Part V Perfecting an Article 9 Security Interest
Chapter 12 Perfection Generally
A. Introduction
The ultimate concern for a secured party is to have priority against third parties, including a trustee in bankruptcy. As will be developed more fully in Part VI, priority is very much a zero sum game. One party wins and the others lose. Moreover, under Article 9, priority outcomes tend to be rule-driven with little room for considering "the equities" in particular cases.
The need for certainty in commercial dealings and the desire to reduce the effect of "off the record " activity are the reasons usually given for such a scheme. After you have examined the sometimes maddeningly complex priority rules in Part VI you can decide for yourself how much certainty those rules offer.
In any event, priority frequently is a function of perfection and the timing of perfection. New section 9-308(a) echoes former section 9-303 by providing that perfection of a security interest requires attachment and some appropriate further action. As to an agricultural lien there is perfection under new section 9-308(b) when the lien is "effective" under the statute creating the lien and some action to perfect has been taken.
As we saw in Part IV, under new section 9-203(a), a security interest attaches when it becomes enforceable. As noted in Chapter 7 (Overview of Enforceability and Attachment), although the actions leading to attachment or perfection can overlap in the sense that they need not occur in any particular order, perfection is a conceptually separate matter from attachment, even in the special case of perfection on attachment.
Typically the required action is to file a financing statement but taking possession of the collateral sometimes is necessary or advisable. As to certain collateral, specialized action, such as getting "control" of the collateral or complying with some law other than Article 9, is needed to perfect. In other cases a security interest may be perfected "automatically, " i.e., by doing nothing. The action beyond attachment, if any, that is needed to perfect a security interest is the subject of this chapter.
Technically there is another decision that must be made before any required action to perfect is taken. A creditor must decide in which state whatever action that is required should be taken -- or, more accurately, a creditor must decide which state's law governs perfection and non-perfection and the effect of each. We first dealt with the governing law question in Chapter 6 (Choice of Law) and we will revisit it in this part in connection with particular modes of perfection.
Recall from the discussion in Chapter 6 (Choice of Law) that under Article 1, section 1-301(c)(8) (formerly revised Article 1, section 1-105(2)), where the Uniform Commercial Code applies, parties generally may not choose the law that will govern perfection of a security interest.
B. Modes of Perfection
1. Filing or Possession
As was true under former Article 9, to perfect a security interest under new Article 9 a secured party ordinarily must either file a financing statement or must take possession of the collateral. New 9-310(a), 9-312(a) and 9-313(a). Where perfection can be achieved by some other method, such as possession or control, then filing is not necessary, see new 9-310(b), and, as is explained below, filing is not effective as to security interests in certain collateral. Under new section 9-310(a), filing is the action required to perfect as to an agricultural lien.
In secured financing law there is a general abhorrence of "secret liens." Secret liens are interests in property to secure debts that are unknown to third parties who may act to their detriment in the belief that the property is free of liens. Public filing and changes of possession operate to give third parties notice that property is or may be subject to a lien. Perfection by filing is covered in Chapters 13 (Overview of Perfection by Filing) and 14 (The Nitty Gritty of Filing). Perfection by possession is the subject of Chapter 15 (Perfection by Possession (Including Documents of Title)).
2. Perfection by "Control"
Former Article 9 introduced the concept of "control" in connection with security interests in investment property. Control was the central mode of perfection as to investment property. New Article 9 continues the use of control as a step for perfecting a security interest in investment property, but it expands the control cases to include security interests in deposit accounts, letter of credit rights and electronic chattel paper. New 9-314(a). See, e.g., Sonic Engineering, Inc. v. Konover Construction Co. South, 51 UCC Rep Serv. 2d 844 (Conn Super. Ct. 2003) (Control of a deposit account). Control as a mode of perfection is also referred to in Chapter 8 (The Specifics of Enforceability).
Perfection as to a security interests in certain property as to which control is proper also may be achieved by filing or possession (technically, by "delivery ") or sometimes without either. New 9-312(a) and 9-313(a). But, generally speaking, control is the superior mode of perfection. The perfection by control situations are dealt with in Chapter 21 (Perfection as to Investment Property) and Chapter 22 (Perfection as to Deposit Accounts, Letter of Credit Rights and Electronic Chattel Paper).
3. Perfection by Compliance with Non-Article 9 Law
There are two important situations in which a creditor must take action under a law other than Article 9 to perfect a security interest. The first involves security interests in vehicles other than those held for sale. Under certificate of title laws enacted in most jurisdictions, perfection of such security interests requires that the interest (lien) be noted on the certificate of title. Consequently, a secured party who takes an interest in a vehicle other than one held for sale must comply with the certificate of title law and have the lien interest noted on the vehicle's title. New 9-303 and 9-311(a)(2) and (d). We will revisit the "lien notation" scheme in detail in Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation).
Another important situation where special action is required is that where federal laws operate to preempt or otherwise displace the perfection scheme of Article 9. In such cases, under new section 9-311(a)(1), the secured party must do as the federal law dictates. A clear example is that to perfect a security interest in a variety of aircraft collateral a creditor must go to the Federal Aviation Authority (FAA) in Oklahoma City, Oklahoma and, ultimately, must register the security interest in Ireland pursuant to procedures established by an international convention to which the United States is a party.
