CHAPTER 11.03. Perfection

• Jurisdiction: United States

11.03. Perfection

As described above, the perfection of a security interest allows that interest to be enforced against third parties. Although the choice of law rules under the Delaware U.C.C. are complex, if the Delaware U.C.C. governs, the usual rules of perfection by filing or possession generally apply.³⁰ In most instances of commercial lending, this will mean perfection by filing a financing statement in the Delaware Secretary of State office if the debtor is a Delaware entity or in the comparable central-filing office in the state of the debtor's organization, if other than Delaware.³¹ The principal exceptions in real estate financing are deposit accounts and letter-of-credit rights.³²

[1] Financing Statements

A financing statement is the filed document by which a security interest in most collateral is perfected.³³ Each financing statement filing must be authorized by the debtor; however, authentication of a security agreement constitutes authorization.³⁴ The Delaware U.C.C. allows a financing statement to be filed before the execution of a security agreement or a security interest attaches, but this does not eliminate the requirement of debtor authorization.³⁵ Accordingly, a secured party who wishes to pre-file a financing statement needs to obtain authorization of the debtor. This authorization can be contained in a commitment letter or any other authenticated record.

[a] Contents of Financing Statement

A financing statement is required to contain the name of the debtor, the name of the secured party or its representative, and an indication of the collateral.³⁶ There are also some specific requirements regarding debtor's names and descriptions of collateral in financing statements.

Most debtors in commercial real estate financing transactions are "registered organizations." A registered organization is an entity whose existence requires the filing of a public organic record with a state or the United States.³⁷ Registered organizations include corporations, limited partnerships, limited liability companies, and most statutory trusts. The name of the debtor that is a registered organization is sufficient for the requirements for a financing statement if the name is the registered organization's name on the public organic record most recently filed in the applicable jurisdiction.³⁸ The use of a trade name alone is not a sufficient name.³⁹ A safe harbor exists for minor errors in debtors' names. If a record search under the correct name of the debtor reveals the financing statement, the name of the debtor is not seriously misleading and the financing statement is sufficient as to the name of the debtor.⁴⁰

Two examples of debtors having special issues in this regard are trusts and series limited liability companies. A statutory or business trust is a registered orga-nization⁴¹ because its organization or formation requires the filing of a public organic record.⁴² Accordingly, under the Delaware U.C.C., the name of the debtor trust that is a registered organization must be as shown on the public organic record of the debtor's jurisdiction of organization.⁴³ For trusts that are not registered organizations, however, there are many permutations. One must take into account factors such as whether under applicable trust law the trust or the trustee is considered the owner of the collateral, whether the trust has a name, and whether the trustee is an individual or a registered organization in determining how to name the debtor.⁴⁴ These factors will also affect where to file a financing statement.⁴⁵

Another difficult situation can arise when obtaining and perfecting a security interest in the assets of a series limited liability company. As discussed elsewhere,⁴⁶it is not entirely clear whether a series is a person separate from the limited liability company itself, whether the limited liability company or the series is the "debtor,"⁴⁷and thus which of the limited liability company or the series would grant the security interest.⁴⁸ However, Delaware law has created the ability of a Delaware limited liability company to elect to file as a so-called "registered series" through a separate filing with the Secretary of State.⁴⁹ Such a "registered series" is a "registered organization" under the Delaware U.C.C.,⁵⁰ and, as with any other registered organization, the place for filing for perfection will be governed by the same rules as discussed below.

The collateral description is sufficient if it meets the requirements for a security agreement.⁵¹ Unlike a security agreement, a collateral description in a financing statement may be sufficient if it contains a generic description of the collateral, such as "all assets" or "all personal property."⁵²

[b] Where to File a Financing Statement

Generally, perfection of a nonpossessory security interest is governed by the law of the jurisdiction where the debtor is located.⁵³ Accordingly, the general rule, as discussed above, is that a financing statement is filed in the jurisdiction in which the debtor is located. An individual debtor is located at the individual's principal res-idence.⁵⁴ An organization (not a registered organization) is located at its principal place of business, if it has only one, or at its chief executive office, if it has more than one principal place of business.⁵⁵ Most importantly, a registered organization is located in the state of its formation.⁵⁶

An important exception to this general rule is the location of filing with respect to fixtures. The law of the jurisdiction where the real property is located governs the effect of perfection and non-perfection of a security interest in fixtures.⁵⁷ A fixture filing is made in the office designated for filing or recording a mortgage in the local jurisdiction.⁵⁸ This office usually is the real property records of the county in which the real property is located.

[2] Control Collateral

A commercial real estate loan at times requires the pledge of a deposit account of the borrower, perhaps one containing rents or reserves for future capital improvements. Such a pledge is intended to create a security interest in that pledged account. But such a security interest is not perfected by filing a financing statement. A security interest in a deposit account can only be perfected by control of that collateral (i.e., the account itself).⁵⁹ There are three ways for a secured party to obtain control of a deposit account. First, if the secured party is the depository bank, the secured party has automatic control.⁶⁰ Second, and most commonly, the debtor, the secured party, and the depository bank enter into an agreement providing that the depository bank will comply with the instructions of the secured party for disposition of the funds in the account without further consent of the debtor.⁶¹ This document is commonly called a deposit account control agreement.⁶² Third, and infrequently encountered, the secured party becomes the depository bank's customer for that deposit account.⁶³

Although a security interest in investment property, including ownership interests in corporations, can be perfected by filing, a security interest in investment property can also be perfected by control. As discussed...