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What You Need to Know about UCC Article 9: Secured Transactions in a Nutshell


# The ABCs of the UCC: Article 9: Secured Transactions - Introduction - What is the UCC and why is it important for business transactions? - What is Article 9 and what does it cover? - What are the main concepts and terms used in Article 9? - Attachment and Perfection - What is attachment and how does it create a security interest? - What is perfection and how does it protect a security interest? - What are the different methods of perfection and when are they applicable? - Priority and Enforcement - What is priority and how does it determine the rights of competing creditors? - What are the rules for priority among different types of collateral and creditors? - What are the remedies for secured parties in case of default by the debtor? - Revisions and Updates - What are the main changes made to Article 9 in 2010 and why were they necessary? - How do the revisions affect existing and future secured transactions? - What are some of the current issues and challenges facing Article 9? - Conclusion - Summarize the main points and benefits of Article 9 - Provide some tips and best practices for complying with Article 9 - Encourage further learning and research on Article 9 - FAQs - Q: How can I find out if a security interest has been perfected? - A: You can search the public records maintained by the filing office in the state where the debtor is located or where the collateral is situated, depending on the type of collateral. You can also request a UCC search report from a service provider or conduct an online search using a database or website. - Q: How can I perfect a security interest in a deposit account? - A: You can perfect a security interest in a deposit account by obtaining control over the account, which means that you have the authority to direct the disposition of the funds in the account. You can obtain control by being the bank that holds the account, by entering into a control agreement with the bank and the debtor, or by becoming the bank's customer with respect to the account. - Q: How can I avoid conflicts with other creditors who have an interest in the same collateral? - A: You can avoid conflicts by following the rules of priority established by Article 9, which generally favor the first to file or perfect their security interest. You can also monitor the status of your collateral and debtor, and take appropriate actions to protect your rights, such as sending notices, demanding payment, or enforcing your remedies. - Q: How can I enforce my security interest if the debtor defaults on their obligation? - A: You can enforce your security interest by taking possession of the collateral, either with or without judicial process, depending on the circumstances. You can also dispose of the collateral by selling it, leasing it, or keeping it in full or partial satisfaction of the debt. You must follow the rules and procedures specified by Article 9 to ensure that your enforcement is lawful and effective. - Q: How can I stay updated on the changes and developments related to Article 9? - A: You can stay updated by reading relevant publications, attending seminars and webinars, joining professional associations and networks, and consulting with experts and advisors. You can also visit the websites of the Uniform Law Commission (ULC) and the American Law Institute (ALI), which are responsible for drafting and revising Article 9. Now, here is the article I will write based on that outline: # The ABCs of UCC: Article 9: Secured Transactions If you are involved in any kind of business transaction that involves borrowing or lending money, buying or selling goods, or leasing or renting equipment, chances are you have encountered or will encounter Article 9 of the Uniform Commercial Code (UCC). Article 9 is one of the most important and complex parts of the UCC, which is a set of standardized laws that govern commercial transactions in all 50 states (except Louisiana). Article 9 provides a comprehensive framework for creating, perfecting, prioritizing, and enforcing security interests in personal property, which are rights that creditors have in their debtors' assets as collateral for their loans. In this article, we will explain what Article 9 is, how it works, why it matters, and how it has changed over time. ## What is Article 9 and what does it cover? Article 9 is an article under the UCC that regulates secured transactions, which are transactions that pair a debt with the creditor's interest in the secured property. Article 9 covers the creation and enforcement of security interests in movable or intangible property and fixtures, which are items that are attached to real estate. It encompasses a wide variety of possessory liens and determines the legal right of ownership if a debtor does not meet their obligations. Some examples of secured transactions that fall under Article 9 are: - A bank lends money to a business and takes a security interest in the business's inventory, equipment, accounts receivable, and general intangibles as collateral. - A car dealer sells a car to a customer and retains a security interest in the car until the customer pays off the loan. - A farmer borrows money from a lender and grants a security interest in their crops, livestock, and farm equipment as collateral. - A manufacturer leases a machine to a lessee and retains a security interest in the machine until the lease term ends. Article 9 does not apply to all types of secured transactions, however. Some of the exceptions are: - Security interests in real property, such as land and buildings, which are governed by state real estate laws. - Security interests in certain types of personal property, such as money, deposit accounts, investment property, and letter-of-credit rights, which are governed by other articles of the UCC or other laws. - Security interests created by statute or common law, such as tax liens, mechanic's liens, or judicial liens, which are governed by their own rules. ## What are the main concepts and terms used in Article 9? Article 9 uses many technical terms and concepts that are essential to understand how it operates. Here are some of the most important ones: - Security interest: A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. It is created by a contract called a security agreement between a debtor and a secured party. A security interest gives the secured party the right to take possession of