) must also contain:
    (1) description of the related real property,
    (2) name of the record owner (if not debtor), and
    (3) an indication that it is to be filed in real property records.
29
Q

Debtor Must “Authorize” Filing of Financing
Statement

A
  • For financing statement to be effective, debtor must
    authorize filing in any signed writing either before/after it is filed.
  • In addition, debtor automatically authorizes financing statement if debtor authenticates financing statement/authenticates a security agreement covering same collateral as financing statement.
30
Q

Authenticated Security Agreement Itself May Be
Filed

A
  • Authenticated security agreement itself may be filed as financing statement if parties so desire.
  • If it’s filed, it must contain all elements described above
31
Q

Effect of Missing Address

A
  • If a financing statement that doesn’t contain debtor’s and/or secured party’s mailing address is accepted by filing office, financing statement is effective despite lack of address(es).
32
Q

Place of Filing: General Rule—File Centrally

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

Exception—Timber to Be Cut, Minerals, & Fixtures
- If collateral is timber to be cut/minerals, or if collateral is/is to become a fixture & filing is a fixture filing, filing is in county where a mortgage on real estate is filed (“locally”).
- In the case of fixture filing, it is safest to file both in
the real estate records & at place that would be proper if goods were not fixtures

33
Q

WHICH STATE’S LAW GOVERNS
PERFECTION?

A
  • The question of which state’s law governs perfection of security interest is especially important when a security interest is perfected by filing, because filing must occur in the proper state.
34
Q

General Rule—Law of State Where Debtor Is
Located Governs Perfection

A
  • The law of the state where debtor is located generally governs perfection of the security interest.
  • Therefore, secured party must generally file the financing statement in that state.
35
Q

Location of Debtor

A
  • If debtor is an individual, they are located in the state of their principal residence.
  • If debtor is a registered org (ex. corp/LLC/LP), debtor is located in the state where its articles of incorporation are filed
  • If debtor is an unregistered org (ex. GP), it is located
    at its place of business if it only has one place of business/chief executive office if it has more than one place of business.
36
Q

Exceptions: Possessory Security Interests and Security

A

Interests in Fixtures & Timber to Be Cut
- Perfection of possessory security interests, as well as security interests in fixtures & timber to be cut, is governed by the law of the state in which the collateral is located.

37
Q

Exceptions: Goods Covered by Certificate of Title

A
  • If goods are covered by a certificate of title, the law of the state issuing the most recent certificate of title governs perfection.
38
Q

Exceptions: Deposit Accounts

A
  • If collateral is a deposit account, unless debtor’s
    agreements w/ bank provide otherwise, the law of
    the state in which the bank has its chief executive office governs perfection.
39
Q

Exceptions: Investment Property

A
  • If collateral is a certificated security, the law of the state where the certificated security is located governs perfection.
  • If collateral is an uncertificated security, unless debtor’s agreements w/ issuer provide otherwise, the
    law of the state where issuer was organized governs
    perfection.
  • If collateral is a securities account, unless debtor’s agreements w/ the securities intermediary provide
    otherwise, the law of the state where the securities intermediary’s chief executive office is located governs perfection.

Exception—Perfection by Filing/Automatic Perfection
- If a security interest in investment property is perfected by filing, or if it’s automatically perfected by a securities intermediary, the law of the state where debtor is located governs perfection.

40
Q

Exceptions: Agricultural Liens

A
  • Perfection of an agricultural lien is governed by the law of the state in which the farm product covered by the lien is located.
41
Q

MOVEMENT OF DEBTOR OR COLLATERAL
FROM ONE STATE TO ANOTHER: Collateral in Which Perfection Is Governed by Debtor’s Location

A

Relocation of Debtor
- If perfection of a security interest is governed by the law of the state in which debtor is located, & debtor
moves from one state to another, security interest generally will become unperfected 4 months after debtor’s move unless secured party files a financing statement in the new jurisdiction b/f the 4-month period is up.

Debtor in Different State
- If collateral is transferred to a new owner who is located in a different state, security interest will become unperfected one year after collateral moves unless secured creditor files a financing statement in new jurisdiction b/f the one-year period is up.

