Perfection of the Security Interest

Question 1

Perfection deals primarily with:

Answer 1

rights as between the secured party and third parties.

Question 2

Is perfection necessary to create a valid, enforceable security interest as between debtor and secured party?

Answer 2

No.

Question 3

How is a security interest perfected?

Answer 3

(1) It attaches and (2) when some additional step (possession or filing) is taken.

Question 4

(A) What are the 5 methods of perfection?

Answer 4

(1) Automatic perfection
(2) Possession of collateral by secured party
(3) Perfection by “control”
(4) Notation of lien on certificate of title
(5) Filing a financing statement

Question 5

When does automatic perfection occur?

Answer 5

Purchase money security interest in consumer goods (PMSI).

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 set). S obtains a security interest in the dining room set. The security interest is automatically perfected.

Question 6

Possession of collateral by secured party

Answer 6

A secured party may perfect a security interest in most types of collateral simply by taking possession of the collateral.

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.

Impossible if goods cannot be taking possession of. m

Question 7

Possession by “control”

Answer 7

Security interests in investment property and electronic chattel paper may be perfect by control. Security interests in nonconsumer deposit accounts can only . be perfected by control.

Question 8

Investment property

Answer 8

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.

Question 9

Nonconsumer deposit accounts

Answer 9

(1) The bank in which a nonconsumer deposit account is maintained automatically has control of the deposit account;
(2) If the secured party is not such a bank, it can obtain control over the deposit account by either: (1) putting the deposit account in the secured party’s name, 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 orders without further consent by the debtor.

Question 10

Notation of lien on certificate of title

Answer 10

Only way to perfect a security interest in an automobile is for the secured party to note its lien on the certificate of title.

Exception: If the debtor is holding the automobile as inventory ( if he’s a dealer) then a secured party must perfect by filing a financing statement against inventory. Noting its lien on the certificate of title will not work.

Question 11

Filing a financing statement

Answer 11

Form UCC1

Question 12

Financing Statement

(1) Notice Filing

Answer 12

Notice must indicate merely that a person may have a security interest in the collateral indicated. One piece of paper.

Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs.

Question 13

(2) Contents of financing statement

Answer 13

(1) Debtor’s Name - the statements are indexed by the debtor’s name.

Individual: debtor name
Corporation: corporate name
Partnership: partnership name

(2) Description of Collateral - “reasonably identifies” test.
(3) Secured Party’s Name
(4) Real property related financing statements
(5) No signature required, though debtor must authorize the filing - the authorization may be in any signed writing. In addition, the debtor automatically authorizes the financing statement if she authenticates a security agreement covering the same collateral –> ispo facto authorization.
(6) Authenticated security agreement itself may be filed: if it is filed, it must contain all of the elements discussed above.

Question 14

Where does the financing statement get filed?

Answer 14

Except otherwise specified in a state’s Article 9, the financing statement is ordinarily filed with the Secretary of State.

Question 15

How long is a financing statement effective for?

Answer 15

5 years from the date of filing.

Question 16

How can it be extended?

Answer 16

By filing a continuation statement.

The continuation statement must be filed in the last 6 months of the 5 year life of the financing statement and must be done perfectly.

Question 17

(B) Perfection as to proceeds

Answer 17

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 after 20 days, the secured party must take new action to perfect its interest unless:

the proceeds are identifiable cash proceeds, or
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.

Question 18

(C) Change in use of collateral

Answer 18

If the debtor changes its use of the collateral (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 serious misleading.