In many financial transactions the lender seeks to have repayment secured. Most often the lender seeks a deed of trust on real property. A security interest in real property is usually the first choice for lenders since it cannot be moved and there is a deed of trust recorded in the chain of title to the real property that puts others on notice of the existence of the lender’s security interest and its priority.

Secured financial transactions are not limited to real property. Lenders make take a secured interest in motor vehicles, business equipment, accounts receivable, and other personal property. However, such collateral is movable and not as easy to track as a deed of trust on real property. In order to obtain a priority, secure these transactions and have the ability to seize such personal property in the event of default by the borrower the lender must Perfect its lien. What is required in many cases is the filing of UCC financing statements with the California Secretary of State. UCC is an acronym for “Uniform Commercial Code” and, generally a filed UCC-1 form by the creditor establishes a relative priority with the debtor’s other creditors. A filed UCC-1 form effectively gives third parties initial notice of the filing party’s interest in the non-real property collateral. A filed UCC-3 financing statement is used to terminate, continue, amend, or assign an interest identified in a filed UCC-1 form.

The creditor’s rights are based on the parties’ loan agreement rather than the financing statement. The financing statement does not create a lien and it does not confer additional rights against the secured party.
Generally, a filed financing statement is effective for a period of five years after the date of filing. If the financing statement indicates that it is filed in connection with a public finance transaction or manufactured home transaction, the initial financing statement is effective for a period of 30 years after the date of filing.

Before the date of expiration of a UCC-1 financing statement, a UCC-3 form continuation statement must be filed as required by California state law. A continuation statement may only be filed within six months before the expiration of the five-year period or the 30-year period in the case of a public finance transaction or manufactured home transaction. If filed in a timely filing the UCC-! financing statement continues to be effective for a period of five years commencing on the day on which the financing statement would have become ineffective in the absence of the filing. Successive continuation statements may be filed in the same manner to continue the effectiveness of the initial UCC-1 financing statement.

Should a lender fail to timely file a continuation statement the UCC-1 financing statement will lapse and be ineffective. Upon lapse, any security interest therein becomes unperfected, unless the security interest is alternatively perfected in some other way such as possession or control of the collateral. If the security interest becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.

There are some other considerations in certain types of transactions that may change these general perfection rules. If you are seeking to secure your rights as a creditor or determine your rights to sell collateral that is or was subject to a financing statement get your attorney involved to protect your legal rights, so everything goes “perfectly.”

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.