Also known as: unperfected security interests · unperfected SI
Written by attorneys · grounded in primary & secondary sources — see below
A security interest held by a creditor who has not taken the steps required to establish priority over other creditors. The interest is subordinate to perfected security interests in the same collateral and to certain buyers and lien creditors.
Upstream Petroleum granted Umbra Technologies a security interest in its drilling equipment. Umbra Technologies failed to file a financing statement. Unity Capital later obtained and perfected a security interest in the same equipment. Unity Capital prevails in a priority dispute because its perfected interest takes precedence over the earlier unperfected interest.
Umar Usmani granted a lender a security interest in intellectual property assets. The lender filed an insufficient financing statement that failed to perfect the interest. When Umar Usmani entered bankruptcy, the debtor-in-possession avoided the unperfected interest under the trustee's strong-arm powers. The assets became available for distribution to unsecured creditors.
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A perfected security interest has priority over a conflicting unperfected security interest. This rule determines outcomes when two creditors claim the same collateral and only one has perfected.
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A buyer who gives value, receives delivery, and lacks knowledge of the security interest takes free of an unperfected security interest if the interest remains unperfected at the time of the purchase. This protection applies to ordinary-course buyers such as retail customers.
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An unperfected security interest is subordinate to the rights of a lien creditor. The bankruptcy trustee, as a hypothetical lien creditor, can avoid the unperfected interest under section 544(a).
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The first security interest to attach has priority when both interests remain unperfected. Attachment alone determines the outcome between unperfected interests.
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