Perfection of a Security Interest by Possession or Control

In the last post I discussed how one might perfect a security interest by filing a security agreement.  There are 5 ways in total to perfect a security interest, and this post will be focus on 2 of the remaining 5, possession and control.

Possession:

Security interests in most types of collateral can be perfected by possession.  There are some types of collateral, however, that cannot be perfected by possession and they should be kept in mind.  The types of collateral that cannot be perfected by possession are general intangibles, non-consumer deposit accounts, non-negotiable documents, electronic chattel paper, certificate of title goods, and accounts.  In other words, to perfect a security interest in these types of collateral will require perfecting by a method other than possessing the collateral.

If perfecting by possession, the security interest will be perfected from the moment of possession and will continue as long as possession is retained.  When the collateral is being possessed by a bailee, possession will begin the moment a bailee authenticates a record acknowledging that it is holding the collateral for the benefit of the secured party.

Control:

As with possession, there are certain types of collateral that can be perfected by control, and here they are rather limited. They are non-consumer deposit accounts, electronic chattel paper, and investment property. Regarding non-consumer deposit accounts, a bank in which a non-consumer deposit account is maintained will automatically have control over the deposit account.  If the secured party is not such a bank, it may obtain control over a non-consumer deposit account by putting the deposit account in the secured party's name or by agreeing in an authenticated record with the debtor and the bank in which the deposit account is maintained that the bank will comply with the secured party's orders regarding the deposit account without requiring the debtor's consent.

As to electronic chattel paper (chattel paper stored in an electronic medium such as a computer), it is controlled when a system is put in place to show the transfer of interests in the chattel paper which reliably establishes the secured party as the assignee.

And finally, there is investment property.   One can gain control over a certificated security (such as a stock or bond represented by a certificate) by taking possession of the certificate if it is in bearer form.  If, however, the certificate is in registered form, the secured party must take possession and the certificate must be indorsed to the secured party or registered by the issuer in the name of the secured party.

If the investment property is a securities account rather than a certificated security, then one will obtain control over that account if the owner of the account instructs the securities intermediary that the secured party has the same rights in the account as the owner or if the owner instructs the intermediary that the intermediary may comply with the secured party's orders without the owner's further consent.