Also known as: possessory security interests · pledge
Written by attorneys · grounded in primary & secondary sources — see below
A security interest in collateral perfected by the secured party's possession of the collateral rather than by filing. Possession gives the secured party control over the collateral and determines the governing law for perfection and priority under the location of the collateral.
Paula Pierce, a student, refused to recite a patriotic pledge during a school event. School officials demanded she affirm loyalty by signing a document that pledged her personal jewelry as security for compliance. When she resisted, officials took physical possession of the jewelry to enforce the demand. The court examined whether the compelled pledge created a valid possessory security interest under applicable law.
Pulse Media's board authorized a loan by delivering corporate equipment directly to the lender as collateral. The lender took immediate possession of the equipment without filing any financing statement. When a dispute arose over the loan, the lender relied on its physical control of the equipment to establish priority.
Select any source to read its text and confirm it supports the definition.
Patrick Phan, located in State A, borrowed funds from a lender in State B and delivered rare coins to the lender's vault in State B. The lender held the coins in its possession. When the debtor defaulted, the parties disputed which state's law governed perfection and priority of the lender's interest in the coins.
Pinnacle Holdings delivered manufacturing machinery to a bank to secure a line of credit. The bank took physical possession of the machinery. Later, when the corporation sought to sell the machinery, the bank asserted its rights based on continued possession of the collateral.
Progressive Healthcare acquired shares in another company and immediately delivered the share certificates to its lender. The lender retained physical possession of the certificates as collateral for a loan. Upon default, the lender claimed priority through its possessory interest in the certificates.
Paragon Construction borrowed funds and handed over construction equipment to the lender. The lender kept the equipment in its storage facility. When creditors competed for the equipment, the lender's direct possession determined the outcome of the priority dispute.
A possessory security interest is perfected by the secured party's actual possession of the collateral. A nonpossessory security interest requires filing or another method such as control to achieve perfection.
The local law of the jurisdiction where the collateral is located governs perfection, the effect of perfection or nonperfection, and priority of a possessory security interest.
Goods, instruments, documents, and chattel paper can be the subject of a possessory security interest when the secured party takes possession.
…not argued or necessarily presented by the record. I am not prepared to give any opinion on negotiable instruments taken as a pledge, even if the question were before us.