What is Perfection?
When a secured party gives notice to the entire world of its security interest (which is key to determining priority).
How Perfection is Most Commonly Done
By:
- filing
- possession
- control
- automatic perfection
Filing
The process of filing a financing statement in a public office (but it must be the correct office in the correct state).
Filing: Choice-of-Law
The law governing perfection of a security interest is the law of the jurisdiction where the debtor is located.
Locations of Types of Debtors
- Individual- is located at their principal residence
- Non-registered org.- located at its place of business
- Registered org.- located in its state of organization
Things the Financing Statement Must Include
- The name of the debtor
- The name of the secured party or the secured party’s rep.; and
- A description of the collateral covered by the financing statement
When a Financing Statement Sufficiently Describes the Collateral
If it provides:
- a description of the collateral that reasonably identifies what is described; or
- an indication that the financing statement covers all assets or all personal property
- overall, a super generic description in a financing statement is sufficient)
Filing: Authorization
A financing statement must be authorized by the debtor. A security agreement is authorization for the financing statement.
Filing: Special Rules for Fixtures
A fixture filing must:
- indicate that it covers fixtures
- indicate that it is to be filed in the real property records
- provide a description of the RP to which the fixture is related; and
- provide the RP owner’s name, if different than the Article 9, debtor
What if the Financing Statement Contains Minor Errors?
The statement will still be effective, unless the errors make the financing statement seriously misleading (failure to provide the name of the debtor)
Standard Search Logic Exception
If a search of the records of the financing office under the debtor’s correct name, using the office’s standard search logic, would disclose a financing statement that fails sufficiently to provide the name of the debtor, the financing statement is not misleading.
Timing of Filing
A financing statement may be filed before a security agreement is made or a security interest otherwise attaches (important for priority)
Perfection of Proceeds
A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered.
Name Changes After Filing
If a debtor changes its name, resulting in a financing statement that is seriously misleading, the financing statement will only be effective to perfect security interests in collateral acquired within four months of the name change, unless an amendment to the financing statement correcting this is filed within four months of the name change.
Debtor’s Relocation After Filing
If the debtor moves to another state, the secured party must file a new financing statement in the new state within four months of the debtor’s move.
Expiration of Filing
A filed financing statement is effective for five years after the date of filing. At this point in time a continuation statement must be filed (which will extend it to another 5 years).
When Must the Continuation Statement Be Filed?
Within 6 months of the expiration of the 5 year period.
Perfection via Possession
A secured party may also perfect a security interest by taking possession of the collateral, if the collateral is:
- tangible negotiable document
- good
- instruments
- money
- tangible chattel paper
Can Possession be Accomplished by a Third Party?
The UCC provides for the secured party to have a third-party possess the collateral on its behalf, so long as the third-party authenticates a record acknowledging that is holding the collateral for the secured party’s benefit.
Secured Party’s Rights and Obligations While in Possession of Collateral
A secured party who has taken possession of collateral must use reasonable care in its custody and preservation. Reasonable expenses incurred in custody and preservation of collateral may be charged to the debtor.
Perfection by Control
A secured party may perfect a security interest by taking control of the collateral if the collateral is a:
- investment security
- letter-of-credit rights
- deposit account
- electronic chattel paper
Control for Investment Securities
- A secured party has control of a certificated security in bearer form if he has possession of the security
- A secured party has control of a certificated security in registered form if he has possession of the security, and the certificate is endorsed to the secured party or registered in the name of the secured party
- A secured party has control of an uncertificated security if he has possession of the security or the issuer agrees that it will comply with instructions from a secured party.
Control Over a Deposit Account
A security interest in a deposit account (a bank account) is perfected only by control. A secured party has control of a deposit account if:
- the secured party is the bank with which the deposit account is maintained (this is actually a form of automatic perfection), or
- the debtor, secured party, and bank have agreed in an authenticated record that the bank will follow the secured party’s instructions directing the disposition of the funds in the deposit account without further consent by the debtor
- the secured party becomes the bank’s customer with respect to the deposit account
Automatic Perfection
There are limited instances in which perfection is automatic. The most common is when the security interest in a PMSI in consumer goods, which perfects upon attachment and remains effective permanently (except for motor vehicles and fixtures)
