SECURITY INTERESTS FOR CREDIT MANAGERS

by Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.

As we saw last time, perfection is the concept of making a lien good against other people so they cannot get rights in the property higher than the party with the perfected lien. It is one thing to create a security interest with your customer. It is another to have it enforceable against third parties.

Most of the ways of perfecting security interests come from the idea of giving notice to third parties that the lien exists. In some situations, if a third party is aware of the lien (has actual notice), it will be good against that third party. The UCC is specific about how security interests are perfected in certain types of property. If the UCC requires a certain type of perfection, other types will not work.

Some liens require no special steps for perfection. Some security interests in consumer goods that are in the hands of the consumer are automatically perfected. The security interest you granted in the refrigerator you bought on credit requires no further act to have it perfected.

The next simplest form of perfection is perfection by possession. A security interest in almost any type of personal property can be perfected by the secured party actually holding the goods. When a bank takes jewelry as security for a loan, it may actually take the items into its possession and store them. Since the bank holds the goods and they are not in the possession of the debtor, any third party attempting to take a security interest in the items would be on notice that there is something unusual about the transaction. Typically, one who is in a position to pledge collateral has possession of the collateral.

Property for which the state issues a certificate of title (generally vehicles) has security interests perfected by notation on the title itself. States will have a system of recording an encumbrance on the state records, and it may be printed on the certificate of title, so anyone looking at or searching the title will see the lien. Contrasted with that, however, are vehicles that are held for resale. Those are considered inventory (or something else) and need to have another type of perfection.

The most prevalent form of perfection is perfection by filing. Much more on that next week.

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