Part 3, Perfection By Filing, A Short Series On Security Interests For Credit Managers

Perfection By Filing

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

While this could be the title of a manual on manicures (sorry, I couldn’t resist), it is about the most frequent type of security interest perfection.

Each state has a system of recording “financing statements” (not financial statements) that are used to give notice to the world. Just as judgments and real estate transactions are recorded somewhere to allow access by the public, so, too, are financing statements. The idea is that a system of recording contributes to the smooth flow of commerce. Everyone knows that the UCC requires filing to perfect certain types of security interest and that the UCC-1 forms (financing statements) are filed with a particular office where they can be searched. Simple enough? Anyone who deals with the UCC knows that things are rarely that simple.

Article 9 of the UCC underwent a major revision in 2001, with every state adopting the revisions and making them effective, generally, by July 1, 2001. A few states had delayed effective dates, but by January 1, 2002, all were effective.

Under former Article 9, one of the non-uniformities was that each state got to decide where the UCC-1 forms need to be filed. Some states had simple, central filing. Some had dual filing. Some had dual filing, sometimes.

Under new Article 9, the most important change is that the financing statement is generally filed where the debtor (customer) is “located.” For corporations and other registered entities, the “location” is the state of registration of the entity. A Delaware corporation doing business (and having assets) only in Pennsylvania is “located” in Delaware. A sole proprietorship will be located where the principal resides, regardless of where it does business.

All states are now central filing states. That is, the financing statements are filed with the Secretary of State. There may still be local filing for fixtures (relating to real estate).

So, let’s look at a simple, typical transaction under former Article 9 and under Revised Article 9. You sell equipment on credit to a customer who only has one location, in Pittsburgh, Pennsylvania. That customer is a Rhode Island corporation. Customer signs an agreement granting you a security interest in that equipment. Under Revised Article 9 (R9), the customer no longer has to sign UCC-1 forms. These forms are filed without a signature. Under former Article 9, you would have needed the signature and had to file the financing statements with the Secretary of the Commonwealth of Pennsylvania, since the property is located in PA. You would also have needed to file with the Prothonotary (Clerk) of the Court of Common Pleas of Allegheny County, since the customer operated only in one county in PA. Now, under R9, that is all different. Since the customer is a Rhode Island corporation, you only need to file the financing statement in Rhode Island! Once those filings are accomplished, you would have a perfected security interest in the identified equipment. And, as we have seen, that gives you a lien good against third parties.

Unfortunately, there are a number of things that can go wrong with that simple scenario, which we will cover next time.

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