Also known as:perfect · perfects · perfected · perfecting · perfections · perfecting a security interest
Written by attorneys — see sources below.
A process by which a secured party renders its security interest effective against third parties. The process requires that the interest has attached and that an additional step such as filing a financing statement or taking possession of the collateral has been completed.
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How its tested
Common Examples
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Filing Financing Statement After Attachment
After Patricia Patel loaned funds to Parker Phillips secured by equipment, the security interest attached upon signing the agreement. Patricia then filed a financing statement in the proper office. The filing perfected her interest against later creditors who might otherwise claim the equipment.
Possession Perfects Security Interest
Preston Pratt borrowed from Penelope Price using jewelry as collateral. The security interest attached when the agreement was signed and value given. Penelope took possession of the jewelry, which perfected her interest against third parties without any filing.
Pacific Bank originated a loan to Paragon Construction secured by a deposit account. The security interest attached upon execution of the control agreement. Pacific obtained control of the account, which perfected its interest and gave priority over other claimants.
Automatic Perfection For Consumer Goods
Phoenix Technologies sold appliances to an individual buyer on credit. The purchase-money security interest attached when the buyer signed the agreement and took possession. The interest was automatically perfected upon attachment, protecting Phoenix against most third parties without filing.
United States v. Smith18 U.S. (5 Wheat.) 153, 161 (1820)
The indictment against Smith was founded upon the act of Congress of March 3, 1819, which provided that any person committing piracy as defined by the law of nations on the high seas, if brought into or found in the United States, shall be punished with death upon conviction.
Smith was tried before the circuit court of the United States for the district of Virginia. The jury returned a special verdict finding the prisoner guilty of the plunder and robbery charged in the indictment. The verdict further established that Smith and his associates were freebooters upon the sea at the time of the offense, not under the acknowledged authority or deriving protection from the flag or commission of any government.
The judges of the circuit court divided in opinion upon the questions presented. They certified the questions to the Supreme Court of the United States. The Supreme Court heard argument on February 21, 1820, and rendered its decision on February 25, 1820.
Peter Park granted a security interest in inventory to a lender that filed a financing statement the next day. A second lender later attempted to claim the same inventory. The first lender's earlier perfection date gave it priority in the collateral.
Merrell Dow Pharmaceuticals Inc. v. Thompson478 U.S. 804, 808 (1986)
The Thompson respondents, residents of Canada, and the MacTavishes, residents of Scotland, filed virtually identical complaints against Merrell Dow Pharmaceuticals Inc., a corporation that manufactures and distributes the drug Bendectin, in the Court of Common Pleas in Hamilton County, Ohio.
Each complaint alleged that a child was born with multiple deformities as a result of the mother's ingestion of Bendectin during pregnancy. In five of the six counts, the recovery of substantial damages was requested on common-law theories of negligence, breach of warranty, strict liability, fraud, and gross negligence. In Count IV, respondents alleged that the drug Bendectin was misbranded in violation of the Federal Food, Drug, and Cosmetic Act because its labeling did not provide adequate warning that its use was potentially dangerous, that the violation of the FDCA in the promotion of Bendectin constituted a rebuttable presumption of negligence, and that the violation of said federal statutes directly and proximately caused the injuries suffered by the two infants.
Merrell Dow filed a timely petition for removal from the state court to the Federal District Court alleging that the action was founded, in part, on an alleged claim arising under the laws of the United States. After removal, the two cases were consolidated. Respondents filed a motion to remand to the state forum on the ground that the federal court lacked subject-matter jurisdiction. The District Court denied the motion to remand and granted Merrell Dow's motion to dismiss on forum non conveniens grounds.
The Court of Appeals for the Sixth Circuit reversed the District Court's denial of remand. The Supreme Court granted certiorari to review the jurisdictional issue.
Pavel Petrov granted a security interest in equipment to a lender that filed a financing statement before the bankruptcy petition. The trustee sought to avoid the interest as unperfected. The prior filing perfected the interest and prevented avoidance.
Metropolitan Life Insurance Co. v. Ward470 U.S. 869 (1985)
Since 1955 Alabama has maintained a domestic preference tax statute that taxes the gross premiums received by insurance companies on policies issued in the State. Foreign life insurance companies pay a tax at a rate of three percent, and foreign companies selling other types of insurance pay at a rate of four percent. All domestic insurance companies pay at a rate of only one percent. The statute permits domestic insurers to exclude from taxable premium income all premiums received from policies issued in other States in which they are not licensed. Foreign insurers may reduce but never eliminate the tax differential by investing prescribed percentages of their worldwide assets in specified Alabama assets and securities.
Appellants are a group of insurance companies incorporated outside Alabama. Metropolitan Life Insurance Co. represents the life insurance claimants, and Prudential Property and Casualty Co. represents the nonlife claimants. In 1981 appellants filed claims with the Alabama Department of Insurance seeking refunds of taxes paid for the tax years 1977 through 1980. They contended that the domestic preference tax statute as applied to them violated the Equal Protection Clause. The Commissioner of Insurance denied all claims on July 8, 1981.
Appellants appealed to the Circuit Court for Montgomery County. The court consolidated the appeals and selected two lead cases. On cross-motions for summary judgment the court ruled on May 17, 1982 that the statute was constitutional. After the Court of Civil Appeals affirmed the finding of legitimate state purposes but remanded for an evidentiary hearing on rational relationship, appellants waived their right to an evidentiary hearing. The Alabama Supreme Court ultimately entered judgment for the State and intervenors.
The Supreme Court of the United States noted probable jurisdiction in 1984. It consolidated the cases and heard argument on October 31, 1984.
What steps are required to perfect a security interest under Article 9?
Perfection requires that the security interest has attached and that the secured party has completed one of the permitted methods such as filing a financing statement or taking possession of the collateral. Filing provides public notice to other creditors. Without perfection the interest remains vulnerable to later lien creditors and a bankruptcy trustee.
Does attachment alone protect a secured party against third parties?
No. Attachment gives the secured party rights against the debtor but does not protect against other creditors or a bankruptcy trustee. Perfection supplies the additional notice required to gain priority over those third parties.
When is a security interest automatically perfected?
A purchase-money security interest in consumer goods is automatically perfected upon attachment without any further step. The rule eliminates the need for filing in routine retail transactions while still giving the secured party priority over most third parties.
How does perfection affect priority disputes among secured creditors?
The first secured party to perfect generally obtains priority over later perfected interests in the same collateral. The filing date or possession date determines the order when multiple parties claim the same asset.
576 U.S. 644 (2015)
…Origins of the American Revolution 27 (1967). Locke described men as existing in a state of nature, possessed of the “perfect freedom to order their actions and dispose of their possessions and persons as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of…