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Certificateless and Non-Negotiable Certificates of Deposit as Pledged Collateral: Don't Bet on It!
A creditor with a security interest in a certificate of deposit believes that it has highly liquid collateral to secure payment of its claim. However, the creditor's security interest must be perfected in order for the creditor to have priority over the interests of a competing lienholder, such as a judgment creditor or bankruptcy trustee. As a result of a number of recent court decisions, a secured creditor should not take it for granted that it has obtained a perfected security interest in a certificate of deposit pledged as collateral. If a secured creditor does not have a perfected security interest in the CD, the CD will be an unencumbered asset available for distribution to all of the debtor's unsecured creditors.
What Is a Certificate of Deposit?
A secured creditor must first determine the category of collateral to which a certificate of deposit belongs in order to determine the proper means of perfecting a security interest in the CD, which may not be so clear. Section 3-104(10) of the Uniform Commercial Code defines a certificate of deposit as "an instrument containing an acknowledgment by a bank that a sum of money has been received by the bank to repay the sum of money. A certificate of deposit is a note of the bank." UCC Section 9-105(1)(i) defines an instrument as either (a) a negotiable instrument or a certificated security, or (b) any other writing that evidences a right to the payment of money (other than a security agreement or lease) if that writing "is of a type which is in the ordinary course of business, transferred by delivery with any necessary endorsement or assignment."
Under existing UCC Article 9, if a certificate of deposit is an instrument, a security creditor can perfect a security interest only by possession. Under Revised Article 9 of the Uniform Commercial Code, which will take effect in many states on July 1, 2001, a secured creditor can perfect a security interest in a certificate of deposit by either taking possession of the CD or filing a UCC financing statement. However, even under Revised Article 9, the preferred method of perfecting a security interest in a CD will continue to be by possession.
Two issues have arisen with respect to a certificate of deposit pledged as collateral. How can a creditor obtain a perfected security interest in a paperless certificate of deposit where the bank did not issue an instrument to evidence the CD? And is a non-negotiable and non-transferable certificate of deposit an instrument or a general intangible? The distinction is critical for purposes of perfecting a security interest in the CD under UCC Article 9. If the CD is an instrument, a secured creditor can perfect a security interest only by possession under existing Article 9, and perfection by possession remains the preferred method of perfection under Revised Article 9. If the CD is a general intangible, a secured creditor can perfect a security interest only by filing a UCC financing statement--possession alone just will not do!
The following cases show the importance of a secured creditor properly categorizing a certificate of deposit and then perfecting a security interest in the CD in the manner required for that particular category of collateral. If a secured creditor fails to do this, the certificate of deposit will be unencumbered and available for distribution to all of the debtor's unsecured creditors.
In Re Alabama Land and Mineral Corp.--The Case of the Certificateless Certificate of Deposit
- Bank of Winter Park beats RTC; appeals court rules bank, not agency, has right...
- Magazine article from: Orlando Business Journal Finkelstein, Alex March 25, 1994 700+ words
...superior claim" to cash the CD because it had actual possession...prohibition contained in the CD defeated" the RTC's argument...to Swann's pledge of the CD to American Pioneer, but still concluded that "the perfected security interest" held by RTC as the receiver...
- Security interest in intellectual property and licenses and the Revised Article...
- Magazine article from: The Licensing Journal Nguyen, Xuan-Thao N. May 1, 2003 700+ words
...assets. A lender with a perfected security interest in intellectual property collateral...and creditors who perfected their security interest in the same collateral at a later...debtor with an understanding of how a security interest in intellectual property is attached...
- Absence of granting language by the debtor prevents the creation of a security...
- Magazine article from: The RMA Journal Weissman, Michael L. June 1, 2007 700+ words
...05-8138) demonstrates that a security interest cannot be created unless there is...that the bank did not have a valid security interest in certain sound equipment owned...Uniform Commercial Code, as to any security interest in the loan or refinancing presently...
- Purchase money security interest suppliers beware: tracing collateral proceeds...
- Magazine article from: Business Credit Nathan, Bruce S. February 1, 2006 700+ words
...customer and obtains a purchase money security interest in the product and all proceeds to...money collateral. The supplier's security interest continues in all identifiable proceeds...supplier, with a first priority security interest in the goods it had sold to the debtor...
- High Court Confirms The Importance Of Registering A Security Interest.(JS...
- News wire article from: Mondaq Business Briefing January 20, 2008 700+ words
...goods registering a purchase money security interest (PMSI) under the Personal Properties...agreement and as such amounted to a 'security interest' under the PPSA. Further, JSB's security interest was subject to ANZ bank's earlier...
- Michigan Court of Appeals, Western District: Bank perfected its security...
- Newspaper article from: Michigan Lawyers Weekly January 7, 2002 700+ words
...Commission Act (MHCA), it perfected its security interest in a mobile home by properly recording...that the bank failed to perfect its security interest in the mobile home because it failed...requirements of the MHCA for creating a security interest in a mobile home. But Western ...
- MN Court of Appeals rules security interest may attach to...
- Magazine article from: Minnesota Lawyer Lore, Michelle December 20, 2004 700+ words
...judge erred in finding a bank's security interest in a debtor's interest in livestock...rights in the collateral for the security interest to attach, the Minnesota Court of...secured the loan by granting the bank a security interest in all of his "rights, title and...
- No-fault insurer retains security interest in home, rules Michigan Court of...
- Newspaper article from: Michigan Lawyers Weekly September 20, 2004 700+ words
...A no-fault insurer may retain a security interest in a home it constructed for an insured...issue in this case is "whether the security interest sought by defendant is reasonable...defendant is reasonably entitled to a security interest," the court concluded in a per...
- Tales of WHOA! On the docket: rejected! Secured creditor's purported security...
- Magazine article from: The RMA Journal Weissman, Michael L. December 1, 2003 700+ words
...secured creditors, claimed it had a security interest in the assets of the trust because...Outboard] shall not create a security interest in the Trust Corpus in favor of the...it forbids Outboard to create a security interest in favor of not only the executives...
- Perfecting security interest in intellectual property.
- Magazine article from: The Licensing Journal Sommer, Evelyn M. May 1, 2003 700+ words
Perfecting Security Interest in Intellectual Property This...likely to arise in perfecting a security interest in intellectual property namely...collateral must perfect its security interest in the intellectual property...
Source: HighBeam Research, Certificateless and Non-Negotiable Certificates of Deposit as Pledged...