Perfection of Security Interests

By McElroy, John M. | The Journal of Lending & Credit Risk Management, June 2000 | Go to article overview

Perfection of Security Interests


McElroy, John M., The Journal of Lending & Credit Risk Management


Historic Changes in the UCC Filing Rules and More

This is the seventh in a series of occasional articles addressing the revisions to Article 9 of the Uniform Commercial Code. Subsequent articles will focus on other specific changes.

A previous article explored the revised Article 9 rules for attachment of a security interest. The attachment steps required by those rules-the giving of value, rights in the collateral on the part of the debtor, and, generally, the authentication of a security agreement--when completed, cause assets of a debtor to be subject to a security interest in favor of a secured party. However, an overriding goal of Article 9 is the protection of third parties--potential creditors of and potential buyers from the debtor. Consequently, an attached security interest, generally, is not enforceable against creditors, transferees, or a trustee in bankruptcy of the debtor unless the security interest is also perfected (providing some form of notice) pursuant to the perfection rules of Article 9. A security interest is perfected when all of the attachment steps and any necessary perfection step have been completed. In general, the attachment steps and the perfection step can be completed in any order. For example, a financin g statement may be filed (the perfection step) prior to the loan closing and the authentication of the security agreement; the security interest, in that circumstance, is perfected when the attachment steps are completed.

Unperfected security interests. An unperfected security interest or agricultural lien is subordinate to the rights of perfected secured parties and lien creditors whose lien attaches before the security interest or agricultural lien is perfected or a financing statement is filed. Generally, buyers, lessees, and licensees who give value and/or receive delivery of the collateral without knowledge of a security interest and before it is perfected may acquire rights in the assets comprising the collateral free of the security interest.

Supporting obligations and collateral securing collateral. As discussed in a previous article, attachment of a security interest in collateral is also automatically attachment of the security interest in any supporting obligation or supporting collateral. The same is true for perfection. Perfection of a security interest in collateral also perfects a security interest in a supporting obligation for the collateral and in a security interest, mortgage, or other lien on personal or real property securing the collateral.

Even though Article 9 does not require a secured party to take additional steps for the security interest to be perfected with respect to underlying collateral, other practical considerations will dictate that additional steps be taken. Specific assignments of the underlying security agreement or mortgage coupled with the filing of a UCC-3 assignment form or recording of an assignment of mortgage are examples of such additional steps. Such additional steps will enhance the secured party's ability to control and enforce the underlying collateral.

Security entitlement carried in securities account. Perfection of a security interest in a securities account also perfects a security interest in the security entitlements credited to the securities account.

Security Interest Perfected upon Attachment

There are a limited number of transactions governed by Article 9 in which the attachment steps alone constitute perfection and an additional perfection step is not required. The following security interests are perfected when they attach:

* A purchase-money security interest in consumer goods (generally).

* An assignment of an insignificant part of the assignor's outstanding accounts or payment intangibles.

* A sale of a payment intangible.

* A sale of a promissory note.

* A security interest in a healthcare-insurance receivable granted to the provider of the health care goods or services. …

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