Secured Transactions - Perfection

Perfection Step 1

Must be attached - Violet Roses Smell Amazing

Perfection Step 2: The Four Main Methods of Perfection

File; Possess; Control; Automatic

Filing Statement Requirements

Debtor name; indication of collateral; debtor’s domicile (filing office); and secured party name

After Attachment

Once you have properly attached your security interest, you now have to file your financing statement in the debtor’s location (either their sate of incorporation or principal place of residence for individuals)

MEE Trick: Misfiling

A secured party files in the wrong jurisdiction by following the collateral’s location instead of the debtor’s. Filing in the wrong state is ineffective, leaving the security interest unperfected even if everything else was done right. The financing statement must be filed where the debtor is located.

Debtor’s name

For a registered organization debtor, the UCC mandates using the name on the public records (exact legal name). Minor errors are tolerated only if they are not “seriously misleading.” An error in the debtor’s name is deemed seriously misleading if a search under the debtor’s correct name, using the filing office’s standard search logic, fails to locate the financing statement

Trick #2 - Wrong Debtor Name

The financing statement uses a trade name or a slightly wrong debtor name. The MEE may note that a search under the correct name would (or would not) find the filing. This signals a name discrepancy issue that could invalidate the whole financing statement.

Financing Statement Debtor Name Errors

Errors will render a filing ineffective. The UCC is unforgiving on name errors unless the search logic still finds the record. If a filing is ineffective, the creditor’s interest is unperfected, meaning it will be subordinate to other interests that are perfected. But an error in the secured party’s name is usually not seriously misleading and will not affect perfection because the filing system searches based on the debtor’s name.

Trick #3 - Filing

Filing early is allowed - a financing statement can be filed before attachment/loan as long as the debtor authorized it. Moreover, priority is governed by “first to file or perfect” rule. The trick is that an early filing can secure a priority date even if the actual security interest attaches later.

Trick 4 - identifying collateral

Financing statements are just to provide notice, it does not need to be detailed about the collateral that has security interests on them. It only needs to let another creditor know once they’ve gone to the filing office that some of the debtor’s assets might already have security interests on them and should be careful. These records are public so it doesn’t need to tell everyone your business

Filing Statement Content

The filing statement should also contain the addresses of both the debtor and secured party and identify whether the debtor is an organization or individual

Non-Filing Perfection

Possession, Control, and Automatic Perfection

Perfection by Possession

Goods; Instruments; Tangible Chattel Paper; Tangible Negotiable Documents; Money. Perfection occurs at the moment the secured party (or its agent) takes possession and continues only while possession is retained

How Possession Perfection Works

If the secured party gets a security interest in a diamond ring or stock certificate, any later lender knows they can’t take it because it is literally not in the debtor’s possession

Perfection by Control Collateral

Investment property; deposit accounts; letter of credit rights; electronic chattel paper; electronic documents

Perfection by Control

Possession by control is the exclusive or option method of perfection for certain types of collateral

Control MEE Trick

Security interest in a deposit account is perfected only by control. You have control if you’re the bank that holds the account; the bank, debtor and secured party sign a control agreement; or a secured party is added as co-owner of the account. Filing a financing statement is ineffective for perfection of deposit accounts, and generally unnecessary for investment property if control is obtained.

Automatic Perfection

Some security interests perfect automatically upon attachment, requiring no filing or further action. The most important category is a purchase-money security interest (PMSI) in consumer goods

Purchase-Money Security Interest in Consumer Goods

A PMSI in consumer goods means the person who gave you the cash (or credit) to buy something for home use gets first dibs on that exact thing if you don’t pay them back.

PMSIs in Non-Consumer Goods

Not all PMSIs qualify for automatic perfection: PMSIs in inventory or equipment (non-consumer goods) are not automatically perfected and generally require filing (and in the case of inventory, a notification to other secured parties) to be perfected.

Certain assignments of accounts or payment intangibles

If a business assigns a small portion of its accounts (not a “significant part” of outstanding accounts), that security interest is perfected upon attachment without filing.

Temporary Perfection

Automatic 20-day perfection proceeds: collateral → proceeds → 20 days

Automatic 20 Day Perfection in Proceeds

A security interest continues in collateral notwithstanding its sale or disposition (unless the secured party authorized a free sale) and automatically attaches to any identifiable proceeds of that collateral. This initial perfection is temporary, lasting for only 20 days after the security interest attaches to the proceeds. After 20 days, you have to file a financing statement to remain perfected (unless it’s identifiable cash proceeds or the original filing would cover what was traded or sold goods for)