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2006 UCC ARTICLE 9 (SECURED TRANSACTIONS) UPDATE
First Run Broadcast: January 13, 2006
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)
The five-year transition period from the old to the revised UCC Article 9 is rapidly coming to an end. All 50
states have adopted revised UCC Article 9, and in most of those states the end of the transition period is July 1,
2006. This is an ideal and crucial time for reviewing the transition rules and developments in the last several
years under the new regime governing secured transactions. Led by two of the nation’s foremost experts on
new UCC Article 9, this program will provide a review of the most important transition rules and recent case
law and other developments. The program will also provide valuable practical advice on opinion practice and
control agreements.
• Review of major transition rules as transition period lapses
• Case law and legislative developments
• Review of special problem areas with non-uniform enactments
• Practical guidance on Article 9 opinion practice and control agreements
• Intellectual property as secured collateral
Steven O. Weise is a partner in the Los Angeles office of Heller Ehrman, LLP, where his practice encompasses
all areas of commercial law. He has extensive experience in financings, particularly those secured by personal
property. He also handles matters involving real property anti-deficiency laws, workouts, guarantees, sales of
goods, letters of credit, commercial paper and checks, and investment securities. Mr. Weise recently served as
Chair of the American Bar Association’s Business Law Section. He has also served as a member of the
Permanent Editorial Board for the Uniform Commercial Code, as an Advisor to the Uniform Commercial Code
Article 9 Drafting Committee, and Chair of the ABA’s Committee on Personal Property Secured Financing and
Committee on Legal Opinions. Mr. Weise is a graduate of Yale University, where he received his B.A., and the
University of California, Berkeley, Boalt Hall School of Law, where he received his J.D.
Edwin E. Smith is a partner in the Boston office of Bingham McCutchen, LLP. As a Uniform Law
Commissioner for the Commonwealth of Massachusetts, he served as a member of the drafting committee for
the revisions of Article 9 of the Uniform Commercial Code. Mr. Smith formerly served as Chair of the
Uniform Commercial Code Committee of the Business Law Section of the American Bar Association and the
ABA Advisor/Liaison to the Permanent Editorial Board of the Uniform Commercial Code. He also served as a
U.S. delegate at the United Nations Convention on the Assignment of Receivables in International Trade, and as
a U.S. delegate to the United Nations Commission on International Trade Law working on creating a secured
transactions guide for legislation in United Nations member countries. He is a member of the American Law
Institute and the National Bankruptcy Conference, and is the past President of the American College of
Commercial Finance Lawyers. He received his B.A. from Yale University and his J.D. from Harvard Law
School.
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2006 UCC Article 9 (Secured Transactions) Update,Teleseminar
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9
MATERIALS ON
REVISED UCC ARTICLE 9
Steven O. Weise
Los Angeles
steve.weise@hellerehrman.com
January 1, 2005
Heller Ehrman LLP
Materials:
An Introduction to the Revised UCC Article 9
A Comparison of the Former Article 9 and the New Article 9
Preparing for the Revised UCC Article 9: the Transition Rules
Staying Perfected Through the Transition (flow chart)
A Comparison of a Security Agreement Under the Former Article
9 and the New Article 9
Effect of Post-Closing Events on Security Interest Perfected by
Filing
9
A N I NTRODUCTION TO
R EVISED UCC A RTICLE 9
Steven O. Weise
Los Angeles
steve.weise@hellerehrman.com
January 1, 2005
Heller Ehrman LLP
Introduction lands.4
Status. The Article 91 Drafting Commit- Purposes of changes. The revisions to
tee2 completed its work in 1998 and the Article 9 represent the first major revi-
sponsoring organizations, the American sion to Article 9 since 1972. There are
Law Institute and the National Confer- significant changes in scope, substan-
ence of Commissioners on Uniform tive rules, and procedures. The revi-
State Laws, promptly gave their ap- sions are intended to bring greater cer-
proval. 3 Article 9 has been adopted in tainty to financing transactions. This
all of States and went into effect in 46 certainty should reduce both transac-
states and the District of Columbia on tion costs and the cost of credit.
