In Depth: A Perfection Problem With A Hidden Solution

Most U.S. lenders are familiar with the need to file a Uniform Commercial Code financing statement to perfect a security interest in collateral. Most lenders are also aware that financing statements must be updated if the debtor changes its name, changes its jurisdiction of organization, etc. However, when a debtor converts from one entity type to another (e.g., a corporation converts to a limited liability company), a technical difficulty arises that many lenders would find difficult to navigate.¹ Unfortunately, the consequences may include loss of perfection or priority of the lender's security interest. This note describes the issue and explains the best way to address it.

It is important to note that the issue described below was identified years ago by John Hilson and Steve Weise², and the solution was implemented by updating the official comments in connection with the 2010 amendments to the UCC.³ However, because the solution was implemented entirely within