In addition to assuring that the seller’s security interest has attached to the collateral, the seller should also seek to have priority over other claims against that property by any other creditors. In order to protect the seller’s claim over such other claims, the seller must first “perfect” the security interest (notify other claimants of the seller’s claim) to have a security interest which takes priority over other claims. Full discussion of the process of perfection, the priorities among conflicting security interests in the same collateral and the full implications of the buyer’s bankruptcy or reorganization on the seller’s security interest is beyond the scope of this material, but the seller nevertheless must fully consider such issues in a business sale transaction.
Sometimes the seller may perfect by taking actual possession of the collateral property (G.L. c. 106 §9-313, for goods, instruments, money and negotiable documents), but more commonly in business sales perfection is accomplished by filing a financing statement (G.L. c. 106 §§9-502 and 504), the so-called “UCC-l,” at the appropriate public location, or by noting the seller’s interest as a lien on the certificate of title for any titled asset such as a motor vehicle (G.L. c. 90D §21). This requires the seller to obtain a new certificate of title from the Motor Vehicle Division reflecting the seller’s lien on its face which has been collateralized. Generally, the seller has priority over conflicting claims if the seller’s security interest is the first to attach and be perfected in the collateral.
The financing statement must contain a description of the collateral in which the seller has a security interest and the addresses of the seller as creditor and the buyer as debtor (the buyer’s signature is not required). G.L. c. 106 §9-504. The description of the collateral in the security agreement may sometimes be somewhat precise and lengthy, but the description in the financing statement may be more generalized. For example, the security agreement may itemize equipment by specific names, serial numbers and quantities, but the financing statement may simply describe such collateral property as “all equipment now owned or hereafter acquired.” The seller’s interest is further protected when the financing statement specifically identifies by name the buyer as the debtor and refers by name to the business itself. The financing statement is filed at the office of the Massachusetts Secretary of State.
The filed financing statement is effective for five years from the date of filing. G.L. c. 106 §9-515(a). The effectiveness of the financing statement lapses after the five-year period unless a continuation statement is filed within six months prior to the lapse. G.L. c. 106 §9-515(c). The filing officials have no statutory duty to notify a secured seller when the five-year period runs nor do they do so in practice. If the promissory note will last more than five years, therefore, in order to continue to perfect the seller’s security interest in the collateral, the seller is best advised to calendar a reminder to file a continuation statement within the time required.
When the promissory note is paid and the buyer’s obligations under the purchase agreement are fully performed, the seller should remove any financing statements from the public records by filing a termination statement (G.L. c. 106 §9-513) at the locations where each financing statement was filed previously, and should release the seller’s claim of lien on any certificates of title.