its scheduled effective date of July 1, Implementation. Revised Article 9
2001. It has since gone into effect in the seeks greater certainty through two
remaining states and the U.S. Virgin Is- primary techniques:
o Expanding the scope of personal
property and transactions covered
1
All statutory references to Article 9 are to the final by Article 9, and
version of the new Article 9 (as modified through
December 31, 2001), including the Comments, o Simplifying and clarifying the
unless otherwise indicated. Copies of the final rules for creation, perfection, pri-
draft may be purchased from the sponsors:
ority, and enforcement of a secu-
NCCUSL, 312.915.0195; and ALI, 800.253.6397, x
7000 or online: rity interest
http://www.ali.org/ali/com_ucc.htm. The final
draft is also available for purchase from the ABA
Revised Article 9 also clarifies the rules
(800.285.2221) and commercial publishers. Copies that apply to consumer transactions
of the drafts prior to the final draft may be ob-
tained at no cost at:
Simplification. The Article 9 Drafting
http://www.law.upenn.edu/library/ulc/ulc.htm Committee established a Simplification
. Task Force to work with the Reporters
2
The Chair of the Drafting Committee was Bill and the Drafting Committee to make
Burke (wburke@shearman.com). The Reporters the revised Article 9 as “user friendly”
were Steve Harris (sharris@kentlaw.edu) and
Chuck Mooney (cmooney@oyez.law.upenn.edu). as possible. Revised Article 9 achieves
3 this goal to a significant extent.
The author was the ABA Advisor to the Drafting
Committee and may be reached at Heller Ehrman Electronic transactions. Article 9 rec-
White & McAuliffe LLP, 601 So. Figueroa Street,
40th Fl., Los Angeles, California 90017-5758;
ognizes emerging methods of engaging
213.244.7831; FAX: 213.614.1868; in electronic commerce. Article 9 pro-
sweise@hewm.com. The author periodically pre-
pares and distributes information and reports on
the new Article 9. Anyone interested in receiving 4 Article 9 was effective on October 1, 2001 in Con-
these should let the author know. The materials necticut, on January 1, 2002 in Alabama, Florida,
are also available at: and Mississippi, and April 1, 2002 in the U.S. Vir-
http://www.hewm.com/news/articles/ucc.pdf gin Islands.
An introduction to revised UCC Article 9
vides throughout its text for the “au- nary course rules). When software
thentication” of a “record” instead of maintains its independent status it will
signing a piece of paper. This follows constitute a general intangible. § 9-
the lead of other recent revisions to the 102(44), (75).
UCC.5 Accounts. Article 9 has always ap-
Consumer matters. Article 9 contains plied to the sale of “accounts.” Revised
many special rules for consumer trans- Article 9 continues this rule. § 9-
actions. This paper sometimes, but not 109(a)(3).6 Former Article 9 defined
always, refers to the special consumer “accounts” to include payment obliga-
rules in the course of discussing a tions arising out of only the sale or lease
commercial rule. There is a section de- of goods or the provision of services.
voted to consumer rules near the end of Under former law, this left many kinds
this paper that should be referred to for of payment rights within the definition
a collection of the principal consumer of “general intangible.” The sale of
rules. these types of payment rights often
Scope serves as a financing transaction, but
former Article 9 did not apply to these
Introduction. Revised Article 9 brings transactions.
into the fold of Article 9 several kinds of
personal property and transactions that Revised Article 9 broadens the defini-
previously resided outside of Article 9. tion of “accounts” to include:
The prior application of non-Article 9 o payment obligations arising out of
common law rules to these transactions the sale, lease or license of all
made the legal results of these transac- kinds of tangible and intangible
tions uncertain and accordingly made personal property (for example,
the transactions more expensive. This “accounts” will include license
is particularly true for securitization fees payable for the use of soft-
transactions. ware), and
Goods v. software. Article 9 draws a o credit card receivables.
line between “goods” and “software.” § 9-102(a)(2). The broader definition
Where software is “embedded” in expands the scope of Article 9 by bring-
goods so that the software becomes ing into Article 9 more transactions
“part of” the goods, Article 9 treats the through the continued application of
software as “goods” for all purposes Article 9 to the sale of “accounts” (as
under Article 9 (such as how to perfect newly defined).
a security interest and buyer in ordi-
6 A seller of accounts and other payment rights sub-
5 Due to revised Article 9’s e-commerce rules, ject to Article 9 (see discussion below) is a
UETA and E-Sign generally do not apply to Arti- “debtor” and a buyer is a “secured party.” §§ 9-
cle 9 transactions. 102(a)(28)(B) and (72)(D).
2
An introduction to revised UCC Article 9
Revised Article 9 also clarifies that a tion subject to Article 9. § 9-109(a)(3).
seller of accounts (and other property Revised Article 9 defines a “promissory
where the sale is an Article 9 transac- note” as a subset of “instruments.” § 9-
tion) retains no interest in the property 102(a)(65) “Promissory notes” include
sold. § 9-318(a). This rejects the hold- “promises,” but not “order paper” (e.g.
ing in Octagon Gas Systems v. Rimmer, checks).
