Perfection of the Security Interest

Question 1

What is perfection?

Answer 1

Perfection deals primarily with rights as between the secured party and third parties. Perfection is not necessary to create a valid, enforceable security interest as between the debtor and the secured party. (This merely states to the other creditors of the world that you have a security agreement, that has now been perfected with the Debtor)

Question 2

What are the methods of perfection? 5

Answer 2

1. Filing a Financing Statement
2. Possession of Collateral by a 3rd Party
3. Perfection by “Control”
4. Notation of Lien of Certificate of Title
5. Automatic Perfection

Question 3

How can a security interest be perfected automatically?

Answer 3

A PMSI in consumer goods; e.g. D borrows money from S Loan Company to buy a new dining room set for her home (the money from S Loan Company is used to buy the dining room set). S obtains a security interest in the dining room set. The security interest is automatically perfected.

1. PMSI, and;
2. In consumer goods

Question 4

When is a security interest perfected in possession of collateral of a third party?

Answer 4

The security interest is perfected from the moment of possession without relation back to the time of attachment. Perfection continues only so long as possession is retained: HOWEVER the exception to this rule is that it is impossible with items you cannot take physical possession of - i.e. General intangibles, accounts, deposit accounts

Question 5

When is a security interest perfected by “control”

Answer 5

1. 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
2. Nonconsumer deposit accounts (spike on the bar): 2 Types
   i. The bank in which a nonconsumer deposit account is
   maintained automatically has control over the deposit account.
   ii. If the secured party is not such a bank, it can obtain control over the deposit account be either: (1) putting the deposit account in the secured party’s name (i.e. Add wells fargo name as co owner to Chase business bank account), or; (2) agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will follow the secured party’s orders without further consent by the debtor (Control agreement - K between debtor, creditor and bank, you say that if you default creditor has access to account)
3. Electronic Chattel Paper: A party has control over electronic chattel paper when a system showing the transfer of interests in chattel paper reliably establishes the secured party as the assignee

Question 6

When is a security interest perfected through a notation of lien on a certificate of title?

Answer 6

Example type: The only way to perfect a security interest in an automobile is for the secured party to note its lien on the certificate of title, HOWEVER there is an exception - If the debtor is holding the automobile as inventory (i.e., if the debtor is a dealer), then a secured party may perfect by filing a financing statement against inventory. There is no need in this situation for the secured party to note its lien on the certificate of title (if this does come up on the bar, I need to be able to elaborate the reasoning behind it, would not want to file thousands of liens on titles individually)

Question 7

When is a security interest perfected through filing a financing statement?

Answer 7

The financing statement is premised on the concept of “notice filing.” The notice must indicate merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs

Question 8

To be complete what must a financing statement contain? 6 elements

Answer 8

1. The debtors name
2. Description of the Collateral
3. The secured party’s name
4. Real Property Related to the Financing Statement
5. Debtor must Authorize the Filing (this does not mean that a signature is required, just that it must be authorized)
6. Authenticated security agreement itself may be filed: If it is filed, it must contain all of the elements discussed above

Question 9

Where should a financing statement be filed?

Answer 9

Except as otherwise specifically provided in a state’s Article 9, the financing statement is ordinarily filed with the Secretary of State, HOWEVER real estate related (i.e. timber, resource extraction or fixtures) financing statements should be filed with the county recorders office where the real property is located

Question 10

On a financing statement what is a debtors name?

Answer 10

If the debtor is an individual, the individual’s name should be given. If the debtor is a corporation, the corporate name should be given. If the debtor is a partnership, the partnership name should be given.

• Individuals - The name on the unexpired DL (not defined by Art. 9, CL is a mess here)
• Business - Put the name of the business as incorporated and not the trade name (i.e. Burger King is a trade name, will not suffice)

Question 11

Suppose a secured loan is made to Michael Sabbath. The financing statement mistakenly shows the name as Michael Sadbath. Is the financing statement effective?