the collateral and dispose of it if the debtor defaults on their obligation. - Debtor: A debtor is a person who owes payment or performance of an obligation secured by a security interest in their property. A debtor can also be a person who owns or has rights in the collateral subject to a security interest. A debtor can be an individual, a business entity, or a government unit. - Secured party: A secured party is a person who holds a security interest in another person's property. A secured party can also be a person who holds an agricultural lien, which is a nonconsensual lien on farm products that secures payment or performance of an obligation related to farming operations. A secured party can be an individual, a business entity, or a government unit. - Collateral: Collateral is the property subject to a security interest or an agricultural lien. Collateral can be tangible or intangible, existing or future, whole or partial. Article 9 classifies collateral into various types, such as goods, instruments, documents, chattel paper, accounts, deposit accounts, investment property, letter-of-credit rights, general intangibles, and commercial tort claims. Each type of collateral has its own rules for attachment and perfection. - Attachment: Attachment is the process by which a security interest becomes enforceable against the debtor with respect to the collateral. Attachment requires three conditions: (1) value has been given by the secured party; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to the secured party; and (3) the debtor has authenticated a security agreement that provides a description of the collateral or the secured party has possession or control of the collateral pursuant to an agreement. Once attachment occurs, the secured party has rights against the debtor but not necessarily against third parties who may claim an interest in the same collateral. - Perfection: Perfection is the process by which a security interest becomes enforceable against third parties who may claim an interest in the same collateral. Perfection protects the secured party's priority over other creditors who may try to collect from or take possession of the collateral. Perfection can be achieved by different methods depending on the type of collateral, such as filing a financing statement with a public office, taking possession or control of the collateral, or automatically upon attachment. Perfection can also be temporary or permanent depending on the circumstances. ## Priority and Enforcement Once a security interest is attached and perfected, the secured party has rights not only against the debtor but also against other parties who may claim an interest in the same collateral. These parties may include other secured creditors, unsecured creditors, lien creditors, buyers, lessees, or trustees in bankruptcy. The question of priority is: who gets paid first and who gets to keep or dispose of the collateral if there is more than one creditor who has an interest in it? The general rule of priority is based on the principle of "first in time, first in right", which means that whoever perfects their security interest first has priority over later creditors. However, there are many exceptions and special rules for different types of collateral and creditors. Some of the most common exceptions are: - Purchase-money security interests (PMSIs): A PMSI is a security interest that enables the debtor to acquire the collateral or that secures a loan that enables the debtor to acquire the collateral. A PMSI has priority over a conflicting security interest in the same collateral if it is perfected at the time the debtor receives possession of the collateral or within a specified period thereafter. A PMSI in consumer goods is automatically perfected upon attachment. - Buyers and lessees: A buyer or lessee of goods may take free of a security interest if they give value, receive delivery, and act in good faith without knowledge of the security interest. This rule applies only if the sale or lease is authorized by the secured party or if the goods are consumer goods sold or leased by a person who used them for personal, family, or household purposes. - Future advances: A future advance is a loan made by a secured party to a debtor after the initial loan that created the security interest. A future advance is secured by the same security agreement and has the same priority as the original loan, unless otherwise agreed by the parties. However, a future advance may lose its priority to an intervening lien creditor if it is made more than 45 days after the secured party knows of the lien or if it is made pursuant to a commitment entered into after the secured party knows of the lien. If a debtor defaults on their obligation secured by a security interest, the secured party has various remedies to enforce their rights. The most common remedy is to take possession of the collateral, either with or without judicial process, depending on whether it can be done without breach of peace. The secured party may also dispose of the collateral by selling it, leasing it, or keeping it in full or partial satisfaction of the debt. The secured party must follow certain rules and procedures specified by Article 9 to ensure that their enforcement is lawful and effective. These rules include: - Notification: The secured party must send a reasonable notification of disposition to the debtor and other interested parties before disposing of the collateral. The notification must include information such as the time and place of a public sale or the time after which a private sale or retention will occur. - Commercial reasonableness: The secured party must dispose of the collateral in a commercially reasonable manner that conforms to reasonable commercial practices among dealers in similar property. The secured party must also act in good faith and in accordance with reasonable standards of fair dealing. ## Revisions and Updates Article 9 has been revised and updated several times since its original adoption in 1952. The most significant revision occurred in 1998, when Article 9 was substantially rewritten and modernized to reflect the changes in commercial practices and technology. The 1998 revision became effective in all 50 states and the District of Columbia in 2001 or shortly thereafter. However, over the years, it became clear that there were some ambiguities and frictions that needed to be addressed by further amendments. Thus, Article 9 was amended again in 2010 by the Uniform Law