995 F.2d 948 (10th Cir. 1993). See PEB As with the buyer of a payment in-
Commentary No. 14 (June 10, 1994) tangible, the buyer of a promissory note
Sale of payment intangibles. The inclu- enjoys automatic perfection of its secu-
sion of many kinds of payment rights in rity interest. § 9-309(4). A buyer of a
the definition of “accounts” does leave promissory note that relies on auto-
behind in the definition of “general in- matic perfection, and does not take pos-
tangible” some important types of session of the promissory note, will
payment rights, such as payment rights generally lose to a subsequent pur-
that arise out of loan agreements that chaser (including a secured party) of
do not constitute “instruments.” Re- the promissory note that does take pos-
vised Article 9 calls a general intangible session of the promissory note. § 9-
where the obligor’s “principal” obliga- 330(d). This issue does not arise with
tion is the payment of money a “pay- payment intangibles where there is
ment intangible.” § 9-102(a)(61). The nothing to possess and the buyer of the
sale of a payment intangible often func- payment intangible whose security in-
tions as a financing transaction. terest first attaches will always have
priority. The buyer of a promissory
Revised Article 9 brings certainty to
note that relies on automatic perfection
these transactions by bringing the sale
would still defeat a lien creditor, includ-
of a “payment intangible” into the scope
ing a trustee in bankruptcy.
of Article 9. § 9-109(a)(3). However, to
permit financial institutions that sell Investment property. Revised Article 9
loan participations to avoid having a continues the rules grafted onto Article
financing statement filed against them, 9 at the time of the adoption of revised
Article 9 provides for the automatic Article 8 in 1994. Revised Article 9 dis-
perfection of a security interest created tributes those rules, which previously
upon the sale of a payment intangible resided largely in former § 9-115, to
(but not a security interest given to se- their proper homes throughout revised
cure an obligation). § 9-309(3). Article 9. Various aspects of these rules
are discussed below.
Sale of promissory notes. The sale of a
promissory note will also often function Deposit accounts. Former Article 9 did
as a financing transaction. Revised Ar- not apply to a security interest in a de-
ticle 9 recognizes this fact and treats the posit account as original collateral. Ar-
sale of a promissory note as a transac- ticle 9 will apply to security interests in
3
An introduction to revised UCC Article 9
deposit accounts as original collateral. o if the claimant is an individual,
The application of Article 9, instead of the claim (i) arose in the course of
non-Article 9 common law, rules to se- the claimant’s business, and (ii)
curity interests in deposit accounts will does not involve personal injury.
make the legal results of these transac- A secured party may not obtain a secu-
tions more certain and accordingly rity interest in an after-acquired com-
make the transactions less expensive. mercial tort claim. § 9-204(b)(2). The
As discussed below, the only way to security agreement must describe the
perfect a security interest in a deposit commercial tort claim with some speci-
account will be to obtain “control” of ficity. § 9-108(e)(1).
the deposit account.
Creation of the security interest
Health-care-insurance receivables.7
Former Article 9 excluded insurance Introduction. The former rules for the
claims from the scope of Article 9 (ex- creation and attachment of the security
cept to the extent they may constitute interest remain substantially the same
proceeds under former § 9-306). Origi- under revised Article 9.
nators of insurance receivables arising Attachment. Attachment generally
from the provision of health care ser- continues to require a security agree-
vices frequently sell them in financing ment, value, and that the debtor have
transactions. To bring certainty to these rights in the collateral. § 9-203.
transactions, revised Article 9 brings
The security agreement. The security
them into Article 9 and treats them as
agreement may be an authenticated re-
an “account.” § 9-102(a)(2), (46). Other
cord. § 9-203. The security agreement
insurance claims remain outside of Ar-
still requires the debtor’s authentication
ticle 9 (except to the extent they consti-
and a sufficient description of the col-
tute “proceeds”). § 9-109(d)(8).
lateral. § 9-203(b)(3)(A). Revised Arti-
Commercial tort claims. Former Arti- cle 9 confirms that the exception to the
cle 9 excluded tort claims from the cov- requirement of a signature (or an au-
erage of Article 9 (except to the extent thentication) where the secured party
they constituted “proceeds”). Revised has possession pursuant to “agreement”
Article 9 continues this rule, except for means that the “agreement” for posses-
“commercial tort claims.” §§ 9- sion has to be an agreement that the
102(a)(13), 9-109(d)(12). Revised Article person will have possession for pur-
9 defines “commercial tort claims” as poses of security.
those tort claims:
Description of collateral. Revised Arti-
o where the claimant is an organiza- cle 9 clarifies that a description of col-
tion, or lateral by Article 9 “type” (e.g. “equip-
ment”) suffices to “describe” the collat-
7 The “-”‘s are officially part of the term. eral (except in certain consumer trans-
4
An introduction to revised UCC Article 9
actions, as described below). § 9- o the perfection of a security interest
108(b)(3). If the collateral is a commer- in the supported obligation auto-
cial tort claim, the description requires matically perfects the security in-
some specificity beyond the category of terest in the supporting obliga-
“commercial tort claims” (e.g. “all tion. § 9-308(d).
