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ExpertAnalysis

CreatingPerfectSecurityInterestsAPrimer
May18,2015,9:40AMEDT

Law360,NewYork(May18,2015,9:40AMEDT)

Thelawofsecuredtransactionsinvolvesthecreationandenforcementofsecurity
interests.Asecurityinterestariseswhenaborrowerentersintoacontractthatauthorizes
thelenderorsecuredpartytotakecollateralthattheborrowerownsiftheborroweris
unabletopaybacktheloan.Asecurityinterestprotectsthelenderinthatiftheborrower
shouldhappentodefaultontheloan,thelenderwillbeabletorecovertheloanamount
bytakingsuchcollateral.Inthecontextofabankruptcycase,asecuredcreditorcollects
itspaymentbeforecreditorswithoutasecurityinterest(i.e.,unsecuredcreditors)andare
thussituatedhigherinthepriorityscheme.Notably,anunperfectedsecurityinterestis
subordinatedtoaliencreditorandtrusteeinbankruptcy.Therearefourmainmethodsof IraL.Herman
perfectinganattachedsecurityinterest,includingthefilingofaproperlyfilledout
financingstatementwiththeapplicableUniformCommercialCodefilingoffice,possessionofthecollateralby
thesecuredparty,controloverthecollateralbythesecuredparty,and,inrarecircumstances,mereattachmentof
thesecurityinterestmayautomaticallyperfectthesecurityinterest.

Securityagreementscreatingsuchsecurityinterestsmaybefoundinpromissorynotes,deedsoftrustorloan
agreements,withtheonlyrequirementbeingthatthesecurityagreementmustincludelanguagegrantinga
securityinterest.

UnderstandingSecurityInterestsandLiens:Attachment

ExtentofSecuredClaimValuationofCollateral

Toensurethatasecuredlenderreceivessufficientadequateprotection,itisimportanttodeterminethevalueof
thelenderssecuredclaimearlyoninthebankruptcycase.Essentially,alenderssecuredclaimisequaltothe
sumofthevalueofitscollateralasofthepetitiondate(plusanypropertythatthesecuredlenderholdsthatis
subjecttosetoff).
Indeterminingthevalueofasecuredlenderscollateral,courtshaveemployedvaryingmethodsofvaluation
dependingonthefactsofthecase,includingusingfairmarketvalue,liquidationvalueandgoingconcernvalue.

SecuredClaimStatusValidity,PriorityandExtentofSecurityInterestsandLiens

ThelawofsecuredtransactionsintheUnitedStatescoversthecreationandenforcementofasecurityinterest.
Usually,asecuredtransactionhappenswhenapersonorbusinessborrowsmoneyforthepurposeofacquiring
property,includingrealestate,vehiclesorbusinessequipment.Asecurityinterestexistswhenaborrowerenters
intoacontractthatallowsthelenderorsecuredpartytotakecollateralthattheborrowerownsintheeventthat
theborrowercannotpaybacktheloan.Thetermsecurityinterestisoftenusedinterchangeablywiththeterm
lienintheUnitedStates.

Asecurityinterestpromoteseconomicsecuritybecauseitprovidesthelenderwiththepromiseofrepayment:if
theborrowerdefaultsontheloan,thelendershouldbeabletorecouptheloanamountbytakingtheagreedupon
assetusedascollateralandsellingit.Asecurityinterestcanbeparticularlyvaluableinbankruptcybecause
securedcreditorswillbeabletocollecttheirdebtsbeforecreditorswithoutasecurityinterest.

Thefirststepintheperfectionofalienistocauseattachmentofthecollateraltooccur,whichwillthereafter
allowthecreditortoperfectthesecurityinterest,whichistheultimategoalinproperlysecuringthecollateral.
Thus,asafirststep,attachmentofthecollateralmustoccur.Ifthesecurityinteresthasattachedtothecollateral,
itisenforceableagainstthedebtorifithasnotattached,itisnotenforceableatall.Thereafter,ifperfectionis
achieved,itwillensurethatthelienofthesecuredpartyisenforceableagainstmostthirdpartiesthatacquirea
lieninthecollateralsubsequenttothesecuredparty.

AnArticle9securityinterestattacheswhenallofthefollowingeventshaveoccurred:

a.ValuehasbeengivenvalueinthecontextofArticle9oftheUniformCommercialCodeisbroaderthan
thecontractualconceptofconsideration.Valueincludesgivingasecurityinterestintotalorpartial
satisfactionofapreexistingdebt,aswellasbindingcommitmentstoextendcredit.
b.ThedebtorhasrightsinthecollateralforpurposesofArticle9oftheUniformCommercialCode,the
debtorneednotownthecollateral.Itissufficientifthedebtorhassomelimitedrightstothecollateral.Of
course,thesecurityinterestwouldthenattachonlytothelimitedrightsthatthedebtorhasorhasthe
powertotransfer.SeeSection9203oftheUniformCommercialCode,comment6.Additionally,a
debtor,forpurposesofthissectionofArticle9,maynotnecessarilybetheprimaryobligoronthe
underlyingloan.Itisthepartywithrightsinthecollateralgrantingthesecurityinterest.Thus,theprimary
obligorcouldbeacorporationandthecollateralsecuringtheloancouldbelongtothepresidentofthe
corporationoritssoleshareholder.Thepresidentorsoleshareholderinsuchacasewouldthenbethe
debtorwhowouldhaverightsinthecollateral.
c.Asecurityagreementhasbeenenteredintowhich:

Isauthenticatedbythedebtor
Describesthecollateraland
Describesthelandifthecollateralincludestimbertobecut.