More complicated, and the subject of a continuing debate, is the extent to which federal law requires that security interests in intellectual property, including copyrighted materials, be perfected otherwise than by filing under Article 9. Perfection by complying with federal law is treated in Chapter 19 (Perfection Pursuant to Federal Law).
4. Automatic Perfection -- Perfection by Doing Nothing
Certain security interests may be perfected without doing anything. This type of perfection is often referred to as "automatic" perfection. The most common instance of automatic perfection is that for a purchase money security interest in consumer goods. New 9-309(1). The definition of "purchase money" in new section 9-103 expands that found in former section 9-107, but the essence continues to be that the credit enables a debtor to acquire rights in the collateral. Most consumer credit is purchase money.
The "exemption" from filing for purchase money creditors in the consumer context is premised on a belief that requiring all creditors who extend credit to file would place a burden on the filing system that is outweighed by the protection accorded to the relatively few creditors who take security interests in consumer goods after the debtor already owns them.
There are other less obvious cases of automatic perfection. New section 9-309 sets forth all the automatic perfection cases, which under Article 9 are referred to as "perfection on attachment." The subjects of "automatic " perfection, or perfection on attachment (perfection without doing anything), and the concept of purchase money security are addressed in greater detail in Chapter 18 (Perfection by Doing Nothing -- Automatic Perfection).
5. Perfection as to Proceeds
As we saw in Chapter 9 (The Specifics of Enforceability -- After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem), when collateral is transferred to another party or collateral is lost or destroyed or simply changes form proceeds result. As was also seen in that chapter, Article 9 is quite solicitous of secured parties when it comes to creating an enforceable interest in proceeds. There is no need for an agreement creating a security interest as to proceeds and a proceeds interest is enforceable without any reference to proceeds in the security agreement.
As for perfection, under new section 9-315(c) an interest in proceeds as to which a security interest attached is perfected automatically, that is, without a secured party doing anything. But, as was true under former Article 9, under new section 9-315(d) the perfection may not continue indefinitely and action to achieve continuous perfection may be necessary. Perfection as to proceeds is considered in Chapters 16 (Perfecting Security Interests in Proceeds and Other Later Acquired Property) and 24 (Continuing Perfection -- Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).
6. Perfection as to Goods Affixed to Real Estate
Goods can be affixed to real estate in such a way as to give a party with an interest in the real estate an interest in the goods. Such goods are "fixtures." See new 9-102(a)(41) and Chapter 5 (Classification of Collateral). A clear example is a central air conditioning or heating system in a building. Security interests in fixtures can be perfected by filing or even by doing nothing (but probably not by possession). However, a creditor who perfects a security interest in a fixture risks losing out to certain real estate claimants unless the creditor makes a special filing called a "fixture filing.
"Perfection of security interests in fixtures and the matter of fixture filings are dealt with in Chapter 20 (Perfection as to Fixtures and Other Real Estate-Related Collateral). Perfection issues as to other real estate-related collateral, such as promissory notes secured by deeds of trust and timber to be cut, also are treated in Chapter 20. The priority issues are treated in Part VI.
The following problems allow you to explore the basics of perfection as set forth above.
Problem 12.1 (interactive)
Jane Jones buys a stereo from Donald Dealer for use in her office. Jane promises to pay the $1200 purchase price in 12 equal monthly installments. Jane signs an agreement giving Donald Dealer an interest in the stereo to secured the unpaid purchase price. Before making a payment Jane's business folds and Jane defaults on her contract with Donald. It so happens that Jane owes Lisa Lender $2000. Lisa has obtained a judgment and a writ of execution pursuant to which the sheriff has seized and sold the stereo at a public sale for $800.
Who gets the $800? Hint: As is explained in detail in Chapter 26 (Secured Party Versus Lien Creditor), generally speaking, if Donald has not perfected its security interest in the stereo at the time of the levy (seizure of the stereo) by the sheriff then Lisa has priority, however, if Donald has perfected at the time of the levy then Donald has priority.
Problem 12.2 (interactive)
Assume the same facts as in Problem 12.1 except that before the sheriff seizes the stereo Donald Dealer properly files a financing statement covering the stereo. Now who gets the $800?
Problem 12.3 (interactive)
Assume the same facts as in Problem 12.1 except that Jane purchases the stereo for use in her home. Now who gets the $800?
Problem 12.4 (interactive)
Assume the same facts as in Problem 12.2 except that the subject of the sale (the collateral) is a used Toyota. Who gets the $800 now?
Problem 12.5 (interactive)
Assume the same facts as in Problem 12.2 except that the subject of the sale is an airplane that Jane intended to restore but which even in its dilapidated condition had to be registered. Who gets the $800 now?
Problem 12.6 (interactive)
In each of the foregoing problems there is a winner and a loser and no pro rata distribution. True or false?
CASE COMMENTARY
In re Sabol, 337 B.R. 195 (Bkcy C.D. Ill. February 6, 2006)
In re Snelson, 330 B.R. 643 (Bkcy E.D. Tenn. 2005)
Vars v. Citrin, 470 F.3d 413 (1st Cir. 2006)
Stockman Bank of Montana v. AGSCO, Inc., 727 N.W.2d 742 (N.D. 2007)
2011-08-22 update