Reference no: EM131660226

Question: The importance of perfecting your security interest as a creditor cannot be overemphasized, particularly when the debt is large and you wish to protect the priority of your security interest over others who have an interest in the debtor's collateral. Failure to perfect or to perfect properly may result in your becoming the equivalent of an unsecured creditor. Perfection by Filing As discussed in this chapter, perfection is most commonly accomplished by filing a financing statement in the appropriate location. (Less commonly, perfection can be achieved by possession or attachment.) Generally, the moment the filing takes place, your priority is established over the other creditors-as well as over some purchasers of the collateral and a subsequent trustee in bankruptcy. When you create a security agreement, describe the collateral in terms that are specific enough to put third parties on notice of your security interest in that collateral. Although the UCC permits broad general descriptions (such as "all assets") in the financing statement (as opposed to the security agreement), if your description is insufficient or misleading, your security interest will not be perfected. Priority between Two Perfected Secured Parties Sometimes, two secured parties have a security interest in the same debtor's collateral. On the debtor's default, the question arises as to which perfected secured party prevails. The answer is important for businesspersons because the loser most often ends up with the same status as an unsecured creditor. The general rule is that the first creditor to perfect will have priority. An exception to the first-in-time rule applies, however, if the first perfection does not involve a purchasemoney security interest (PMSI) and the second is a PMSI. This exception can be extremely important if the collateral is inventory or other goods, such as equipment, and the security agreement for the first-in-time non-PMSI contains an afteracquired property clause. This clause and the "timely" perfection of the PMSI (with proper notice for inventory) will come into conflict. In this situation, the perfected PMSI holder has priority to the debtor's newly acquired inventory or equipment.

CHECKLIST FOR PERFECTING YOUR SECURITY INTEREST

1 File a financing statement promptly.

2 Describe the collateral sufficiently-sometimes, it is better to err by giving too much detail than by giving too little.

3 If you are a holder of a PMSI, be sure that it is properly perfected (give proper notice if it involves inventory) so that you have priority over a previously perfected non-PMSI in the same collateral.