SecurityAgreements

Noparticularformisrequiredforasecurityagreement.Thesecurityagreementcanbecontainedinthe
promissorynote,thedeedoftrustoraloanagreement.Itmust,however,includelanguagegrantingasecurity
interest.Whilenomagiclanguageisrequired,apresentgrantofasecurityinterestshouldbeevidentfromthe
wordsofthedocument.Forinstance,aUCC1financingstatementhasalloftheinformationrequiredtobeina
securityagreement.Itisauthenticatedbythedebtor,itdescribesthecollateral,anditmaydescribetheland.
Indeed,bytheveryactofauthenticatingafinancingstatement,onecouldarguethatitisimplicitthatthedebtor
intendedtograntasecurityinterestinthedescribedcollateraltothesecuredparty.Nonetheless,thisaloneisnot
sufficientunlessitcontainsspecificgrantinglanguageofsomekind.

Itshouldbenotedthatasecurityagreementisnotrequiredforattachmentifcollateralisinthepossessionofthe
securedpartypursuanttothedebtorssecurityagreement,orthecollateralisdepositaccounts,electronic
chattelpaper,investmentpropertyorletterofcreditrightsoverwhichthesecuredpartyhascontrol.

DescriptionofCollateral

Thesecurityagreementmustcontainadescriptionofthecollateralbeingsecured,althoughsuchdescription
neednotbeexactanddetailed(i.e.,serialnumbers),butitmustreasonablyidentifythecollateralthatissubject
tothesecurityinterest.Ontheotherhand,asupergenericdescriptionsuchasallassetsorallpersonal
propertyisnotsufficientforasecurityagreement.(Thatwould,however,beasufficientdescriptionfora
financingstatementunderrevisedArticle9oftheUniformCommercialCode).Itissufficientifthesecurity
agreementliststhecollateralbycategory,suchasallequipment,inventoryandaccounts.

Proceeds

InArticle9parlance,proceedsmeans,amongotherthings,anypropertyacquireduponthesale,lease,exchange
orotherdispositionofcollateralthatissubjecttoasecurityinterest,anythingcollectedordistributedonaccount
ofthecollateral,andinsuranceproceedsuponthelossordestructionofthecollateraluptothevalueofthe
collateral.Thereisnoneedtoputastatementinthesecurityagreementprovidingforasecurityinterestinthe
proceedsofcollateral.Theattachmentofasecurityinterestincollateralautomaticallygivesasecuredparty
rightstotheidentifiableproceeds.

AfterAcquiredProperty

Afteracquiredpropertyispropertyinwhichthedebtorhadnorightsatthetimeoftheloantransactionbutin
whichitsubsequentlyacquiresrights.Inorderforasecurityinteresttoattachtothattypeofcollateral,there
mustbeanaffirmativestatementinthesecurityagreementcreatingorprovidingforasecurityinterestinafter
acquiredproperty.Itissufficienttoinsertthephrasenowownedorhereafteracquiredinthesecurity
agreementsdescriptionofcollateral.Suchastatementisnotrequiredinthefinancingstatementforperfection
ofasecurityinterestinafteracquiredproperty.

FutureAdvances

Ifappropriate,asecurityinterestincollateralmayalsosecurefutureobligationsowedbythedebtortothe
securedparty.Thosefutureobligationsoradvancesdonotneedtobemadepursuanttoacommitmentmadeor
evenbeseriouslycontemplatedatthetimeatwhichthesecurityagreementisenteredinto.Allthatisrequiredis
astatementinthesecurityagreementwherebythedebtorgrantsthesecurityinteresttosecurefutureadvances.
Asapracticalmatter,itshouldbeevidentthatwhenrepresentingdebtors,itisimportanttofocusonthe
languageinthesecurityagreement.Thelanguagecouldbesobroadthattheagreementgrantsthesecurity
interesttosecureanyandeveryotherobligationofanykindeverowedbythedebtortothesecuredparty.This
isaclausethatbearscloseexaminationtoensurethatitaccordswiththeintentofthepartiesatthetimeatwhich
thecontractisenteredinto.

ReviewoftheRequirementsofaSecurityAgreement

Requirementsforasecurityagreementincludethatit:

Beawritten(orelectronic)record
Besignedorauthenticatedbythedebtor
Containasufficientdescriptionofthecollateral
Belessthanaspecificserialnumberapproachbutbemorethanmerelyallassets
Adescriptionbycategoryissufficient(e.g.,allequipment,accounts,andgeneraltangibles).

Otherrequirementsincludethat:

Valuehasbeengiven
Thedebtorhasrightsinthecollateral
Thereisnoneedtoincludeproceeds,whichisautomaticallyincluded
Theafteracquiredpropertyclausemustbeincludedand
Thefutureadvancesclauseshouldbeincluded,ifappropriate.

