Security Interests Revisited

Several years ago we did an article on security interests where we recommended that creditors and sellers of goods consider obtaining a security interest in specific goods or other property to protect themselves in the event of a default by a customer. In the case of a seller of goods, if you are extending credit in connection with the sale, you should always consider perfecting a security interest in your goods so that some other creditor of your customer does not end up coming ahead of you in the event of a default or a bankruptcy. In the case of a lender, a security interest in specific goods or other property can provide needed collateral as security for a loan.

There is currently pending legislation to amend the rules on perfecting a security interest in the Commonwealth of Pennsylvania. Other states have similar changes pending.

Here is a summary of the changes under revised Article 9 of the Pennsylvania Uniform Commercial Code:

  • With the exception of real estate related collateral, such as fixtures, minerals and timber, most filings to perfect a security interest no longer have to be made locally; most filings are now made only with the Secretary of State in Harrisburg.
  • The debtor (the borrower or customer) must be identified more accurately under the revised system, and if the debtor’s name is not reflected precisely on the recorded financing statement, the security interest may be ineffective.
  • Rules relating to the description of collateral have been eased, with generic categories of collateral (“all of debtor’s assets”, “debtor’s equipment” etc.) being permitted in the recorded financing statements.
  • The debtor’s signature is no longer required on a financing statement. Financing statements must still be authorized by the debtor, however, and this is typically covered in a separate agreement (sometimes called a pledge or security agreement) between the debtor and the secured party.
  • Where the debtor and the collateral are located in different states, the new rules simplify the filing requirements by requiring only that the secured party file a financing statement in the state where the debtor is located, regardless of the location of the collateral.

Lenders and sellers of goods generally will applaud the changes to the rules on perfecting security interests. The new rules are scheduled to become effective in Pennsylvania on July 1, 2001, although this date could change if final legislative confirmation is delayed. We will continue to monitor this important legislative change and report any developments in a future issue.

— Kevin Palmer

Posted in Finance / Taxes  |  Leave a comment

Leave a thought...