claims arising out of the explosion oc- Similarly a security interest in an obli-
curring at the debtor’s Chicago fire- gation also attaches to any security in-
works factory on July 4, 2001”). § 9- terest that secures that obligation and
108(e)(1). Unlike financing statements that security interest is perfected when
(as discussed below), a description of the security interest in the obligation is
collateral in a security agreement may perfected. §§ 9-203(g) and 9-308(e).
not use a “supergeneric” statement,
such as “all my personal property.” § 9- Transfers of intangibles. Former § 9-
108(c). 318(4) renders ineffective any restriction
in an account or a general intangible
Proceeds. As with former Article 9, a consisting principally of a right to pay-
security interest automatically attaches ment that would prevent the sale of the
to “proceeds” of the collateral. §§ 9- account or the creation of a security in-
203(f), 9-315(a)(2). Revised Article 9 ex- terest in the general intangible. Revised
pands the definition of “proceeds” to Article 9 builds on this. §§ 9-406 and 9-
include: 408
o rights arising out of the license of Revised Article 9 renders wholly in-
property, and effective any restriction in an account,
o distributions on investments and promissory note, payment intangible,
other collateral. or chattel paper, or under other law,
§ 9-102(a)(64). that would interfere with the:
Supporting obligations and underlying
o creation or perfection of a security
collateral. Revised Article 9 collects into interest in the right to payment, or
a new concept several kinds of rights, o enforcement of the secured
such as guaranties, that are understood party’s security interest in the
under former law to follow the debt. right to payment.
Revised Article 9 calls these rights “sup-
§ 9-406(d) and (f). These rules do not
porting obligations.” § 9-102(a)(77).
apply to the sale of a payment intangi-
Under revised Article 9:
ble or a promissory note. The next
o the creation of a security interest in paragraph describes the rules that ap-
a payment obligation automati- ply to the sale of that type of collateral
cally attaches to “supporting obli- (as well as in other circumstances).
gations” related to the obligation. For other kinds of rights, such as
§ 9-203(f), and
5
An introduction to revised UCC Article 9
payment intangibles and promissory Control. As a result of amendments
notes (when sold) and a licensee’s rights to Article 8 completed in 1994, former
under a license, revised Article 9 ren- Article 9 permits “control” of invest-
ders ineffective a restriction on transfer, ment property to serve as a method of
in the contract or arising under other perfecting a security interest in invest-
law, to the extent the restriction would ment property. For a security entitle-
interfere with the creation, attachment ment, this requires an agreement be-
or perfection of the security interest. § tween the secured party and securities
9-408(a) and (c). In transactions subject intermediary that the securities inter-
to § 9-408, Revised Article 9 does not in- mediary will comply with entitlement
terfere with the enforceability of an oth- orders originated by the secured party
erwise effective restriction (in the con- without further “consent” of the debtor.
tract or under other law) on the secured §§ 8-106, 9-106(a). Revised Article 9
party’s enforcement of its security inter- clarifies that the secured party’s agree-
est in the general intangible. § 9-408(d). ment with the debtor that the secured
Perfection: other than filing party will not exercise its control rights
until a subsequent event happens, such
Introduction. Revised Article 9 clarifies as the debtor’s default, does not inter-
the application of some of the rules of fere with the present existence of con-
former Article 9. It also permits the use trol (and therefore perfection). § 8-106,
of a financing statement to perfect a se- Comments 4 and 7 (revised). Present
curity interest in some kinds of collat- control (and therefore perfection) will
eral that under former Article 9 could not exist if the secured party’s future
be perfected only by other means. exercise of control requires the consent
Possession by bailee. Revised Article 9 of the debtor.
modifies the former method of perfect- Revised Article 9 also provides for
ing a security interest by possession the use of control as a method of perfec-
where a third party has possession of tion (sometimes the exclusive method)
the collateral. Most decisions under for:
former § 9-305 hold that the secured
party can perfect its security interest in
o deposit accounts,
collateral in the possession of a bailee o letter-of-credit rights, and
by giving notice of the security interest o electronic chattel paper.
to the bailee. Revised Article 9 provides
that the security interest is note per- § 9-314(a).