UnderstandingSecurityInterestsandLiens:Perfection

PerfectionofSecurityInterestsGenerally

Anunperfectedsecurityinterestissubordinatedtoaliencreditorandabankruptcytrustee.Statedinthereverse,
aperfectedsecurityinterestprevailsoverajudgmentcreditorandabankruptcytrustee.Therearefourbasic
methodsofperfectinganattachedsecurityinterest.Firstandmostcommonisaproperlycompletedfinancing
statementfiledwiththeappropriateUCCfilingoffice.Second,thecollateralmaybeinthepossessionofthe
securedparty.Third,thesecuredpartymayhavecontroloverthecollateral.Fourth,inafewcases,the
attachmentofthesecurityinterestautomaticallyperfectsthesecurityinterest.

1)PerfectionbyFiling

Asecurityinterestinmanytypesofcollateralmaybeperfectedbyfilingaproperlycompletedfinancing
statementintheappropriateUCCfilingoffices.Exceptforsecurityinterestsarisingoutofcertainsalesof
accountsorpaymentintangibles,thefilingofaproperlycompletedfinancingstatementistheonlymethodof
perfectingasecurityinterestinaccountsorcommercialtortclaimintangibles.Thisisbecausethesetypesof
collateralhavenophysicalpresencethatenablesperfectionbypossession.Thefilingofafinancingstatementis
analternativemethodofperfectingasecurityinterestingoods,negotiabledocuments,instruments,chattelpaper
andinvestmentproperty.

AfinancingstatementunderrevisedArticle9oftheUniformCommercialCodemustsetforth:

a.Thedebtorsname
b.Thedebtorsmailingaddress
c.Indicatewhetherthedebtorisanindividualoranorganization
d.Ifthedebtorisanorganization,indicatethetypeoforganization(i.e.,corporation,partnership,limited
liabilitycompany,etc.),thejurisdictionoforganizationandanorganizationalnumber
e.Thenameofthesecuredpartyorthesecuredpartysrepresentative
f.Themailingaddressofthesecuredpartyoritsrepresentativeand
g.Adescriptionofthecollateralcoveredbythefinancingstatement.

Thetwoprincipalingredientsthatcausethegreatesttroubleare:(1)thedebtorsnameand(2)thedescriptionof
collateral.Uniformformsforfinancingstatements,continuationstatements,terminationstatementsandthelike
arecontainedinArticle9oftheUniformCommercialCodeitself.Anydocumentmeetingthesesrequirements
maybefiledasafinancingstatement.

Afinancingstatementmaybefiledwithoutthedebtorssignatureonthefinancingstatementifthedebtor
authorizesthefiling.Byenteringintoasecurityagreement,adebtorautomaticallyauthorizesthefilingofa
financingstatementcoveringthecollateraldescribedinthesecurityagreement.

Acollateraldescriptioninafinancingstatementissufficientifitindicatesthecollateralcoveredbythe
financingstatement.Afinancingstatementindicatesthecollateralifithasadescriptionofthecollateralorifit
indicatesthatitcoversallassetsorpersonalpropertyofthedebtor.Supergenericcollateraldescriptionsfor
financingstatementsareallowedunderrevisedArticle9oftheUniformCommercialCode.Wherethesecurity
agreementcreatesalieninalloftheassetsofthedebtor,thesupergenericcollateraldescriptionwouldbeas
follows:Allassets.Aslightlyexpandedsupergenericallassetdescriptionisasfollows:

Allpersonalpropertyofdebtor,whereverlocated,andnowownedorhereafteracquired,including
accounts,chattelpaper,depositaccounts,documents,equipment,generalintangibles,instruments,
inventory,investmentproperty,letterofcreditrightsandcommercialtortclaims,andtheproceedsand
productsoftheforegoing.

Thedebtorscorrectnameiscrucialtothevalidityofthefinancingstatementbecauserecordsareindexedon
thatbasis.Thenameofthedebtorshouldappearonthisformexactlyasitappearsonthesecurityagreement,
andifthedebtorisaregisteredorganization,exactlyasthedebtorsnameappearsinthepublicrecordsofthe
organization.Ifthedebtorisanindividual,thefinancingstatementmustindicatethedebtorslastname.Atrade
nameisnotasufficientnameforadebtor.
Foratrust,therulesaresomewhatconfusing.Itisnecessarytoexaminethetrustdocumentsanddetermine
whetherseparatefilingsarerequiredunderthenamesoftheindividualtrustee(s),andeithertheindividual
settlor(s)orthenameofthetrustitself,ifithasone.Anynameusedforthedebtorotherthanthecorrectname
rendersthefinancingstatementinsufficientandseriouslymisleading,unlessthenameusedissosimilartothe
debtorscorrectnamethatasearchunderthedebtorscorrectname,usingthefilingofficesstandardsearch
logic,woulddisclosethefilingwiththeincorrectname.

