Perfecting Security Interests: Notice To The Attorney, And The Uniform Commercial Code, Part 2
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In Part 1, I discussed the purpose and creation of security interests in claims. In this part, I will examine the additional steps required to perfect a security interest, thus making it effective in the event of payment default by the plaintiff or another eventuality that either obfuscates or frustrates collection of the settlement proceeds.
As a general matter, the mere creation of a security interest in a claim gives the provider certain preferential rights over other stakeholders, while also imposing duties on the plaintiff granting that security. However, despite the lien’s primary validity, additional steps must be taken to enforce the security against third parties and settle prioritization of competing security interests.
Imagine a situation where your firm has invested significant capital in a commercial claim. You signed an agreement with the plaintiff, received a security interest in return, and perhaps even restricted the plaintiff from granting any future security interests in the same claim to other investors. When the case settles for much less than expected, you are surprised to learn that three other investors received similar security interests from the plaintiff around the same time. There is not enough money to pay everyone. What is the priority of payments in this scenario?
A security interest may be perfected by three methods, depending on the type of asset and the nature of the transaction. These methods are not mutually exclusive and therefore may be used concurrently. They include:
- physical possession of the secured asset;
- notice to the fundholder; and
- statutory registration.
Tags: security interest, Security Interests
