Other Perfection Methods

Although the financing statement is the primary method of perfection, there are other types of perfection available as well. Sometimes the filing statement is optional for these methods (you can still perfect with a financing statement even if another method is available. Other times, these other methods are required. Essentially it all depends on which collateral you are dealing with.

The starting place to determine which method is available is by looking at Article 9 saying that a financing statement is the method of primary method of perfection is found in 9-310(b), which then directs you to 9-308, 9-309, 9-311, 9-312, 9-313, and 9-314.

These sections point to methods of perfection including maintaining possession, control, and other types of automatic perfection. Of course, these methods only apply if the collateral in question is not preempted by another filing system.

Other Filing Systems

There are three times when Article 9 does not apply to perfection:

1. When federal law preempts the filing system with an alternate system (aircraft; ships; railroad transportation methods; some IP, that is registered copyrights).
2. When a certificate of title statute applies (automobiles except for dealerships with automobiles as inventory).
3. If the state has an alternate system for specific types of collateral.

There are a few key differences between Article 9 filing systems and other methods. For instance, other methods:

1. Are property based (similar to real estate systems)
2. Required to file to obtain property rights
3. Can’t pre-file
4. Filing shows who has rights
5. Filing stays on the record permanently.

Perfection by Possession

9-310(b)(6)

The only way to perfect collateral of money (cash) is by possession. See 9-312(b)(3). Perfection may also (in addition to filing a financing statement) be accomplished by perfection for the following collateral:

• Goods
• Instruments
• Tangible chattel paper
• Tangible negotiable documents of title

See 9-313(a)

Notice all of these collateral types are physical, that is, tangible.

The main premise of perfection by possession is that possession gives notice. For instance, if a potential creditor asks a potential debtor to produce collateral as proof and the debtor does not have possession (because they already promised and gave up possession of the collateral to another creditor), then the potential creditor would be on notice that someone else has possession and might have ownership rights in that property.

This theory presents issues though. What if the potential debtor lies about the possession status (“it’s a loan, not a credit”)? What if the potential debtor has put the collateral in a bank deposit box (who has possession, the bank or the debtor)? Additionally, what if the collateral is possessed by a third party such as a bailee? 9-313(c) addresses these issues. Ultimately, as long as the third party is not too close to the debtor, a third party can take possession and provide acknowledgment of possession (“I [bailee] am holding onto this [item] in behalf of [secured party]”).

Special rules apply for documents which can be found in 9-312(c) (negotiable documents) 9-312(d) (non-negotiable documents).

Perfection by Control

Perfection by control is the only method of perfecting deposit accounts (9-104) and letter-of-credit rights (9-107). Additionally, perfection by control may also occur for the following collateral:

• Investment property (9-106; 8-106)
• Electronic chattel paper (9-105)
• Electronic documents of title (7-106).

See 9-310(b)(8); 9-314.

Control also has different definitions, depending on which type of collateral is in question. The sections next to the collateral above is where that definition can be found.

Essentially, perfection by control is the same as possession. The main difference is that one involves tangible collateral and the other does not. Because control is intangible, it is often difficult to determine who has control. As such, each of the collateral types has their own definition.

Automatic Perfection

Steps

• 9-308
• 9-310(a)
• 9-310(b)(2)
• 9-309 – Automatic attachment

The purpose of automatic perfection is to avoid the costs of providing notice when the notice would provide little benefit. However, although perfection is easy (attachment is the only requirement), searching for a security interest becomes quite difficult. As such there are several rules outlining perfection, depending on the type of collateral.

Purchase-Money Security Interest in Consumer Goods

A transaction can automatically perfect if the attachment is a purchase-money security interest (PMSI) in a consumer good. See 9-309. This rule has two parts:

1. The transaction must be a PMSI (9-103) and;
2. The collateral must be a consumer good that is not subject to certificate of title laws.

A transaction satisfies the first element (must be a PMSI) if:

1. Seller-financed
2. Third-party-financed for a specific purchase, and the money was used to purchase that product.

Typically a PMSI occurs in larger retail purchases such as purchasing an appliance (e.g., refrigerator, sofa, etc.).

Associated Collateral

See 9-308(d).

Sometimes when collateral is so closely related to the original perfected collateral, the new collateral automatically perfects. The reasoning is that the new collateral’s relationship with the original collateral is sufficient notice for potential creditors to be aware of.

For instance, accounts often have “supporting obligations.” If a secured party obtains an interest in the accounts, then they will also have an interest in the supporting obligation.

Other Automatic Rules

There are several other automatic perfection types found in §§ 9-310(b)(2), 9-309(2)-(14), 9-312(e)-(g).

Disclaimer

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.