Asapracticalmatter,considertakingthefollowingsteps:

Gettingthenameoftheregisteredorganizationfromitscertificateofformation,itscertifiedarticlesof
incorporation,itscertifiedarticlesoforganization,oritscertificateoflimitedpartnership,ineachinstance
issuedbythesecretaryofstateofthejurisdictionofitsformation.

Requiringanynaturalpersonwhoisaborrowertoproduceapassport,socialsecuritycard,birth
certificate,federalincometaxreturnorphotocopyofhisdriver'slicense.

Gettingcopiesofformationdocumentsfromunregisteredentities(thepartnershipagreement,etc.).

Gettingacopyofthetrustagreementandallamendmentsiftheborrowerisatrusttoobtainthecorrect
namesofthetrust,thetrustee(s),andthesettlor(s)andlistingallthreeasdebtors.

AccordingtoSection9516(b)(5)(A)oftheUniformCommercialCode,themailingaddressofthedebtormust
beincluded.AlthoughthestandardUCC1formpreviouslyhadaspaceforboththedebtorssocialsecurity
number(foranindividual)andfederalemployeridentificationnumber(foranorganization),manystateshave
eliminatedthisspaceoutofconcernsfordebtorsprivacy.See,e.g.,Cal.Comm.Code9521(allowingUCC1
formswithoutablankforsocialsecuritynumber).Butsee,e.g.,IdahoComm.Code289502(e)(3)(requiring
thedebtorssocialsecuritynumberorotheruniquenumber,combinationofnumbersandletters,orother
identifierselectedbythesecretaryofstateusingaselectionsystemormethodapprovedbythesecretaryof
agriculture,orinthecaseofadebtordoingbusinessotherthanasanindividual,thedebtorsinternalrevenue
servicetaxpayeridentificationnumberorotherapproveduniqueidentifierforafinancingstatementcovering
farmproducts).Itisthereforeimportanttocheckboththefilingandtheprivacyrequirementsforthestatein
whichtheUCC1willbefiled.

Ifthedebtorisanorganization,thetypeoforganizationmustbespecified(i.e.,corporation,generalpartnership,
limitedliabilitycompany),alongwiththejurisdictionoftheorganization.SeeSection9516(b)(5)(C)ofthe
UniformCommercialCode(afilingagainstadebtorthatisanorganizationisineffectivewhenitisrejectedfor
failuretoindicatethetypeoforganizationandthejurisdiction).Additionally,theformmustcontainthename
andmailingaddressofthesecuredparty.SeeSection9516(b)(4)oftheUniformCommercialCode(afiling
doesnotoccurwhenthefilingofficerefusestoacceptthefilingbecauseoffailuretoincludethenameand
mailingaddressofthesecuredpartyofrecord).

ThebasicapproachinthecurrentversionofArticle9isthatperfectioncentersonthedebtorslocationrather
thanonwherethecollateralisormaybelocated.Furthermore,Article9presentlydefinesthelocationofthe
debtorinwaysthat,formanyentitiesincludingcorporations,changepriorlawbyfocusingontheplaceof
incorporationorregistrationratherthanonthelocationofthechiefexecutiveoffice.

AregisteredorganizationisonethatisorganizedunderthelawsofastateortheUnitedStates.Examples
includecorporations,limitedliabilitycompaniesandlimitedpartnerships.Forregisteredorganizationsthatare
organizedunderthelawofthestate,thefilinglocationofthedebtoristhestateoforganization(regardlessof
whetherthedebtorsactualbusinesslocationorheadquartersisinthatstate).Thus,forexample,aDelaware
limitedliabilitycompanydoingbusinessinNevadaandhavingallofitsassetsinNevada,theplaceoffilingis
theDelawareSecretaryofState.

Foranorganizationthatisnotregistered,thefilinglocationisinthejurisdictionoftheplaceofbusiness,or,if
thereismorethanoneplaceofbusiness,thejurisdictionofitschiefexecutiveoffice.Examplesoforganizations
thatarenotregisteredincludeageneralpartnershipandanunincorporatedassociation.

Asourceofconfusionoccurswhenthedebtorisatrust.Specifically,itisnotclearwhetheratrustisviewedas
anunregisteredorganizationorasoneormoreindividualswhoareactingintheircapacitiesastrusteesor
settlorsofthetrust.Asapracticalmatter,untilthelawwithrespecttotrustsissettled,itisbesttofileinall
possiblelocations:forindividuals,theirjurisdictionofresidenceandforthetrust,thejurisdictionofthetrusts
placeofbusinessorchiefexecutiveoffice,ifithasone.Itismostimportantthatthefilingoccuratleastinthe
jurisdictionwherethetrusteeislocatedif,underapplicablelaw,thetrusteehaslegaltitletothecollateral.

Forindividuals,thefilinglocationisthestateoftheindividualsprincipalresidence,withrespecttoboth
businessandpersonalassetsoftheindividual.Thus,ifanindividuallivesinMontanabutdoesbusinessasasole
proprietorshipinNewMexico,underArticle9theplaceoffilingwouldbetheMontanaSecretaryofState.

