Perfection relates to the steps required be taken in order to make a security interest effective against the claims of third parties and/or to retain the effectiveness in case the grantor of the security interest defaults.
A creditor can let other creditors know of her interest in the collateral by perfecting its interest in two ways:
a) By filing a financing statement in the appropriate public office giving public notice to the third parties. Such financing statements must comprise the names of the debtor and the secured party, and the nature of the collateral covered.
b) By taking possession of the collateral until the repayment of the loan by debtor.
Security interest provides creditors with a lien at the same time, when debtors exercise control over the goods. The facts indicate that the debtor was using the equipment in its commercial activities. The commercial use was subjected to the perfected security interest of Union.
As per the case, the debtor's interest in the equipment was not perfected. The law of priorities as set forth in Uniform Commercial Code Article 9 provides that first perfection takes priority over unperfected security interests. The creditor's interest takes priority over unperfected interests.
Person J bought a New Mercedes-Benz from a dealer. J offered a purchase money security interest (PMSI) to JP Bank. The purchase automatically created a lien for JP Bank. JP Bank secured the lien with the State office. Later, J forged the release of the lien against the title.
Relying on this title, Company NX bought the car and sold it to Person X. NX warranted that the title was clean. X offered a PMSI to US bank. A new title was issued and JP Bank learned of the new lien and it sued J, X and US bank.
Purchase Money Security Interest:
It refers to a security interest in a property which is created automatically when a buyer purchases goods. The sale automatically creates a security interest in the purchase made. The interest enables a lender to obtain a prior ranking of the interest on the property over the other secured creditors. Section 102 (a) (2) of Uniform Commercial Code (UCC) creates an interest in purchase transactions.
In this case, JP bank has a lien on the car. Thus, its security interest will be given priority than the US bank. JP bank secured the lien over the car first and the bank was not aware of the forgery. Thus, US bank cannot claim its interest on the property.
US bank failed to check whether there are any liens issued over the car previously or not. Thus, JP Bank has the right to possess the car.
The Security interest that JP has in the car prevails over a security interest that US bank has over the car. As JP bank offered the money for the purchase of Mercedes Benz and immediately secured the asset by registering with the state authorities.
Thus, it can be concluded that the PMSI created in favor of JP bank dominates over the PMSI created in favor of US bank.