Lenders are constantly reminded of the importance of taking appropriate steps to perfect a security interest in personal property which is collateral to assure a loan repayment. Nonetheless, there are numerous instances in which the lender has not perfected its security interest. In that event has the security interest lost all value? We would suggest it has not.
The critical provision in determining the rights an unperfected security interest affords is SDCL 57A-9-201(a), which provides: “[e]xcept as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” Obviously the most important “otherwise provided” in the Uniform Commercial Code are the provisions granting priority to a perfected secured creditor over other creditors including secured creditors who have failed to perfect their security interest. The effectiveness of the unperfected security interest against the debtor and creditors, however, provides valuable rights to the lender.
The focus on perfection leads lenders, on occasion, to forget that the governing document between lender and borrower is the security agreement. All the rights granted under the security agreement are effective against the borrower, without regard to whether perfection of the security interest has occurred. Thus, the right to peacefully repossess collateral and the right to make a commercially reasonable disposition of that collateral remain with the lender so long as a security agreement has been executed by the borrower.
The extension to other “creditors” is severely limited where there are other creditors with a perfected security interest. Nonetheless, there are instances in which an unperfected security interest will protect the lender’s rights in collateral, such as disputes with an estate personal representative of a deceased borrower, disputes with parties such as landlords who seek to retain a debtor’s property for unpaid rent, and of property sold other than in the ordinary course of business. Considering rights as an unperfected, secured creditor, a lender should also keep in mind that some security interests are perfected without a filing such as money held in an account located at a secured creditor bank, purchase money security interest in consumer goods, and property which is proceeds of another secured creditor’s collateral.
Accordingly, even when your security interest has inadvertently remained unperfected, you should not assume that all is lost. The rights you retain may be limited by other creditors who hold perfected security interests, but in the absence of such creditors a lender may still derive substantial benefit from even an unperfected security interest.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.