11. What methods exist for perfecting a security interest in personal property?
Establishing or making one’s security interest effective as against third parties is known as “perfection” of the security interest. Perfection takes place when the security interest has attached and the creditor has taken all proper steps required by Article 9 for perfection. Generally, Article 9 allows a secured party to perfect her security interest through the following methods::
• Financing Statement – The most common way of perfecting a security interest under Article 9 is to file a financing statement in the appropriate public office. State law establishes the system and location for filing a public financing statement. Most states allow for filing through the secretary of state’s office, while other states allow for filing at a public office (such as the courthouse) in the area where the collateral is located.
⁃ Note: Perfection by filing is appropriate for any collateral, except negotiable instruments.
• Possession or Control – In some cases, the secured party may perfect a security interest by establishing possession of or control over the collateral securing the obligation. The theory behind this method of perfection is that a third party would not reasonably extend credit and take a security interest in collateral that the debtor supposedly owns but does not possess and cannot otherwise demonstrate ownership.
⁃ Note: Control may include holding a certificate of title of physical possession of the collateral.
• Automatic Perfection – Some security interests are automatically perfected, either permanently or temporarily, upon attachment of the security interest to the collateral.
⁃ Example: A Purchase Money Security Interest (PMSI) is a transaction in which a lender provides funds or financing to purchase the collateral securing the loan. If the collateral is a consumer good, the lender is automatically perfected. If the collateral is a non-consumer (business) good, the security party is automatically perfected for a temporary amount of time.
Each of these methods of perfecting a security interest is discussed separately.
• Discussion: Why do you think the law allows secured creditors to perfect their security interests via multiple methods? What are the justifications for the above methods? What is the common characteristic in each of the methods of perfecting a security interest?
• Practice Question: Tom sells a piece of equipment to May to use in her business. He provides financing that allows May to pay for the equipment over the next 24 months. Tom and May undertook the steps necessary to attach a security interest in the equipment. What methods might Tom use to perfect his security interest?