13. What is “automatic perfection” of a security interest?
In certain types of transactions, a secured party’s interest in collateral is automatically perfected without filing a financing statement and without taking possession or control of the collateral. This is known as “automatic perfection”. Depending upon the nature of the collateral, automatic perfection may be permanent or only last for a temporary period. Temporary automatic perfect allows a party a window of time to undertake procedures to permanently perfect the security interest. Below are the most common types of automatically perfected security interest:
• Purchase Money Security Interests in Consumer Goods,
• Purchase Money Security Interests in Non-Consumer Goods,
• Perfection in Proceeds from the Sale of Goods, and
• Assignments of Accounts Receivable and Contract Rights.
Each of these types of security interests and the automatic perfection attributes are discussed in a separate lecture.
• Discussion: What do you think is the justification for allowing automatic perfection of security interests in certain types of goods? Do you think it is necessary to allow for automatic perfection of security interests in the above types of goods?
• Practice Question: Carly finances the sale of goods to Derek. She is curious as to whether the sale is perfected or no. What information do you need to know to determine whether her security interest is perfected?