When securing a loan with personal property collateral the goal is to have a first priority perfected security interest. The security interest attaches to the collateral once your debtor has signed a security agreement with granting language, and you have given value to the debtor and adequately described the collateral to which the security interest attaches.
The security agreement controls the relationship between you and your debtor regarding the collateral. However, it is the perfection of the security interest that controls your bank’s priority as to every other person in the world who might claim an interest in your collateral: other secured parties and lien creditors including a debtor in possession or trustee in bankruptcy.
Security interests can be perfected by control of collateral such as deposit accounts (not held at your bank) and investment securities, title liens on collateral for which a state title system exists, filing with the FAA perfects on aircraft, or possession of collateral. But the most common means of perfection on commercial collateral is by filing a financing statement.
Under prior versions of UCC Article 9, a secured party had to chase its collateral around the nation and file a financing statement wherever its collateral was located. As the US shifted from the local economies of 1960 (the effective date of the UCC in Kentucky) to a national economy, this requirement became burdensome. Prior to Revised Article 9, I handled a secured transaction that required filing in 36 states, 12 with dual filing (local and central). To perfect the client’s security interest I filed 48 financing statements with different filing fees and often on unique forms.
Revised Article 9 resolved those issues. A secured party need only file a financing statement in the filing office for the state where Article 9-307 (KRS 355.9-307) deems the debtor located. For any form of registered organization, that state is the state in which the debtor was originally organized, NOT a state where it is registered to do business.
This rule, although a boon for Delaware, provides a bright line standard for a secured party to perfect its security interest by filing a financing statement in a single state. I recently handled a case where the secured party filed a financing statement with the Kentucky Secretary of State for a debtor registered to do business in Kentucky with its principal place of business in Kentucky, but originally organized in Ohio. The proper place to file was Ohio. The failure to perfect the security interest in the correct state was challenged by a lien creditor.
When you look up your debtor’s organization on the Kentucky Secretary of State’s website, don’t be fooled, it may just be the registration of your debtor to do business in Kentucky. Examine the web page closely and determine whether it is a Kentucky organization or just registered here. That page also designates the state in which the organization was organized, which is the jurisdiction in which you must file your financing statement to properly perfect your security interest.