Ifthedebtorchangesitslocation,thesecurityinterestmustbeperfectedinthenewjurisdictionwithinfour
monthsofthechange.Similarly,ifthedebtorchangesitsname,afinancingstatementamendmentmustbefiled
withinfourmonthsofthechange.Moreover,ifthecollateralistransferredsubjecttothelendersexisting
securityinteresttoadifferententityandthenewdebtorislocatedinadifferentjurisdictionfromthetransferor,a
financingstatementmustbefiledwithinoneyearofthetransferinthenewdebtorsjurisdiction.

2)PerfectionbyPossession

Asecuredpartymayperfectasecurityinterestbyhavingpossession,eitheritselforthroughathirdparty,ofthe
collateral.Possessorysecurityinterestsaretheoldestformofsecurityinterestsinpersonalproperty.As
commercehasexpanded,however,possessorysecurityinterestsareincreasinglylesscommon.Thistendency
hasbeenacceleratedbytheadventofelectronichandlingsystemsforvariousformsofsemiintangibles.Article
9doesnotdefinesuchpossession.Itappears,however,thatitmeansthatthesecuredpartyoritsagenthas
takenphysicalcontrolofcollateralthatisatangibleasset.

Certaintypesofcollateralmustbeperfectedthroughpossession:

MoneyTheonlywaythatasecuredpartymayperfectitssecurityinterestinmoneyisbypossession.
 InstrumentsAlendermayperfectasecurityinterestinaninstrumenteitherbyfilingorpossession.
Priorityasbetweenasecuredpartyhavingpossessionandthesecuredpartyhavingafilinggoestothe
securedpartyhavingpossession.Asecurityinterestarisingoutofasaleofapromissorynote(i.e.,an
instrument)isperfectedautomatically,withoutadditionalaction,whenitattaches.SeeSection9304(4)of
theUniformCommercialCode.

LettersofCreditPossessionofaletterofcreditdoesnotperfectasecurityinterestinproceedsofthe
letterofcredit.

CertificatedSecuritiesAsecuredpartyperfectsitsinterestincertificatedsecuritiesbypossession,
withoutanynecessaryendorsement.

ChattelPaperArticle9limitsperfectionbypossessiontotangiblechattelpaper.InreCommercial
MoneyCtr.Inc.,392B.R.814,825n.22(B.A.P.9thCir.2008)InreInofinInc.,455B.R.19,37(Bankr.
D.Mass.2011).Electronicchattelpapermaynotbeperfectedbypossessionandinsteadmaybeperfected
bycontrolorfiling.SeeInreKRAMInc.,451B.R.154,173(Bankr.D.N.M.2011)(Perfectionby
possessionappliesonlytotangiblenegotiabledocuments,goods,instruments,moneyortangiblechattel
paper...Perfectionbycontrolappliesonlytoinvestmentproperty,depositaccounts,letterofcreditrights,
electronicchattelpaperandelectronicdocuments.).

OtherCollateralAsecuredpartywillperfectbytakingpossessionofcollateral,includinggoodsand
negotiabledocuments.Ifcollateralisinthepossessionofathirdparty,perfectionwilldependuponthe
thirdpartysabilitytoauthenticatearecordevidencingperfection(i.e.,signingawritingorotherwise
authenticatinganelectronicrecord)acknowledgingthatthethirdpartypossessesthecollateralforthe
benefitofthelender.

3)PerfectionbyControl

Controlworkstoperfectaninterestincollateralheldbyathirdpartybyagreementforthebenefitofthe
lender.Article9oftheUniformCommercialCodepermitsperfectionofasecurityinterestbycontrolfor
investmentproperty,depositaccounts,electronicchattelpaperandlettersofcredit.

DepositAccountsTheonlywaytoperfectasecurityinterestinadepositaccountisbyobtaining
controlofthedepositaccountthefilingofafinancingstatementdoesnotworkforadepositaccount.A
securedpartyhascontrolofadepositaccountifitisthedepositorybankorifthedepositaccountinthe
depositorybankisinthesecuredpartysname.Additionally,asecuredpartyhascontrolifthedepository
bankagreeswiththesecuredpartythatthedepositorybankwillcomplywiththeinstructionsfromthe
securedpartyconcerningtheaccount,withoutallowingforconsentbytheaccountholder.
 InvestmentPropertyInvestmentpropertyisacatchalltermthatincludescertificatedsecurities,
uncertificatedsecurities,securityentitlementsandsecuritiesaccounts.Ifthecollateraldoesnotqualifyas
investmentproperty,itisprobablyageneralintangible.

TableSummarizingMethodsofPerfectioninVariousTypesofCollateral

COLLATERAL PERFECTION

Accounts Filing9.310

AgriculturalLiens Attachment9.308filing9.310

Filing9.312possession9.313(tangiblechattelpaper)
ChattelPaper*
control9.314(electronicchattelpaper)

CommercialTortClaims(noperfectioninafter Filing9.310(Notethattherearedifferentdescription
acquiredcommercialtortclaims) requirementsforthistypeofcategory.)

