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When a lender provides financing to a commercial borrower, it typically requires the borrower to grant a security interest in some or all of the borrower's assets. Among many other types of assets or collateral, a borrower may be required to grant a security interest in stock or membership interests owned by the borrower, including stock or membership interests in the borrower's subsidiaries or affiliates.
Of course, simply obtaining a security interest provides only marginal protection relative to parties other than the borrower ' including, for example, competing secured creditors or trustees in bankruptcy. See, e.g., UCC ' 9-322 (priority rules governing competing security interests in collateral); and 11 U.S.C. ' 546 (bankruptcy trustee possesses rights and powers of certain lien creditors). Thus, in addition to merely obtaining a security interest, a lender must take all necessary steps under the Uniform Commercial Code (“UCC” (the UCC has been adopted in all 50 states with some ' usually, but not always, minor ' variations)) or other applicable law to perfect that interest.
The appropriate method for perfecting a security interest varies depending on the type of collateral. To perfect security interests in many types of assets, a lender need only file a UCC financing statement in the appropriate filing jurisdiction. For other assets, a UCC financing statement may not perfect a security interest, or it may only provide a fragile level of perfection that is vulnerable to being trumped by a party that has perfected through a different means.
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