42
Q

Other Collateral: Collateral in Which Security Interest Is Perfected by Possession

A
  • If a perfected security interest in collateral is a possessory security interest (which is governed by the law of the state in which collateral is located), & collateral is moved from one state to another, security interest will remain perfected w/o any further action as long as the security interest is also perfected by possession under the laws of the new state.
43
Q

Other Collateral: Certificate of Title Property (Automobiles & Other Vehicles)

A
  • If a vehicle is moved from one state to another & is covered by a certificate of title issued by the new state, a security interest in the vehicle that was properly perfected in the original state lasts as long as it would have if the vehicle had not been covered by the new certificate of title
44
Q

Other Collateral: Certificate of Title Property (Automobiles and Other Vehicles) - Exception—Purchasers for Value

A
  • If a vehicle subject to a perfected security interest in one state is moved to a new state & is covered by a certificate of title issued by the new state, the security interest in the original state is perfected as against a purchaser for value of the vehicle only until the earlier of:
    (1) The time when security interest would have become unperfected in the original state if the vehicle
    had not been covered by the new certificate of title
    (same rule as the general rule), or
    (2) 4 months after vehicle is covered by the new certificate of title
45
Q

Other Collateral: Certificate of Title Property (Automobiles and Other
Vehicles) - Exception—Clean Certificate of Title Issued in New
State

A
  • If the certificate of title issued in the new state does not note secured party’s interest in vehicle, the
    following parties have priority over secured party:
    (1) Buyer of vehicle who is not in the business of selling vehicles who purchases for value & receives
    delivery of vehicle w/o knowledge of security interest, and
    (2) Secured party who perfects a security interest in vehicle w/o knowledge of other security interest after the clean certificate of title is issued in the new state
46
Q

Other Collateral: Deposit Accounts, Uncertificated Securities, and Securities Accounts

A
  • If bank, issuer, or securities intermediary moves to a new state, perfection of an interest in the deposit account, uncertificated security, or securities account continues until the earlier of:
    (1) The time when security interest would have become unperfected in the original state if the bank, issuer, or securities intermediary had not moved to the new state, or
    (2) 4 months after bank, issuer, or securities intermediary moves to new state
47
Q

CONTINUATION AND TERMINATION
STATEMENTS: Continuation Statements

A
  • Financing statement is valid for 5 years.
  • A continuation statement may be filed, good for an additional 5 years.
  • Continuation statement can only be filed w/in 6 months b/f lapse of filed statement.
  • The authorization of debtor is not required for a continuation statement; secured party may authorize it.
48
Q

Termination Statements

A
  • Generally, a secured party is not obligated to terminate a financing statement.
  • However, if there is no outstanding obligation of debtor & no commitment on part of secured party to make further advances, or if debtor didn’t authorize filing of initial financing statement, secured party must, on demand of debtor, w/in 20 days, file a termination statement/provide one to debtor.
49
Q

Timing for Consumer Goods

A
  • In the case of consumer goods, secured party must file termination statement w/in 1 month after there is no obligation/commitment, or if debtor demands it, w/in 20 days of the demand.
50
Q

TEMPORARY PERFECTION (AND
CONTINUATION FOR PROCEEDS): Perfection for Proceeds

A
  • If a secured party has a perfected security interest in
    collateral, 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:
    (1) Proceeds are identifiable cash proceeds (this is
    sometimes called “cash proceeds” rule),
    (2) Security interest in original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting the proceeds would be filed in the same place as the financing statement for original collateral, & proceeds were not purchased w/ cash proceeds of the collateral (this is sometimes called “same office” rule), or
    (3) Security interest in proceeds is perfected w/in
    the 20-day period
51
Q

Examples:

A

1) S loans money to D and takes a security interest in D’s inventory. S perfects its security interest by filing a financing statement with the secretary of state. D trades some of its inventory to X for some equipment. S remains perfected as to the equipment beyond the 20-day period.
2) S loans money to D and takes a security interest in D’s inventory. S perfects its security interest by filing a financing statement with the secretary of state. D sells some inventory for cash and uses the cash to purchase some equipment. Unless the financing statement’s description was already broad enough to encompass the equipment, S would need to amend its financing statement (by amending the description to cover the equipment) within 20 days to be perfected as to the equipment.

52
Q

Temporary Perfection for Instruments,
Negotiable Documents, and Certificated
Securities
a. New Value

A
  • 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
53
Q

Delivery of Collateral to Debtor for Disposition

A
  • Where 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 (ex. where creditor gives debtor a promissory note, which is serving as collateral, so that debtor can present the note to its maker for payment), perfection is valid for 20 days, after which creditor must reperfect (by filing/taking possession) or lose their perfection.
54
Q

CHANGE IN USE OF COLLATERAL

A
  • If debtor changes its use of collateral (ex. from equipment to inventory), the filed financing statement (w/ description of “equipment”) remains effective to perfect the security interest.
  • Secured creditor has no duty to monitor collateral/to amend financing statement, even if creditor knows that description is seriously misleading.

Secured Transactions (6 decks)

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