CommodityAccounts(asubsetofinvestment Attachment9.309(securityinterestcreatedbyan
property)* intermediary)otherwise,filing9.312control9.314

Attachment9.309(purchasemoney)otherwisefiling
ConsumerGoods**otherthanvehicles,boats,etc.
9.310

DepositAccounts(includesnonnegotiableCDs) Control9.312and9.314

Equipment** Filing9.310

FarmProducts** Filing9.310

Fixtures Filing9.310see9.501,9.502(fixturefiling)

GeneralIntangibles(includesmostLLCand Filing9.310saleofpaymentintangibleattachment
partnershipinterests) 9.309
Goodssubjecttoastatuteortreatysuchasboats, Compliancewithapplicablefederalorstateregulations
cars,aircraft 9.309(1)and9.311

Healthcareinsurancereceivablesassignedto
Attachment9.309
serviceprovider

Instruments Filing9.312possession9.313

Inventory**(includingmotorvehicles,boats,
Filing9.312
manufacturedhomes,etc.)

InvestmentProperty* Filing9.312control9.314

LetterofCreditRights Control9.312and9.314

Filing9.312ifinventorypossession9.313compliance
ManufacturedHome,**motorvehicles,**boats**
withstateregulations9.311(noninventory)

MembershipInterestinLimitedLiability Filingasageneralintangible9.310ifLLChasopted
Company(asubsetofeithergeneralintangiblesor intoArticle8,filing9.312orcontrol9.314as
investmentproperty)* investmentproperty

Money Possession9.312

Filing9.312possession9.313control9.314(electronic
NegotiableDocuments*
documents)

Filingasageneralintangible9.310ifpartnershiphas
PartnershipInterest(asubsetofeithergeneral
optedintoArticle8,filing9.312orcontrol9.314as
intangiblesorinvestmentproperty)*
investmentproperty

Proceeds Perfectionofsecurityinterestinoriginalcollateral9.315
 PromissoryNote(Sale) Attachment9.309

Attachmentifcreatedbybrokerorintermediary9.309
Securities(asubsetofinvestmentproperty)*
filing9.312control9.314

Software(asubsetofgeneralintangibles)thatis
Filing9.310(a)unlessotherstatutegoverns9.310(b)(3)
notpartofgoods

*Withrespecttocollateralinwhichasecurityinterestmaybeperfectedbyfilingorcontrol,perfectionby
controlispreferable.

**Forgoodsotherthangoodscoveredbyacertificateoftitle,possessionisalwaysanoptiontoperfect.See
Section9.313(c)oftheUniformCommercialCode.

TableSummarizingStateVariationsofMethodsofPerfection

California,Colorado,Districtof
Columbia,Hawaii,Idaho,
Asecurityinterestcreatedbyasaleofanaccountthatistherightsto
Kentucky,Maryland,
paymentofwinningsinalotteryorothergameofchanceisperfected
Massachusetts,Nebraska,North
whenitattachesundernonuniformSection9309(14).
Dakota,Oklahoma,Rhode
Island,Texas,VirginIslands

Asecurityinterestinoraclaiminorunderanypolicyofinsurance
(otherthanahealthcareinsurancereceivable),includingunearned
premiums,maybeperfectedonlybygivingwrittennoticetotheinsurer
underSection9312(b)(4).NonuniformSection9310(b)(11)statesthatit
California
isnotnecessarytofileafinancingstatementtoperfectsuchasecurity
interest.
Ahealthcareinsurancereceivablemaybeperfectedonlyasotherwise
providedunderSection9312.

Filingisnotnecessarytoperfectasecurityinterestintimbersoldbythe
Idaho
stateofIdaho,pursuanttoanonuniformSection9310(b)(11).

Louisiana Arecordofmortgageisnoteffectiveasafinancingstatementfiledasa
fixturefilingafixturefilinginLouisianaisfiledintheUCCindex,notin
therealpropertyrecords.
Asecurityinterestinacollateralmortgagenotemaybeperfectedonly
bythesecuredpartystakingpossessionunderSection9313,pursuantto
 nonuniformSection9312(b)(4).
Asecurityinterestinalifeinsurancepolicymaybeperfectedonlyby
controlunderSection9314.

Section9311omitsthe2010amendmentsregardinggoodscoveredbya
Missouri
certificateoftitle.

Acooperativeorganizationsecurityinterestbecomesperfectedwhenthe
cooperativeinterestfirstcomesintoexistenceandremainsperfectedso
longasthecooperativeinterestexists,pursuanttononuniformSection9
308(h).
UndernonuniformSection9310(b)(11),filingisnotnecessaryto
NewYork perfectasecurityinterestinacooperativeinterest.
UndernonuniformSection9312(i),subsections9312(a)through(h)do
notapplytocooperativeinterests.UndernonuniformSection9313(j),
subsections9313(a)through(i)donotapplytocooperativeinterests.
UndernonuniformSection9314(d),subsections9314(a)through(c)do
notapplytocooperativeinterests.

Filingisnotnecessarytoperfectasecurityinterestinagriculturalliens
NorthDakota createdbychapter3517,3530,or3531,pursuanttononuniformsection
9310(2)(k).

FilingisnotnecessarytoperfectasecurityinterestsubjecttoSouth
DakotaCodifiedLaws493411to493411.4,inclusive(covering
SouthDakota mortgagesortrustdeedsexecutedbypublicutilitiesandsecurityinterests
againstpersonalpropertyofpublicutilities),pursuanttononuniform
Section9310(b)(11).