fected by possession unless the bailee The meaning of “control” for deposit
acknowledges in an authenticated re- accounts closely resembles that for a se-
cord that it is holding the collateral “for curity entitlement. § 9-104. For elec-
the secured party’s benefit.” § 9-313(c). tronic chattel paper, control requires a
unique “marking” of the electronic chat-
6
An introduction to revised UCC Article 9
tel paper. § 9-105. A secured party has lateral where a secured party can use
“control” of a letter-of-credit right when the filing of a financing statement to
it obtains the consent of the issuer of the perfect its security interest. These now
letter of credit to the assignment to the include the following types of property,
secured party of the proceeds of the let- where a secured party could formerly
ter of credit under § 5-114(c), § 9-107. perfect only by possession:
This does not give the secured party the o Instruments
right to make the draw under the letter
of credit. o Investment property (including
stock certificates) (until the 1994
Automatic. As noted above, revised revisions to Article 8)
Article 9 provides for automatic perfec-
tion of a security interest in several cir- § 9-310(a). The availability of perfec-
cumstances, including the following: tion by filing does not preclude perfec-
tion by other means available for that
o Sale of payment intangibles type of collateral, such as possession or
o Sale of promissory notes control (as appropriate). As discussed
§§ 9-308(d), 9-309. These automatic per- below, there are special, non-temporal
fection rules do not apply to an obliga- priority rules for some of these types of
tion secured by payment intangibles or collateral when a secured party perfects
promissory notes, as opposed to a sale only by filing and another secured party
of one of those two types of property. perfects by possession or control (as
There is also automatic perfection of a appropriate).
security interest in a supporting obliga- Location of the debtor. Article 9
tion and in a security interest that se- changes the rules for the location of fil-
cures an obligation that itself is collat- ing a financing statement. Generally
eral. former law provides for the filing of a
Perfection: filing financing statement in the state where
goods are located for goods and in the
Introduction. Revised Article 9 makes state of the debtor’s chief executive of-
extensive changes to the rules of the fil- fice for intangible collateral, such as ac-
ing system. These are designed to: counts and general intangibles. New
o simplify procedures, Article 9 provides for only one place to
file when filing to perfect a security in-
o reduce the costs of compliance,
terest in each kind of collateral: the
and
place of the debtor’s “location,” except
o reduce the risk of inadvertent er- for fixture filings, and filings made to
rors. perfect a security interest in as-
Kinds of collateral subject to filing. Ar- extracted collateral and timber to be cut.
ticle 9 greatly expands the kinds of col- § 9-301.
7
An introduction to revised UCC Article 9
Article 9 then defines “location”: determine when a mistake in the
o for a “registered organization” debtor’s name is so incorrect as to make
(generally an entity created by a the financing statement ineffective. § 9-
filing with a state), the entity’s lo- 506(c). The financing statement is effec-
cation is that state. § 9-307(f). For tive as a matter of law if a computer
example, for a debtor incorpo- search run under the “standard” search
rated in Maryland, with its chief logic of the filing office using the
executive office in New Jersey, a debtor’s correct name turns up the fi-
secured party perfecting a secu- nancing statement with the incorrect
rity interest would file the financ- name. If it does not, then the financing
ing statement in Maryland, the statement is not effective as a matter of
state of the debtor’s formation, for law. The court has no discretion to de-
all kinds of collateral and a filing termine that the incorrect name is “close
in New Jersey would have no ef- enough.” As a result the secured party
fect; that makes a mistake in the debtor’s
name is dependent on the kind of com-
o for an entity not created by a fil- puter search logic used by a particular
ing, the entity’s location is the state’s filing office. The simple answer
place of its chief executive office is to get the name right.
(§ 9-307(b)); and
Article 9 rejects decisions that sug-
o for an individual, the person’s lo- gest that if the secured party is acting
cation is her principal residence (§ on behalf of others that the financing
9-307(b)). statement must indicate that the se-
The perfection of an agricultural lien cured party is acting in a representative
(which is not a “security interest”) on capacity. § 9-503(d).
farm products occurs through a central Indication of the collateral. Most deci-
filing of a financing statement in the ju- sions under former law do not permit a
risdiction where the farm products are “supergeneric” “all assets” indication of
located. § 9-302. A fixture filing used collateral in a financing statement.
to perfect a security interest is filed lo- New Article 9 will permit the use of this
cally. § 9-501(a)(1)(B). type of description in a financing state-
The debtor’s name. Article 9 continues ment, assuming of course that the de-
the requirement that the financing scription accurately describes the deal
statement include the debtor’s name. § between the secured party and the
9-502(a)(1). Article 9 also continues the debtor. § 9-504(2). Article 9 continues
disapproval of the use of a fictitious the former rule that a supergeneric de-
name in place of the debtor’s “real” scription will not suffice in a security
name. § 9-503(c). agreement. § 9-108(c).
