Security Interests and Liens Priorities
This practice note discusses the requirements for the attachment and perfection of consensual security interests in personal property under Article 9 of the Uniform Commercial Code (UCC). A security interest is said to attach to collateral when it becomes a right that is enforceable against the debtor’s property. Perfection places third parties, including the debtor’s other creditors, on notice of the existence of a security interest.
There are four basic methods for perfecting a security interest under the UCC. First, and most common, is the filing of a properly completed financing statement with the appropriate UCC filing office. Some collateral requires a filing with a governmental agency designated for the filing of such perfection devices (e.g., the patent office, the FAA in Tulsa, OK). Second, the collateral may be held in the possession of the secured party. Third, perfection by obtaining control over the collateral. Fourth, in a few cases, the attachment of the security interest automatically perfects the security interest.
This practice note also covers issues concerning the relative rights of creditors holding competing interests in a particular res. There are a number of general rules:
- A creditor with a valid and perfected security interest has recourse to its collateral.
- If two or more creditors are properly perfected, then the priorities among such competing secured creditors is spelled out in the UCC, but the general rule is that the first to perfect has priority, whether the competing security interests and liens are consensual or nonconsensual. The general rule does not apply in instances where the UCC specifies that perfection by possessions trumps an earlier filing; there are other exceptions to the first in time rule.
- Although an unperfected security interest may be enforceable against the debtor, a properly perfected security interest will have priority over such unperfected interest.
- Under the Bankruptcy Code, a trustee or debtor in possession has the rights of a perfected lien creditor and an unperfected security interest may be avoided, so that the underlying claim is treated as a general unsecured claim in bankruptcy.
Stated in the reverse, a perfected security interest prevails over a judgment creditor and over a bankruptcy trustee or debtor in possession.
This practice note addresses the attachment and perfection of contractual security interests, the priority of liens, and related issues as follows:
- Extent of Secured Claim – Valuation of Collateral
- Secured Claim Status – Validity, Priority, and Extent of Security Interests and Liens
- Security Agreements
- Perfection by Filing
- Perfection by Possession
- Perfection by Control
- Lien Priorities
- Bankruptcy Risks
To read the full practice note, please click here.
“Security Interests and Liens Priorities,” by Ira L. Herman was published as a Lexis Practice Advisor® Practice Note on February 20, 2020. Reprinted with permission.