Perfection of a Security Interest by Filing

Once a security interest has attached, it's then important to determine whether the requirements for perfecting that security interest have been satisfied.  By perfecting the interest a party will have priority over most other third parties (though well known by anyone who has studied this subject, there are exceptions).

There are five ways to perfect a security interest. Throughout the next five posts I'll be reviewing each in detail.  If an essay question shows up on the bar exam testing secured transactions, the probability is quite high that an issue dealing with perfection will be included. 

The five methods to perfect a security interest are as follows:

(1): Filing

(2): Taking possession of the collateral

(3): Control

(4): Automatic perfection

(5): Temporary perfection

To file a security interest requires filing a financing statement which can be filed either electronically or in writing.  The financing statement must contain the debtor's name and mailing address, the secured party's name and mailing address, an indication of the collateral covered by the financing statement and if the financing statement covers real-property-related collateral a description of the real property, the name of the record owner, and an indication that it is to be filed in the real property records. 

A minor error in the debtor's name will not invalidate a financing statement but seriously misleading errors will. If the debtor's name becomes insufficient and therefore seriously misleading (because, for example, the debtor changes his/her name) then the financing statement will only be effective against collateral acquired by the debtor before the name became insufficient and within 4 months after.  After that point, the secured party must re-file using the debtor's correct name. 

If the filing office chooses to accept a financing statement that does not contain the debtor's address, the statement is effective despite the lack of address.  The financing statement must indicate the type of collateral covered by the statement but it may do so broadly (for example "equipment").  It may even include a "supergeneric" description such as "all assets."

The debtor must authorize the financing statement in an authenticated record either before or after it is filed.  Filing should be done centrally in the office of the secretary of state.  One exception to the place of filing deals with filing for security interests in timber to be cut, minerals and fixtures. Those interests should be filed locally in the county where a mortgage on real estate is filed. 

Filing is valid for 5 years.  A continuation statement may be filed which will extend this 5 year period for another 5 years but may only be filed within 6 moths before the lapse of the first 5 year period.  

Next up will be a post on another method for perfecting a security interest: taking control of the collateral.

And, yes, I know that is the worst cliffhanger ever. :)