Article 9 contains a statutory rule to The debtor’s signature. In perhaps the
8
An introduction to revised UCC Article 9
most dramatic change, Article 9 has Effect of other articles of UCC. Article 9
done away with the requirement that defers to the rights of holders in due
the debtor sign the financing statement. course under Article 3 and protected
§ 9-502, Comment 3. This will facilitate purchasers under Article 8 “to the ex-
electronic filing of financing statements tent” those articles provide rights to
and, as a result, electronic searches. those persons. § 9-331. The provisions
A secured party can file a financing in other articles do not always give pri-
statement (without the debtor’s signa- ority to persons protected by those arti-
ture) only if authorized by the debtor to cles in all disputes with a secured party
make the filing. § 9-509(a)(1). Article 9 under Article 9. See §§ 3-305, 3-306, 8-
provides for automatic authorization to 303. See also § 8-501 (revised).
file a financing statement consistent Filing v. control. As discussed above,
with the security interest granted by the a secured party with a security interest
debtor in the security agreement. § 9- in investment property or electronic
509(b). A secured party would need chattel paper may perfect its security
express authorization (or subsequent interest by filing or control. A secured
ratification) to pre-file a financing party that perfects a security interest in
statement if the debtor has not yet au- investment property only by filing will
thenticated a security agreement. not have priority against a secured
This change should not have any ef- party that later perfects by control, even
fect on the possibility of the filing of if the second secured party knows of
fraudulent financing statements. Under the prior perfected security interest. §§
former law and procedures a person 9-328(1), 9-329(1). A secured party that
could forge a debtor’s signature on a does not fear a debtor double-financing
financing statement and file it with the collateral can rely on the simple filing of
filing office. The filing office had no a financing statement to perfect the se-
way of checking the validity of a signa- curity interest and defeat a lien creditor,
ture. including a trustee in bankruptcy and
debtor in possession.
Priority
Filing v. possession. Similarly, the new
General rule. Generally Article 9 contin- right to perfect a security interest in an
ues the long-standing rule that the first instrument by the filing of a financing
secured party to file a financing state- statement does not protect the secured
ment or to perfect its security interest party that perfects solely by filing
has priority. § 9-322(a)(1). There are a against a subsequent secured party that
number of non-temporal exceptions, perfects by taking possession of the in-
generally based on the method of per- strument, unless the second secured
fection. Some of these are described be- party knows that its purchase violates
low. the rights of the first secured party. § 9-
9
An introduction to revised UCC Article 9
330(d). Once again, the decision of vestment property rank equally. New
whether to depend solely on the filing Article 9 changes the rule to temporal
of a financing statement to perfect a se- priority. § 9-328(2). The same rule gen-
curity interest will turn on the secured erally applies to perfection of a security
party’s level of confidence in the interest in a deposit account, where
debtor. control is the only method of obtaining
Automatic v. other methods of perfection. perfection. § 9-327.
As noted above a security interest aris- A securities intermediary that obtains
ing out of the sale of a promissory note a security interest in a security entitle-
is automatically perfected. Generally, a ment or securities account maintained
subsequent secured party that takes with the intermediary or a depositary
possession of the promissory note will that obtains a security interest in a de-
have priority over a secured party that posit account maintained with the de-
perfects its security interest solely positary will each have automatic “con-
through the automatic perfection rules, trol” of the collateral for purposes of
unless the subsequent secured party perfection. §§ 8-106, 9-104(a)(1) and 9-
knows that its security interest violates 106. Each of those persons will gener-
the rights of the first secured party. § 9- ally have priority over another secured
330(d). Nevertheless, a secured party party, even if the other secured party
buying promissory notes, but leaving has previously perfected its security in-
them in the hands of the seller for ser- terest by obtaining control of the collat-
vicing, will often take this approach, eral. §§ 9-327(3), 9-328(3).9 The same is
confident that the secured party’s rights true for the depositary’s set-off rights.
will survive the seller’s bankruptcy. § 9-340.
The security interest created upon Purchase-money security interests. Ar-
the sale of a payment intangible is also ticle 9 continues the priority for pur-
automatically perfected. Because there chase-money10 security interests. § 9-
is no alternative means of perfection 324. It was not clear under former § 9-
(such as possession), the buyer (“se- 312(4) whether a secured party could
cured party”) does not have to worry obtain a purchase-money security inter-
about non-temporal priorities.8 est in intangible collateral. New Article
Control v. control. Former Article 9
generally provided that two secured 9 The securities intermediary and the depositary
parties that each have control of in- may of course agree to subordinate their priority.
In addition, the special priority rule does not ap-
ply if the other secured party has obtained control
by becoming the entitlement holder under § 8-
8 These priority rules between multiple assignees do
106(d)(1) or the customer of the depositary under
not necessarily control the question of whom the
§ 9-104(a)(3).
account debtor should pay. See § 9-406(a) – (c),
Comment 7. 10 The “-” is officially part of the term.
