Excerpt from the Uniform Commercial Code:
The Uniform Commercial Code adopts the “notice filing” approach, under which an abbreviated notice is filed with the appropriate filing officer evidencing that a debtor and secured party intend to engage in a secured transaction using specified collateral as security. The actual security agreement may even be executed later. The Code became effective at midnight on June 30, 1966, and applies to transactions entered into and events occurring after that date.
In plain language, the Uniform Commercial Code allows a creditor to notify other creditors about a debtor’s assets used as collateral for a secured transaction by filing a public notice (financing statement) with a particular filing office.
Where to File
To be effective, a financing statement must be filed in the proper filing office in order to provide notice to third parties. The proper place to file a financing statement depends generally upon the nature, use, and location of collateral provided as security. The place of filing is either:
- a state of organization if the organization is registered with a state;
- state of the chief executive office if the organization is unregistered and has more than one place of business; or
- state where an individual resides in the case of an individual or sole proprietor.
Pursuant to Section 9.501, Texas Business and Commerce Code, a financing statement should be filed on property located in Texas by the secured party with:
|"(a) Except as otherwise provided in Subsection (b), if the local law of this state governs perfection of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is:|
|(1) the office designated for the filing or recording of a record of a mortgage on the related real property, if:|
(A) the collateral is as-extracted collateral or timber to be cut; or
|(2) the office of the Secretary of State, in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing.|
|(b) The office in which to file a financing statement to perfect a security interest in collateral, including fixtures, of a transmitting utility is the office of the Secretary of State. The financing statement also constitutes a fixture filing as to the collateral indicated in the financing statement that is or is to become fixtures."|
In most cases, financing statements are filed at the close of a secured transaction. However, it is advisable to file financing statements and perform a search on the debtor to discover existing filings by other creditors before the loan closing.
Secured Transaction Terminology
Security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.
Secured party is a lender, seller, or other person in whose favor a security interest exists.
Debtor is the person who owes payment or performance of the obligation that is secured.
Security agreement is the agreement between the secured party and the debtor that creates or provides for a security interest.
Collateral refers to the items of property in which a security interest is granted by the debtor.
Perfection occurs when the steps required under the UCC are taken by the secured party in order that the security interest will be valid against creditors.
Conflicting security interests refers to the condition when two or more secured parties have perfected security interests in the same collateral.
Priority is the term used to describe the superior rank of a security interest. Rank is assigned using the FIFO principle; first in first out.
Subordination is an agreement between holders of conflicting security interests whereby the secured party with the superior security interest subordinates its interest to the secured party that would otherwise acquire an inferior priority position.
Purchase money security interest can be obtained if all conditions under Section 9.107 and 9.312 have been met. Allows secured party to obtain a superior security interest in specific assets without regard to the existence of conflicting security interests.