“Security Interests: A Complex Web” by A. Jay Preston

What is a “security interest”? It is as it sounds; a security interest is an interest in personal property or fixtures, items of personal property that become substantially intertwined with real property, that secures payment or the performance of an obligation. This article discusses Article 9 of the Uniform Commercial Code which sets forth the rules regarding security interests, and some of the special rules that are often overlooked. The rules of Article 9 are difficult to follow as the language utilized is not commonplace in everyday life, and the sections frequently cross-reference one another.
The basics of the creation of a security interest are: (1) that the party receiving the security interest gives value for the interest; (2) the party granting the interest has rights in the collateral or the power to transfer rights in the collateral; and (3) one of the four specific conditions of Missouri Revised Statute § 400.9-203(b)(3) is met. Generally, the conditions require that the debtor sign a security agreement describing the collateral or the secured party takes possession of the collateral pursuant to a security agreement, oral or written. Once a security interest is created it is not required, but is essential in order to protect oneself, to “perfect” the security interest. “Perfection” of a security interest ensures that the interest is protected against third parties who may have claims against the debtor. The most common methods of perfection are the secured party taking possession of the collateral or the filing of a “financing statement.” A financing statement is a publicly available document, filed with the Missouri Secretary of State, identifying the debtor, the creditor, and giving a general indication of the collateral. The idea behind perfection is to let other possible creditors know of existing obligations of the debtor. By perfecting one does not prohibit another from taking a security interest in the same collateral, but a priority is established in the event that the debtor defaults on its obligation.
A tricky part of Article 9 is determining when it does or does not apply, in whole or in part. There are some transactions where Article 9 is wholly inapplicable. For example, under Missouri law, one may not take a security interest in a personal service contract, nor may one take an interest in another’s personal injury claim. Article 9 doesn’t apply to interests in real property. An interest in real property may be taken, but not under Article 9. There are still other transactions where Article 9 applies to the creation of the security interest, but perfection of the interest is governed under a different set of rules. The most commonly known example of this is perfecting an interest in a motor vehicle. In order to perfect an interest in a motor vehicle one must file a “Notice of Lien” with the Missouri Director of Revenue. This notice serves the same purpose as a financing statement under Article 9; it gives notice of one’s claim to third parties.
One extremely tricky situation involving Article 9 is in regard to manufactured homes, largely due to the ease in which they may be transported. Under current Missouri law an interest in a manufactured home may not be perfected under Article 9. Just as a motor vehicle, a security interest in a manufactured home is perfected by filing a notice of lien with the Director of Revenue. At first blush this may appear odd because manufactured homes can’t be driven on their own; they must be towed or placed on a trailer. However, given their transportability the comparison to motor vehicles is understandable. The first trick to manufactured homes is that once they are affixed to real estate an interest is perfected, in part, by filing in the real property records. To perfect, the manufactured home must actually be affixed to real estate, the owner of the home and the real estate must be the same person, and an affidavit of affixation must be filed with the Recorder of Deeds and the Director of Revenue. The other twist to manufactured homes is that from June 30, 2001 to August 28, 2002 perfection could be achieved under Article 9 by the filing of a financing statement. Thus, before one takes a security interest in a manufactured home one should check the real property records, the UCC filings, and the Certificate of Title on file with the Department of Revenue.
Largely, the point of this article is to make clear that if one is contemplating taking a security interest in the property of another there are a multitude of different places to check for pre-existing security interests and a multitude of different ways to create and perfect security interests depending on the property involved. Unless all the rules are followed one opens up the possibility of losing the security that was likely an essential part of the decision to go forward with the transaction. Article 9 is embodied in the Missouri Revised Statutes § 400.9-101 to § 400.9-809.