10
An introduction to revised UCC Article 9
9 resolves that ambiguity with a rule eral after the closing.
that a secured party may obtain a pur- Money. The priority of rights to
chase-money security interest only in money and its close equivalents, such
goods, with one exception. § 9- as checks, often raise disputes. Article 9
103(a)(1). The exception permits a pur- resolves many of these disputes.
chase-money security interest in soft-
ware if the debtor acquired its interest A secured party with a junior secu-
in the software: rity interest in accounts may collect
checks delivered in payment of the ac-
o for the principal purpose of run- counts in which another secured party
ning the software in hardware in has a prior security interest. The junior
which the secured party also has a secured party’s security interest in the
purchase-money security interest, checks will prevail if the junior secured
and party can establish holder in due course
o in an integrated transaction with status. § 9-332. It may very difficult (if
the acquisition of the related not impossible) for the junior secured
hardware. party to establish that fact if it has no-
§ 9-103(c). tice of the senior secured party’s claim
to the instrument. §§ 3-302, 9-331. See
Article 9 rejects the “transformation also § 9-332. Under a less-demanding
rule” that some courts applied under standard, the junior secured party may
former Article 9.11 That rule provided also have separate rights under § 9-
that purchase-money security interest 330(d) as a secured party that has per-
could lose its “purchase-money” charac- fected its security interest in an instru-
ter in certain circumstances, such as a ment by possession over another se-
refinancing of the purchase-money debt cured party that has perfected its secu-
or having other collateral secure the rity interest in the instrument only by a
purchase-money debt. § 9-103(f). Arti- method other than possession.
cle 9 validates the “dual status” rule
that permits collateral to have both pur- If the debtor collects the accounts, de-
chase-money and non-purchase-money posits the checks in the debtor’s bank
status. § 9-103, Comment 7. account, and then transfers money (in
cash or by using the debtor’s check) to a
Post-closing events junior secured party (or anyone else),
General. As under former law, a se- the transferee will take free of a security
cured party holding a perfected security interest unless the transferee acts in
interest in collateral can lose that collat- “collusion” with the debtor in violating
the rights of the secured party that had
a security interest in the cash or the
11 Revised Article 9 does not provide a rule on this
subject for consumer-goods transactions. § 9-
103(h).
11
An introduction to revised UCC Article 9
check as proceeds. § 9-332.12 new financing statement in the new lo-
Change in debtor’s name. If the debtor cation. § 9-316(a)(2). If the secured
so changes its name that the name on party:
the financing statement used to perfect o does not do so, it will become ret-
the secured party’s security interest be- roactively unperfected in collat-
comes “seriously misleading,” the se- eral in which it had a perfected
cured party has four months to file an security interest on the date of the
amendment to the financing statement change of location against a pur-
to correct the name. If the secured chaser and prospectively unper-
party does not do, the secured party fected against a lien creditor
will remain perfected in collateral o does file a financing statement in
owned by the debtor when it changed the debtor’s new location prior to
its name and collateral acquired during the end of the four-month win-
the four months following the name dow, the secured party will re-
change. The secured party will not be- main perfected in the collateral in
come perfected in collateral acquired which it had a security interest on
more than four months after the name the date of the change in location
change. § 9-507(c). and that perfection will relate
Change in “location” of debtor. If the back for priority purposes to the
debtor13 changes its “location”14 as de- date of filing in the debtor’s for-
fined in §§ 9-301 – 9-307, the secured mer location.15 The secured
party again has four months to file a party’s security interest in collat-
eral acquired after the change in
12 For guidance on the meaning of “collusion,” see location will be perfected from the
UCC § 8-115, Comment 5. date of the filing of the financing
13 Because revised Article 9 does not provide for the statement.
filing of a financing statement in the state where
the collateral is located, movement of the collateral Transfers of collateral. Subject to ex-
is not an event that affects the perfection of a secu- ceptions discussed below, a secured
rity interest perfected by the filing of a financing
statement.
party holding a perfected security in-
terest in collateral retains that perfected
14 A so-called “reincorporation” transaction is not a
change in the location of a corporation. § 9-316, security interest upon the debtor’s
Example 5. For these purposes, a reincorporation transfer of the collateral. § 9-315.
is analyzed as a “transfer” of the collateral that ex-
ists on the date of the reincorporation and as a Buyers of goods. Buyers in ordinary
“new debtor” issue for collateral acquired after the course of business of goods (including
date of the reincorporation. Each of these issues is any software “embedded” in the goods)
discussed below. Some state laws for LLCs and
similar entities allow for the entity to change ju- will continue to “take free” of a security
risdictions and remain the “same” entity. In that
circumstance, there would be a change in location
of the entity. 15 § 9-316, Comment 3.
