Perfection is the process a secured party protects their priority in some collateral against others who may want to have a claim on that same collateral. In other words, it is a way of letting others know, “hey, I already have some ownership rights in this property, if you also attach, I’m the first in line.” See 8-308(a) Priority is going to be determined largely by whether an interest was perfected. 9-310(a). So, how does one perfect their interest? There are five main methods:
- Filing a financing statement (9-310, 9-500s)
- Taking possession of the collateral (9-313)
- Ensuring control of the collateral (9-314)
- Sometimes attachment is enough (9-309)
- Other laws may apply that determine perfection rules (9-311).
Here, we will be discussing the essential elements of a financing statement, the primary method of perfection.
One last note before diving into the financing statement, it is important for the secured party to keep up to date on the collateral to ensure that changes are reflected in the financing statement. The reason for this is because if the financing statement does not match the current state of the interest, the collateral may no longer be perfected because of those changes.
The essential elements of the financing statement are:
- The name of the debtor
- The name of the secured party
- An indication (not description) of the collateral.
The whole point of this bare bones essential requirements are to put prospective buyers on inquiry notice (not actual). This is largely because perfection might occur before attachment. Thus, parties are on notice that another might have an interest in the collateral. As such, the idea is to provide the interested party with just enough information to track down the other parties and learn more.
The Name of the Debtor
Interestingly, the most important aspect of the financing statement is the debtor’s name. The reason for this is because the statement is filed and indexed by the name of the debtor. For instance, if a party wants to learn what collateral is already secured, they will look up the name of the debtor. As such, if there is an error, a prospective secured party will not be able to locate the correct filings. To address this issue, 9-503(a) outlines the rules of the debtor’s name and 9-506 discusses what happens if errors occur.
Sometimes, if there is an error, but the error was not “seriously misleading” a search will pull up the correct records and the perfection may still be effective. Sometimes to address the issue of a potential error causing a secured interest to be ineffective, filers will make multiple filings under variations of the same name (cover all the bases). The issue with this is that it will pull up multiple records and make it quite difficult for a searcher to determine who is who.
Registered Organizational Debtors
9-503(a)(1) These are businesses or organizations that are registered with the state.
9-503(a)(6) These are usually partnerships. They are organized but don’t have a filing with the state. Most of the time, this is not relevant because most of the time organizations are registered.
Below shows the alternate ways to determine the name of an individual. States can choose which alternatives to use. Most states use the first alternative.
- By the drivers license (if filing is made in the state of issuance) 9-504(a)(4)
- If there is no drivers license, the filer needs to use the “individual name of the debtor” or “surname and first personal name.” 9-503(a)(5)
- By the safe harbor rule, the filer can use either 9-503(a)(4)
- The individual name
- Driver’s license
- Surname and first personal name
- Go to 9-503 to define a name
- If the name is an error, go to 9-506(a-c) to see if it is a “seriously misleading” mistake and whether the incorrect name would appear while searching the correct name.
The Name of the Secured Party
Essentially, the correctness of the name of the secured party is also subject to the “seriously misleading” rule. However, because everything is indexed by the debtor’s name, it is unclear how an error would be seriously misleading.
Indicating the Collateral
There is a difference between attachment and perfection. There is also a difference between the description required for attachment and the indication required for perfection. An indication can be much more broad because the purpose is only to put a searcher on inquiry notice of what might be covered. As such, there is no need to provide a detailed description and phrases such as “all assets” would suffice for perfection (where that would be insufficient for attachment). See 9-504.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.