Filingisnotnecessarytoperfectasecurityinterestinoilorgas
Texas
production,pursuanttononuniformSection9310(b)(11).

Filingisnotnecessarytoperfecttheagriculturallienofahandleron
Washington
orchardcropsasprovidedinRCW60.11.020(3).

AnalyzingCompetingLiensandInterestsandCertainBankruptcyRisks

LienPriorities
Article9oftheUniformCommercialCodeestablishesasystemofprioritiesamongcreditorswithcompeting
interestsinares.Generally,apartywithavalidandperfectedsecurityinterestwillhavepriorityoverunsecured
creditorsandoverliencreditors,whohaveacquiredanonconsensuallienagainstpropertysubjecttoaprior
securityinterestbyattachment,levyorthelike.

Amongsecuredcreditors,thefirstintimetoperfectgenerallyhaspriority.TheUniformCommercialCode
employsapureracesystemsuchthatactualknowledgeofanunperfectedsecurityinterestbyacompeting
lenderisnotrelevanttotheinquiry.Themostimportantexceptiontothefirstintimeruleisthepriority
providedbytheUniformCommercialCodetoapartysecuredbyapurchasemoneysecurityinterest(PMSI).
Generally,aPMSIisasecurityinteresttakenorretainedbyasellerofthecollateraltosecureallorapartofits
purchaseprice,orforvaluegiven,toenablethedebtortoacquirerightsorusethecollateralifthevalueisin
factsoused.Thekeyistofindadirectnexusbetweentheloanproceedsandthecollateral.Comment3to
Section9103oftheUniformCommercialCodestates:

Theconceptofpurchasemoneysecurityinterestrequiresaclosenexusbetweentheacquisitionof
collateralandthesecuredobligation.Thus,asecurityinterestdoesnotqualifyasapurchasemoney
securityinterestifthedebtoracquirespropertyonunsecuredcreditandsubsequentlycreatesthesecurity
interesttosecurethepurchaseprice.

Intangiblecollateralisnongoodscollateralandispersonalpropertythatcannotbetouched.UnderArticle9of
theUniformCommercialCode,theonlyintangiblecollateralthatcanbesubjecttoaPMSIissoftware
purchasedfortheprincipalpurposeofuseingoodsthatarethemselvestakenunderaPMSI.Inotherwords,the
PMSIispermittedinsoftwareinanintegratedtransactionwiththeacquisitionoftherelatedhardware.

Forgoodsotherthaninventoryorlivestockthatarefarmproducts,Article9givesaperfectedPMSIpriority
overaconflictingsecurityinterestinthegoodsandtheidentifiablecashproceeds,ifthePMSIisperfected
within20daysafterthedebtorreceivespossession.

InordertogetaPMSIininventory,thesecuredpartymustjumpthroughsomehoops.ThePMSIhaspriorityif:

1.Itisperfectedwhenthedebtorreceivespossessionoftheinventory
2.TheholderofthePMSIsendsanauthenticatednoticetotheholderoftheconflictingsecurityinterest
3.Thecompetingsecuredpartyreceivesthenoticewithinfiveyears(sixmonthsinthecaseoflivestock
constitutingfarmproducts)beforethedebtorreceivespossessionand
4.ThenoticestatesthatthePMSIholderexpectstoacquireaPMSIininventoryanddescribestheinventory.
Thepurchasemoneypriorityininventoryattachestotheproceedsofthatinventoryonlytoaverylimited
extent.Apriorfileronaccounts,forexample,willhavepriorityonaccountsarisingfromthesaleof
inventoryunlessthecreditorsagreeotherwise.

ContractualandStructuralSubordination

ThepriorityrulesofArticle9oftheUniformCommercialCodecanbemodifiedcontractually,i.e.,bya
subordinationagreement.Intercreditoragreementsarecraftedtoestablishprioritiesasamatterofcontractrather
thanfollowingtheArticle9priorityscheme.Intercreditoragreementstypicallyaddressissuesincluding:


1.Therightofaseniorlendertoblockpaymentsbythedebtortoasubordinatedlenderafteradefaultunder
theseniorlendersloandocuments
2.Astandstillperiodduringwhichajuniorlendermaynotexerciseremedies
3.Bankruptcyrightssuchaswithregardtodebtorinpossessionfinancing,cashcollateraluse,objectionsto
thedispositionofthesharedcollateral,votingrightswithregardtoaplanofreorganization,etc.

SecuredPartyvs.BankSetoffRights

Adepositorybankscommonlawrightofsetoffhaspriorityoverasecurityinterestheldbyanothersecured
lender,includingonewhoclaimsthedepositaccountsascashproceedsofanassetbasedloan.Thedepository
bankwillloseitsseniorstatusonlyifacompetingsecuredcreditortakescontrolofthedepositaccountin
questionorifthedepositorybankhasagreedtoacontractualsubordinationofitssetoffright.

