When is perfection by possession used, and which collateral types does it cover?

When is perfection by possession used, and which collateral types does it cover?

• A. Perfection by possession applies to instrument-type collateral like negotiable instruments, cash, or certain chattel paper when held by the secured party.
• B. Perfection by possession is used for all intangible assets to avoid filing.
• C. Perfection by possession is used only for real property liens.
• D. Perfection by possession applies to all collateral regardless of control.

Answer: (A)

Perfection by possession occurs when the secured party takes physical control of the collateral to establish priority. It is used for instrument-type collateral—negotiable instruments, cash, and certain chattel paper—when the secured party actually holds the items. This method works because possession gives the secured party enforceable rights against others who may claim the same collateral, making it a straightforward way to perfect for tangible, hand-held items. Other choices don’t fit because not all assets can be perfected by simply possessing them. Intangibles usually require filing or another perfection method, and real property liens are perfected by recording a mortgage or deed of trust rather than taking possession. Perfection by possession also isn’t universal for all collateral; many items cannot be physically possessed or are better perfected by other means.

Perfection by possession occurs when the secured party takes physical control of the collateral to establish priority. It is used for instrument-type collateral—negotiable instruments, cash, and certain chattel paper—when the secured party actually holds the items. This method works because possession gives the secured party enforceable rights against others who may claim the same collateral, making it a straightforward way to perfect for tangible, hand-held items.

Other choices don’t fit because not all assets can be perfected by simply possessing them. Intangibles usually require filing or another perfection method, and real property liens are perfected by recording a mortgage or deed of trust rather than taking possession. Perfection by possession also isn’t universal for all collateral; many items cannot be physically possessed or are better perfected by other means.