So, when it comes to goods, possession is a true alternative to filing a financing statement. If the collateral is chattel paper, instruments, certificated securities, and negotiable documents, these types of collateral can also be perfected by either filing or possession. However, for purposes of priority, possession is a superior method of perfection of certificated securities, chattel paper, and instruments. When it comes to money, though, possession is the exclusive method of perfection. Not surprisingly, there is some collateral where perfection by possession is impossible due to the intangible nature of the collateral, such as accounts and general intangibles. In addition to possession, Article 9 also permits perfection of security interests for deposit accounts and investment property by control of the secured party. Section 9-312(b) specifies that security interests in deposit accounts and letter of credit rights can only be perfected by control under § 9-314. When it comes to deposit accounts, generally a secured party takes control when it is the bank in which the account is maintained. As an alternative, where the secured creditor is not the bank in which the account is maintained, the bank can authenticate a record agreeing that it will comply with the secured party’s instructions with regard to the account. Finally, the secured party could just become the bank’s customer by putting the account in the name of the secured party. Perfection of deposit accounts by control sometimes comes up on the bar exam to illustrate that control, rather than filing, is the only method of perfection for deposit accounts. Perfection of a security interest in investment property can be made by a filing or delivery of a certificated security, but control is a superior method of perfection. If the investment property is a certificated security, the secured party must have control of the certificate, meaning it must be delivered to the secured party and registered in the secured party’s name. If it is an un-certificated security, the secured party can perfect by control if it registers itself as the owner of the security on the records of the corporation. Most owners of investment property, though, do not actually have the certificates, but rather a securities intermediary buys and sells securities on their behalf. In such an instance, a secured party would control a securities entitlement by becoming the entitlement holder or getting the securities intermediary to agree that it will comply with the secured party’s instructions regarding the entitlement. For instance, I open a securities account at Traders and invest $100,000 in Apple stock. When I borrow money from Second Bank using the securities entitlement as collateral, Second Bank could perfect by becoming the customer of Traders or obtaining an agreement with Traders to follow Second Bank’s instructions regarding my account. One last alternative to look at. As it turns out, there is also an exception to the filing requirement for most purchase-money security interests in consumer goods. A purchase money security interest is sometimes called a PMSI. PMSI’s are automatically perfected upon attachment of the security interest pursuant to § 9-309 if we have consumer goods. Section 9-103 directs that in order to have a PMSI, there must be a security interest created where an obligation was incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral, but only if the value is in fact so used. An example of the first would be if I purchase a refrigerator from Sears on credit and Sears takes a security interest in the refrigerator. As an example of the second, if my friend Scott lends me $1000 to purchase a new refrigerator, taking a security interest in the refrigerator, this would be a PMSI so long as I actually used the $1000 to purchase the refrigerator. If Scott was prudent, he would make sure that he gives me a check for $1000 made out to both myself and Sears. The PMSI’s of Sears or

Discussions in Secured Transactions – Possession, Control and Automatic Perfection Page 2 of 3

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