Question/Answer Memo for Assignment 5

1. I have a question about § 9-322(a)(3). It says that the first security interest to attach has priority if conflicting security interests are unperfected. How can this ever apply? If there are two creditors, A and B, that each have an unperfected security interest, wouldn't it be true that as soon as one of them repossesses the collateral to sell it after the debtor defaults, the repossessing creditor becomes perfected by possession of the collateral? And at that point, § 9-322(a)(3) would no longer apply because if A repossessed, A's perfected security interest would now have priority over B's unperfected interest under § 9-322(a)(2). So isn't it practically impossible for there to be a priority contest that would be governed by § 9-322(a)(3)?

No, it isn't impossible, but it is unlikely. Keep in mind that repossessing the collateral would not always perfect a previously unperfected security interest. For example, as discussed in Assignment 5, if the collateral is a titled vehicle, perfection can occur ONLY by compliance with the certificate of title statute, not by repossession of the vehicle. [§ 9-311(b)] Also, if the collateral is intangible (e.g., accounts or general intangibles), repossession of the collateral is not possible; perfection could occur only by filing a financing statement.

The general point, however, is valid. Section 9-322(a)(3) could only apply if you had a lawsuit between two creditors who were both (1) dumb enough never to have perfected in the first place and (2) dumber enough not to have taken the correct steps to perfect once the dispute arose! As soon as one of them takes steps to perfect — even if that is after a priority dispute arises, and even if after one of the parties has filed a lawsuit — § 9-322(a)(3) would no longer apply.

2. Suppose that PCB takes a security interest in Debtor's equipment, and Bank prepares a UCC-1 covering the equipment, but PCB messes up and puts down the wrong address for the Debtor. What happens if the filing officer catches the mistake? Can the filing officer refuse to accept the filing because it doesn't contain the Debtor's correct address?

No. If you look at the language of § 9-520(a) and § 9-516(b)(5)(A), it seems to say that the filing officer can and must reject the filing if it doesn't contain the debtor's mailing address. But look again carefully. It doesn't say that the UCC-1 has to contain "the" mailing address of the debtor, it says it has to contain "a" mailing address for the debtor. In other words, the address doesn't have to be right; there just has to be an address listed. The drafters make this point explicitly in the comments to § 9-516, in comment 3: "Neither this section [§ 9-516] nor Section 9-520 requires or authorizes the filing office to determine, or even consider, the accuracy of information provided in a record." If it contains information that purports to be an address for the debtor (and information that purports to satisfy the other § 9-516(b) requirements), then the filing office HAS to accept it for filing. The idea is that the filing officer should not be making legal judgments and should instead be fulfilling what is essentially a ministerial function.

3. But what if the filing officer still refuses to accept it? What am I supposed to do, get a writ of mandamus or something?

In practice, if the address really is wrong, the secured party should probably correct the address and then file the UCC-1 with the corrected address.

However, technically speaking, if the filing officer refuses to accept a UCC-1 that was properly tendered with the correct filing fee [§ 9-516(a)] — in other words, if it is wrongfully rejected — then that UCC-1 is considered filed [§ 9-516(a)] and it is effective as a filed record [§ 9-516(d)], even though it hasn't been indexed and thus couldn't be found because it won't appear anywhere in the records!

However, this is scant protection, because § 9-516(d) goes on to say that the wrongfully refused filing is NOT effective against a purchaser of the collateral who gave value in reasonable reliance upon the absence of the record from the files. Thus, while the wrongfully rejected filing would have perfected the Bank's security interest as against lien creditors (such as the bankruptcy trustee if Debtor later filed for bankruptcy), it would not be sufficient to protect the Bank's security interest against someone who bought the equipment from the Debtor after doing a UCC search and finding no filings covering the equipment.

As a result, no responsible secured party would ever rely solely upon § 9-516(d). If the filing was refused, the secured party should always correct the information to the extent necessary to get the filing officer to accept it, so that it can be indexed to give notice to third parties.

4. I have a question about the situation in one of the problems where the secured party messed up and the collateral description was just left off the UCC-1 entirely, but the filing officer accepted it anyway. In that situation, can't the secured party argue that the error isn't really seriously misleading? After all, if the UCC-1 has the debtor's correct legal name, any searcher will find it. If it doesn't list any collateral, shouldn't the searcher assume that the UCC-1 potentially covers any of the debtor's property? Isn't the searcher on inquiry that anything the debtor owns might be covered?

Nice try, but that argument doesn't work. The problem is that § 9-502(a) says that a collateral description is absolutely necessary — one of the three absolute requirements for a financing statement to be effective. Further, even though § 9-506(a) says that "minor errors or omissions" will not defeat the effectiveness of a UCC-1 if those errors don't render the financing statement "seriously misleading," note that § 9-506(a) also requires that such a financing statement has to "substantially satisfy[] the requirements of [Article 9, Part 5]." If the UCC-1 has no collateral description at all, it does not even "substantially satisfy" § 9-502(a) and thus the "minor error" rule isn't triggered.

While the argument makes some intuitive sense as a matter of possible policy, there's nothing in the Code that gives a court the discretion to imply that a blank collateral description is to be treated as the legal equivalent of a supergeneric collateral description.