Lesson 14: Automatic Perfection and Possession
The concept of Automatic Perfection in secured transactions allows certain security interests to be perfected without the need for filing or possession. This is particularly significant in the realm of Purchase Money Security Interests (PMSI).
What is Automatic Perfection?
Automatic perfection occurs when a secured party's interest in collateral is perfected without any action required on their part. According to UCC Article 9, certain types of collateral are subject to automatic perfection, meaning the secured party does not need to file a financing statement or take possession of the collateral.
Automatic perfection often applies to consumer goods.
Types of Collateral Subject to Automatic Perfection
Common types of collateral that may qualify for automatic perfection include:
- Purchase Money Security Interests (PMSI) in consumer goods
- Assignment of accounts
- Sale of payment intangibles or promissory notes
Possession as a Method of Perfection
Another important method of perfection is by possession. This method requires the secured party to take physical possession of the collateral.
For example, a secured party might take possession of a valuable piece of art as collateral.
Diagram: Methods of Perfection
Legal Implications
Understanding the mechanisms of automatic perfection and possession is crucial for both secured parties and debtors. Proper perfection establishes priority over other claims and ensures the enforceability of the security interest.
Priority is critical, especially in cases of debtor insolvency.
Example: Automatic Perfection in Consumer Goods
Consider a scenario where a consumer buys a new laptop on credit. The seller retains a PMSI in the laptop. Under UCC Article 9, this PMSI in consumer goods is automatically perfected.
No further action, such as filing a financing statement, is required by the seller.
Further Reading
For a deeper understanding of secured transactions, you may refer to: