Perfection by possession

     A possessory security interest in personal property is enforceable against the debtor even in the absence of an authenticated record evidencing a security agreement between the parties. See Commentary.Enforceability of consensual lien in personal property and fixtures.  Under U.C.C. 9-313(a), possession of some types of collateral by the secured party is also sufficient, without more, to perfect the security interest in such collateral, because such possession is thought to provide sufficient notice that someone other than the debtor may have an interest in the collateral.  If possession perfects a security interest, the filing of a financing statement is not required for perfection (U.C.C. 9-310(b)(6)).

     The pawnbroker holding jewelry or other valuables is one instance of a secured party perfecting through possession.  But there are a wide array of other, dissimilar situations in which a secured party may claim perfection through possession.  In some, an agent of the secured party (e.g. an employee of a corporate secured party) may hold possession.  Possession by an agent of the secured party who is not also an agent for the debtor is sufficient to perfect.  Official Comment 3 to 9-313.  Article 9 distinguishes between possession by an agent and possesssion by a third party who is not an agent.   Possession by third parties who are not agents (often bailees) will suffice to perfect the security interest only if additional requirements specified in U.C.C. 9-313(c), 9-312(c), (d), or 8-301 are satisfied.   We explore some of these requirements in Problem.Perfection by possession. 

     Possession is not a permissible method of perfecting a security interest in some types of collateral, in most cases because there is nothing to possess (accounts, deposit accounts, electronic chattel paper, commercial tort claims, letter of credit rights, certain types of investment property).  See Official Comment 2 to U.C.C. 9-313.  

     While possession is a permissive means of perfection for the types of collateral listed in U.C.C. 9-313(a), it is a mandatory method of perfection for a security interest in money. U.C.C. 9312(b)(3).  Money (i.e. legal tender) is fully negotiable, passing freely in commerce such that someone other than a thief who acquires the money takes it free of the claims of an owner who has misplaced the money or from whom it might have been stolen.  The negotiability of money facilities the flow of commerce, freeing those who take money in exchange for goods or services from the necessity, time and expense of checking for competing claims to it.   Negotiability and its benefits would be seriously impaired were a secured party to be able to leave the money with the debtor, perfect a security interest in the money by filing a financing statement, and gain through perfection priority over subsequent transferees of the money.  Possession of money avoids this problem by removing money serving as collateral from circulation.  Former Article 9 took the same approach with respect to promissory notes and other instruments.  Instruments are a medium of exchange other than money that may also provide the benefits of negotiability to its users.  See Commentary.Assertion of claims and defenses against assignees.   Revised Article 9 permits a secured party to perfect as to instruments either through possession or through the filing of a financing statement.  U.C.C. 9-312(a).    But allowing the filing of a financing statement to perfect a security interest in an instrument will not impair the negotiability of instruments because U.C.C. 9-330(d) gives priority over a secured party who has perfected by filing (i.e. it doesn't give priority over a secured party who has perfected by possession) to any purchaser of the instrument who takes possession of the instrument for value and without knowledge that the purchase violates the rights of the secured party.