Perfection of Security Interest - Pt 1

Question 1

Perfection - In General

Answer 1

• ensures that secured party can acquire max priority in collateral over third parties who may also have rights in the collateral
  -> establishes secured party’s rights in the collateral as against third parties (vs. attachment deals w/ rights against the debtor)

Question 2

Methods of Perfection

Answer 2

1) filing
2) taking possession of the collateral
3) control
4) automatic perfection
5) temporary perfection

Question 3

Time of Perfection

Answer 3

• security interest isn’t enforceable against anyone until it has attached to the collateral
  -> CAN’T perfect the security interest before it attaches to the collateral
• attachment + perfection can occur simultaneously
  -> if all the steps for perfection are taken before security interest has attached, perfection will occur upon attachment

Question 4

Automatic Perfection

Answer 4

• certain situations in which security interest is automatically perfected upon attachment
• most common situation = PMSI in consumer goods
  -> PMSI in consumer goods is perfected as soon as it attaches

Question 5

Limitations on Automatic Perfection

Answer 5

• keep in mind that the PMSI rule only applies to CONSUMER goods
• security interest in motor vehicles: can be perfected only by notation on vehicles certificate of title
• PMSI in fixtures will have priority over an encumbrancer of the real estate only if PMSI holder files a fixture filing

Question 6

Possession/Pledge

Answer 6

• security interests in most types of collateral can be perfected simply by taking possession of the collateral

Question 7

Possession - Time of Perfection

Answer 7

• where secured party takes actual possession of the collateral, security interest is perfected from moment of possession
  -> continues as long as possession is retained

Question 8

Perfection by Possession - Collateral in Hands of Bailee

Answer 8

• where the collateral (other than certified securities and goods covered by a doc) 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’s holding the collateral for the secured party’s benefit

Question 9

Collateral That Can’t Be Pledged

Answer 9

• security interests in general intangibles, deposit accounts, nonnegotiable docs, electronic chattel paper, certificate of title goods, + accounts cannot be perfected by possession

Question 10

Possession - Attachment + Perfection Exam Tip

Answer 10

• taking possession can simultaneously satisfy reqs for attachment and perfection
• possession may be the last thing needed for attachment, + attachment plus possession results in perfection

Question 11

Perfection by Control

Answer 11

• security interests in investment property, nonconsumer deposit accounts, + electronic chattel paper may be perfected by “control”
• security interests in nonconsumer deposit accounts can ONLY be perfected by control (unless they’re perfected as proceeds of collateral)

Question 12

Methods of Obtaining Control - Nonconsumer Deposit Accounts

Answer 12

• 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 in the secured party’s name OR
- 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

Question 13

Methods of Obtaining Control - Investment Property

Answer 13

• 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 w/o further action from the owner

Question 14

Electronic Chattel Paper

Answer 14

• 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 15

Perfection for Motor Vehicles

Answer 15

• under 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

Question 16

Perfection for Motor Vehicles - Exception: Dealers

Answer 16

• 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