To perfect a security interest is to obtain rights against the “world.” Thus, perfection is a crucial part of a secured transaction as it allows secured parties to have priority over competing parties with interests in the collateral. The first step in the process of perfection of a lien is “attachment” of the collateral, which then permits the creditor to “perfect” the security interest, which is the ultimate goal of ensuring that a security interest serves its intended purpose – properly securing the collateral to ensure its rights against other parties.
Once attachment of the collateral has taken place, and the security interest has properly attached to the collateral, it is enforceable against the debtor. Once perfection is achieved, it will ensure that the secured party’s lien is enforceable against other creditors and third parties that subsequently acquire a lien in the collateral.
Under California law, and the law in most states, a security interest attaches when three events have occurred in their entirety. The first is that value must be given, a concept that in terms of the law of secured transactions is broader than the contractual concept of consideration. With secured transactions, the value given by the secured party is fairly obvious as a lender gives value to a debtor by loaning money to the debtor to buy equipment or inventory. A seller also gives value to a debtor when it sells equipment to the debtor.
Second, the debtor must have rights in the collateral. The debtor must have some power to transfer rights in the collateral to the secured party. The debtor may have only limited rights in and in some cases, need not own the collateral.
Finally, certain conditions must be met that complete the process including the execution of a security agreement authenticated by the debtor describing the collateral; control over letters of credit, deposit accounts, investment property, chattel paper, or electronic documents; and, if the collateral is a certificated security in registered form, delivery of the security certificate to the secured party.
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