Does a lender need to take possession of the original leases to perfect its security interest in the equipment leases?
UCC, Revised Article 9, Reduce Financial RiskDo you have UCC questions about equipment leases? Are you at risk to losing priority to other creditors? Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., gets asked questions like this all the time, and has taken the time to write some answers. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).
Pledges of Equipment Leases: Does a lender need to take possession of the original leases to perfect its security interest in the equipment leases?
Answer: Under Article 9 of the Uniform Commercial Code (the “Code”), a lender can perfect its security interest in the leases (which are classified as “chattel paper” under the Code) by either:
- Filing a UCC financing statement covering the leases.
- Taking possession of the original leases.
However, a lender who does not take possession of the original leases risks having its security interest primed by another creditor who gives new value to the borrower and takes possession of the original leases. In certain limited situations, it is not practical to take possession of the original leases and some lenders will require that a legend be affixed to each original lease in the debtor’s possession describing the assignment to the lender by name and address (although such legending would need to be monitored and could be easily removed by an unscrupulous borrower, presenting a potential significant business risk to the lender). It should be noted that many lenders employ both perfection methods described above (i.e., UCC filing and taking possession of the original leases) to achieve better protection.