BankruptcyRisks

Avalid,perfectedsecurityinterestgenerallywillbeenforcedbythebankruptcycourts.However,thelender
withcollateralfacesvariousrisksthatcoulddefeatthelendersseniorstatus,includingtheautomaticstay,
subordination,recharacterization,surcharges,avoidance(preferencesandfraudulenttransfers),andfailureto
properlyperfect(strongarmpowersofthetrusteeunderSection544oftheBankruptcyCode).

Adherencetothetechnicalrequirementsforperfectionisessential.Securedcreditorsriskavoidanceofa
securityinterestthattheymaythinkisperfectedwhentheyfilethefinancingstatementinthewrongjurisdiction.
SeeInreDavis,274B.R.825,828(Bankr.W.D.Ark.2002)(afinancingstatementforfarmequipmenthadto
befiledinthecountyofthedebtorsresidence).Forexample,inKunkelv.Ries(InreMorken),199B.R.940
(Bankr.D.Minn.1996),thecollateral,whichwaslivestock,wereexpectedtobeintransitthroughseveralstates.
ThesecuredcreditorreliedonSection9103(d)(1)oftheUniformCommercialCode,whichallowsasecurity
interesttoremainperfectedforfourmonthsaftercollateralismovedfromthestatewherethefinancing
statementisfiled.Thebankruptcycourtheld,however,thatbecausethesecuredcreditorknewatthepointthat
thefinancingstatementwouldbefiledthatthecollateralwouldbemovedtoastateotherthantheoneinwhich
itwasperfected,thesecuredcreditorwasnotentitledtorelyonthefourmonthrule.Id.at962.

Additionally,inFleetNationalBankv.WhipannyVentureILLC(InreITGroupInc.),307B.R.762(D.Del.
2004),thecreditorsimilarlyfailedtoperfectasecurityinterestintheproceedsfromacontracttosellreal
propertywhenitfiledafinancingstatementinNewJersey,whichwaswherethepropertywaslocated.Because
thecreditorsinterestwasinageneralintangible,however,thecreditorwasrequiredtofileinthestatewherethe
debtorschiefexecutiveofficewaslocated,whichhappenedtobeColorado.Id.at766.Sincethecreditorhad
notfiledafinancingstatementinColorado,thesecurityinterestwasunperfectedandavoidableunderthe
trusteesstrongarmpowers.Id.at767.

Asecurityinterestislikewiseunperfectedifthecreditorhasfollowedtheprocedureforperfectinganinterestin
thewrongtypeofcollateral.Forexample,acreditorofacardealershipwhoperfectsaninterestinvehiclesthat
areinventorymustfileafinancingstatementandcannotperfectthroughtheusualprocessofindicatingthe
interestonthecertificateoftitle.SeeInreBabaeianTransp.Co.,206B.R.536,546(Bankr.C.D.Cal.1997)(a
securedcreditorwhofailedtofileaUCC1financingstatementhadnotperfecteditssecurityinterestinvehicles
thatwereheldasinventory).

Similarly,asecurityinterestisalsounperfectedwhenitisfiledunderthenameofthewrongdebtororwhenthe
securedcreditorfailstoindicatecorrectlythenamesofmultipledebtors.SeeOfficialCommitteeofUnsecured
Creditorsv.RegionsBank(InreCamtechPrecisionManufacturingInc.),443B.R.190,19899(Bankr.S.D.
Fla.2011)(asecurityinterestagainstassetsofadditionaldebtorswasunperfectedwherethecreditorlistedtheir
namesonlyonanonstandardattachmenttothefinancingstatement,andneitherthenamesoftheadditional
debtorsnortheattachmentwerereferencedonthefinancingstatement).Moreover,asecurityinterestmayeven
beunperfectedasaresultofaclerkserrorin,forexample,failingtoproperlynotethenameofthesecured
creditoronacertificateoftitle.See,e.g.,InreReaster,242B.R.423,426(Bankr.S.D.Ohio1999)(asecured
interestinamobilehomewasnotperfectedwheretheclerkfailedtoidentifythenameofthecorrectlienholder
onthecertificateoftitle,andtheerrorwasnotminor).

ByIraL.Herman,Thompson&KnightLLP

IraHermanisapartnerinthebankruptcyandrestructuringgroupatThompson&Knight.

TheauthorwouldliketothankEvelynBreithauptofGoldWeemsBruserSues&RundellinAlexandria,
Louisiana,forhercontributionstothepreparationofthisarticle.

ThisarticleisexcerptedfromLexisPracticeAdvisor,acomprehensivepracticalguidanceresourceproviding
insightfromleadingpractitionersonthetopicscriticaltoattorneyswhohandletransactionalmatters.Formore
informationonLexisPracticeAdvisorortosignupforafreetrialpleaseclickhere.Lexisisaregistered
trademarkofReedElsevierPropertiesInc.,usedunderlicense.

Theopinionsexpressedarethoseoftheauthor(s)anddonotnecessarilyreflecttheviewsofthefirm,itsclients,
orPortfolioMediaInc.,oranyofitsortheirrespectiveaffiliates.Thisarticleisforgeneralinformation
purposesandisnotintendedtobeandshouldnotbetakenaslegaladvice.

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