Answer 11

YES - As long as the financing statement is not seriously misleading (what do the results from a reasonable search produce)

Question 12

What if the debtor changes his/her name from what it is on the financing statement? (e.g. gets married)

Answer 12

If the debtor so changes its name that a filed financing statement becomes seriously misleading the financing statement is effective to perfect a security interest in collateral acquired by the debtor before or within 4 months after the change. It is not effective to perfect a security interest in collateral acquired by the debtor more than 4 months after the change (unless an amended financing statement is filed within the 4 months that renders the financing statement not seriously misleading)

Question 13

Will a security interest in Hilda’s hats be perfected by a properly filed financing statement that describes the collateral as “inventory?” Description of the collateral in a financing statement

Answer 13

Yes - Art. 9 categories work, normal vocab works (here there is flexibility as before) she could have described the collateral as hats

Question 14

Will a security interest in Hilda’s hats be perfected by a properly filed financing statement that describes the collateral as “all assets” or “all personal property?”

Answer 14

Valid in the financing statement; invalid in security attachment

Question 15

Will errors in the secured party’s name effect the perfection?

Answer 15

Because searches are not conducted under the secured party’s name, an error in the name of the secured party will not be seriously misleading (though, in an appropriate case, this type of error may give rise to an estoppel in favor of a particular holder of a conflicting claim to the collateral

Question 16

How may a debtor authorize the filing of a financing statement?

Answer 16

1. Any signed writing (e.g. the security agreement itself may have it)
2. Ipso Facto authorization = authenticates - Debtor signs security agreement, and authorized
   - BAR TIP - Debtor signed the security agreement, but the bank forget them to sign the authorization

Question 17

What is the general rule for filing a financing statement when there are multiple states involved in the transaction?

Answer 17

The general rule is that you file in the state where the debtor is located, the debtor is located in the state where he is domiciled (principal residence)

• If the debtor is a business or a corporation than they are located where they are incorporated (do not go for the Bar headfake, that they are located anywhere else)
• If a partnership or something similar than they are located where in the principal place of business and if more than one than can be located at chief executive offices

Question 18

What if the creditor is perfected as to a debtor who lives in NC and the debtor moves to UT?

Answer 18

The secured party will become unperfected after 4 months after the move, UNLESS he files a new financing statement with the state to where the debtor moves within the 4 months

Question 19

What if the creditor is perfected as to a debtor who is located in NC and the collateral is transferred to a new debtor in UT?

Answer 19

The secured party will become unperfected after 1 year after the collateral moves, UNLESS he files a new financing statement with the state to where the collateral moves within the 1 year

Question 20

How long is a financing statement valid for?

Answer 20

5 years from the date of filing

Question 21

How may a financing statement be extended beyond 5 years?

Answer 21

By filing a continuation statement -the continuation statement must be filed in the last 6 months of the five-year “life” of the financing statement (i.e., between 4.5 and 5 years)

Question 22

What is perfection as to the proceeds?

Answer 22

If a secured party has a perfected security interest in collateral, a secured party automatically has a perfected security interest in whatever proceeds the debtor receives in exchange for that collateral for 20 days. To remain perfected in those proceeds beyond 20 days, the secured party must take new action to perfect its interest UNLESS:

1. The proceeds are identifiable cash proceeds, or;
2. The security in the original collateral was perfected by filing a financing statement, a security interest in the type of collateral constituting proceeds would be filed in the same place as the financing statement for the original collateral, and the proceeds were not purchased with cash proceeds of the collateral (sometimes called the “same office” rule)

Question 23

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.

Answer 23

Equipment is now proceeds, yes attachment if identifiable, invoice was traded for the collateral
Is it perfected? Yes - for 20 days then,
Equipment is not cash (part 1 not met), we dont have to do a thing

Question 24

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 broad enough to include the equipment, S would need to file a new financing statement within 20 days to be perfected as to the equipment.

Answer 24

• Same Office Rule: Filed in the same office, but cant use cash to purchase the proceeds, on the 21st day we are unperfected, now we have to amend the financing statement to cover the the equipment or file a new one
• Sell inventory on credit which creates accounts, this is a same office rule exception, this is a classic same office rule event

Question 25

What if there is change in the Use of Collateral:

Answer 25

If the debtor changes its use of the collateral (e.g., 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 it knows that the description is seriously misleading