What is Perfection of a security interest?

Perfection is the process of putting the entire world on notice that the secured party claims a security interest in the debtors collateral. Recall, a security interest is enforceable against the debtor at the time that it attaches. That is, the attached security interest will allow the secured party to repossess the assets of the debtor in the event of non-payment of the secured debt. 

A problem arises when other creditors of the debtor seek to establish a security interest in the debtors property, including the collateral already securing existing debts. These parties are effectively claiming an interest in the collateral that competes with the original secured party's interests. 

Secured parties must make certain that the security interest is enforceable as against third parties who claim a competing interest in the collateral. The security interest is only enforceable as against these third parties once it is perfected. 

Perfection allows the secured party to maintain priority of payment or priority above other creditors in the event the collateral must be repossessed and sold to pay outstanding debts. The concept of priority of security interests is discussed further below.

Note: Any party with a security interest in collateral can repossess and sell the collateral upon default by the debtor. Priority establishes a party's entitlement to the proceeds of sale.

When is a Security Interest Enforceable?

A security interest is enforceable against the debtor at the time when it attaches. Secured parties, however, must make certain that the security interest is enforceable against third parties. That is, the secured party wants to have priority of payment above other creditors in the event the collateral is repossessed and sold. The concept of priority is discussed further in separate lectures.

What is the Priority of Creditors?

To establish a secured creditors priority of interest in collateral above all other creditors of the debtor, the secured creditor must perfect her security interest. Being the first party to perfect her interest in the collateral gives her priority above any other creditors who later attempt to establish a secured interest in the collateral. In turn, failing to perfect a security interest allows a later creditor who perfect their security interest in the collateral to receive priority of payment from the sale of the collateral. 9-317(a). Most notably, an unperfected security interest is subordinate (lower priority) to a lien creditor (such as a plaintiff receiving a judgment against the debtor) or the trustee in the event of bankruptcy. The trustee represents all unsecured creditors, which has the effect of subordinating the secured party below all other creditors.11 U.S.C. 544(a)(1). In short, perfecting a security interest is essential to receive the benefits of the security interest.

What are the Methods of Perfecting a Security Interest?

Generally, Article 9 allows a secured party to perfect her security interest in multiple methods. Below are the primary methods for perfecting a security interest:

• Filing a financing statement in the appropriate public office;
• Take or retain possession of the collateral;
• Obtain or retain control of the collateral over the collateral; or
• In limited circumstance, automatic perfection of the security interest in the collateral

Each of these methods of perfecting a security interest are discussed further in separate lectures.

Related Topics

• Secured Transactions Law (Intro)
• What is a Security Interest?
• Collateral 
• Pledge as Collateral
• Collateralize
• Cross Collateralization
• After-Acquired Collateral
• Unsecured Loan Definition
  
• Unencumbered Asset
• What is a Secured Creditor?
• Unsecured Creditor
• What are the benefits of security interests for creditors?
• Limited Recourse Debt
• Uniform Commercial Code - Article 9
  
• What are the common types of security interest in real property (land)?
• What is a mortgage?
• How does a security interest protect the mortgage holder?
• Lis Pendens
• Deficiency Judgment
• What is a Deed of Trust or Security Deed?
• What is a Land Sale Contract?
• What is a security interest in personal property?
• How does one establish a security interest in personal property?
• What is Perfection of a security interest?
• What are the methods of perfecting a security interest in personal property?
• UCC-1 Statement
• How does one establish a security interest in real property (land)?
• Register of Deeds
• What is Automatic Perfection of a security interest?
• What is a Purchase Money Security Interest (PMSI) in consumer goods?
• What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
• How does one continue perfection of a PMSI in non-consumer goods?
• What is Temporary Automatic Perfection in Proceeds from the sale of goods?
• How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
• How does one perfect a security interest by Possession of the collateral?
• How does on perfect a security interest by Control of collateral?
• How does one perfect a security interest by Filing a Financing Statement?
• What authorization is required to file a financing statement?
• Where is the appropriate office to file a financing statement?
• Defeasance
• Continuation Statement
• What is Priority of a security interest?
• What role does perfection play in establishing the Priority of a secured party?
• What are the common conflicts arising as to priority of a security interest?
• What is the priority of parties secured by common law and statutory liens?
• Lien - Definition
• Blanket Lien Definition
• Unperfected Lien
• Possessory Lien 
• Non-Possessory Lien 
• Tax Lien
• Mechanics Lien Definition
• Construction Lien
• Cloud on Title
• What is the priority of a buyer of collateral that is subject to a security interest?
• What is required to be a buyer in the ordinary course of business?
• How does 9-320(b) protect consumers who purchase goods from other consumers?
• What is the Shelter Principle?
• What are the general Priority Rules for Conflicting security interests?
• Subordination Agreement
• Who has Priority in Proceeds from the sale of collateral?
• What is a secured party's priority in future advances to a debtor?
• What is the priority of a PMSI in goods (other than inventory and livestock)?
• What is the priority of a PMSI in inventory?
• What is the priority of conflicting PMSIs?
• What is the priority of security interests in fixtures?
• What is the scope of fixture priority rules?