Commission and the American Law Institute. The 2010 amendments were adopted in all 50 states and the District of Columbia, mostly with an effective date of July 1, 2013. The 2010 amendments made several changes to Article 9, but most of them were minor or technical in nature. The main changes were related to the following issues: - Debtor name: The 2010 amendments clarified the name of the debtor to be provided on the financing statement. For registered organizations, such as corporations, limited liability companies, and limited partnerships, the proper name to be used is the name that the organization used when it filed its organization documents with the state. For individuals, the proper name to be used is the name that appears on their driver's license or state-issued identification card issued by the state where they reside. If they do not have such a license or card, then their individual name or surname and first personal name may be used. - Debtor location: The 2010 amendments clarified the rules for determining the location of a debtor for filing purposes. For registered organizations, the location is still the state of their organization. For individuals, the location is their principal residence. For other types of organizations that are not registered with any state, such as trusts and estates, the location is their place of business if they have only one, or their chief executive office if they have more than one. - Electronic chattel paper: The 2010 amendments added a definition of electronic chattel paper, which is chattel paper evidenced by a record or records consisting of information stored in an electronic medium. Electronic chattel paper is a type of collateral that can be perfected by control. The 2010 amendments also provided rules for determining whether a secured party has control of electronic chattel paper. - Foreclosure clarifications: The 2010 amendments clarified the effect of contractual provisions that purport to prohibit, restrict, or condition the assignment or grant of a security interest in certain types of collateral, such as promissory notes and payment intangibles. Such provisions are generally ineffective against a secured party who takes a security interest in good faith and without knowledge of the provision. However, such provisions may still give rise to a claim for breach of contract or other remedies against the debtor or assignor. The 2010 amendments did not change the basic structure or principles of Article 9, but rather refined and improved them to address some of the issues and challenges that arose in practice following a decade of experience with the 1998 revision. ## Conclusion Article 9 is a vital part of commercial law that governs secured transactions in personal property. It provides a comprehensive and uniform framework for creating, perfecting, prioritizing, and enforcing security interests in various types of collateral. It also adapts and evolves to reflect the changes and developments in commercial practices and technology. Understanding Article 9 is essential for anyone who is involved in any kind of business transaction that involves borrowing or lending money, buying or selling goods, or leasing or renting equipment. By following the rules and procedures established by Article 9, parties can protect their rights and interests in their collateral and avoid potential conflicts and disputes with other creditors. However, Article 9 is also complex and technical, and requires careful attention to detail and accuracy. Mistakes or omissions in drafting security agreements or filing financing statements can result in losing priority or even losing collateral altogether. Therefore, parties should always consult with legal counsel and experts before entering into any secured transaction. If you want to learn more about Article 9 and its revisions and updates, you can visit the websites of the Uniform Law Commission (ULC) and the American Law Institute (ALI), which are responsible for drafting and revising Article 9. You can also read relevant publications, attend seminars and webinars, join professional associations and networks, and consult with experts and advisors. ## FAQs - Q: How can I find out if a security interest has been perfected? - A: You can search the public records maintained by the filing office in the state where the debtor is located or where the collateral is situated, depending on the type of collateral. You can also request a UCC search report from a service provider or conduct an online search using a database or website. - Q: How can I perfect a security interest in a deposit account? - A: You can perfect a security interest in a deposit account by obtaining control over the account, which means that you have the authority to direct the disposition of the funds in the account. You can obtain control by being the bank that holds the account, by entering into a control agreement with the bank and the debtor, or by becoming the bank's customer with respect to the account. - Q: How can I avoid conflicts with other creditors who have an interest in the same collateral? - A: You can avoid conflicts by following the rules of priority established by Article 9, which generally favor the first to file or perfect their security interest. You can also monitor the status of your collateral and debtor, and take appropriate actions to protect your rights, such as sending notices, demanding payment, or enforcing your remedies. - Q: How can I enforce my security interest if the debtor defaults on their obligation? - A: You can enforce your security interest by taking possession of the collateral, either with or without judicial process, depending on whether it can be done without breach of peace. You can also dispose of the collateral by selling it, leasing it, or keeping it in full or partial satisfaction of the debt. You must follow the rules and procedures specified by Article 9 to ensure that your enforcement is lawful and effective. - Q: How can I stay updated on the changes and developments related to Article 9? - A: You can stay updated by reading relevant publications, attending seminars and webinars, joining professional associations and networks, and consulting with experts and advisors. You can also visit the websites of the Uniform Law Commission (ULC) and the American Law Institute (ALI), which are responsible for drafting and revising Article 9.




The ABCs of the UCC: Article 9: Secured Transactions Russell A. Hakes

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