12
An introduction to revised UCC Article 9
interest created by the buyer’s immedi- in a merger), or
ate seller. § 9-320. o the second person becomes gen-
Licensees. A licensee under a nonex- erally obligated for the obligations
clusive license in ordinary course will of the other person and the sec-
also “take free” of a security interest cre- ond person acquires all or sub-
ated by its immediate licensor.16 It is stantially all of the assets of the
important to note that the nonexclusive other person.
licensee will not “take free” of a security §§ 9-102(a)(56), 9-203(d). The financing
interest created by a remote licensor. statement filed against the original
For example, if a licensor grants a secu- debtor will be effective against the new
rity interest in its intellectual property debtor if:
and then grants an exclusive license to a
licensee, the exclusive licensee would o it would have been effective
not “take free” of the security interest. against the original debtor, and
A person who obtained a nonexclusive o is filed in the proper jurisdiction
sublicense from the original licensee in to perfect against the new debtor.
this circumstance would not “take free” § 9-508(a).
of the security interest created by the
The financing statement will cease to be
original licensor. Conversely, if the li-
effective against the new debtor four
censor granted a nonexclusive subli-
months after the new debtor becomes
cense, the sublicensee would “take free”
the “new debtor” unless the name of the
of the security interest granted by the
new debtor is sufficiently close to the
licensor, as would an exclusive subli-
name of the original debtor to pass the
censee from the original nonexclusive
computerized “seriously misleading”
sublicensee.
test of § 9-506(c). See § 9-316, Comment
New debtor. A person (a “new 2, Example 5; § 9-508, Comment 4. If
debtor”) will “become bound” by a se- the new debtor is in a different state
curity interest that another person en- than the original debtor, the financing
tered into if under other law: statement will not perfect a security in-
o the other person’s security agree- terest in any of the assets previously
ment becomes effective to create a owned or newly acquired by the new
security interest in the property of debtor, even if the new debtor’s name is
the second person (as in a the same as that of the original debtor.
Enforcement
16 In this circumstance “takes free” means that the
Introduction. Much of the litigation un-
nonexclusive licensee can continue to enjoy its
rights under the license following a foreclosure by der Article 9 arises in connection with
the licensor’s secured party against the licensor so the enforcement of a security interest.
long as the licensee performs its obligations under New Article 9 resolves many of the dis-
the license. § 9-331, Comment 2.
13
An introduction to revised UCC Article 9
putes that have arisen in litigation. courts have long debated whether a
Commercial reasonableness. Each “as- failure to meet the notice or commercial
pect” of a foreclosure sale must be reasonableness requirements of former
“commercially reasonable.” § 9-610(b). Article 9 would:
Some debate has occurred over the o bar all deficiencies (the “absolute
years on whether the foreclosure sale bar” rule), or
price itself must satisfy that test. New o reduce the secured party’s defi-
Article 9 indicates that a low price “of ciency to the extent that the failure
itself” will not make a foreclosure sale to comply affected the price ob-
not commercially reasonable. § 9- tained at the foreclosure sale (the
627(a). However a low price obtained “rebuttable presumption rule”).
at the foreclosure sale “suggests that the
court should scrutinize carefully all as- Article 9 establishes by statute the re-
pects of a disposition.” § 9-610, Com- buttable presumption rule. § 9-
ment 10. There is one circumstance dis- 626(a)(3).17
cussed below where it can have an ad- Certain low-priced foreclosure sales.
ditional effect. Even where the secured party has con-
Guarantors. Article 9 makes clear that ducted a commercially reasonable fore-
a guarantor of an obligation subject to closure sale, Article 9 contains a special
Article 9 is entitled to the same notices rule for deficiencies where:
and protections as the debtor and may o a secured party, a person related
not waive those rights before default if to the secured party, or a guaran-
the debtor could not waive them. §§ 9- tor of the secured debt, purchases
102(a)(59), 9-602. the collateral at a foreclosure sale,
Notices. New Article 9 returns to the and
rule of the original Article 9, abandoned o The purchase price is “signifi-
in the 1972 revisions, that a secured cantly below the range of pro-
party must give enforcement notices to ceeds that a complying disposi-
other secured parties claiming a secu- tion to a person [other than one of
rity interest in the same collateral, as those persons] … would have
well as the debtor. § 9-611(c)(3)(B). Ar- brought.”
ticle 9 implements this rule in a way
§ 9-615(f). In that circumstance alone,
where the secured party can have con-
Article 9 reduces the secured party’s
fidence that it has given notice to all
deficiency claim by the amount that the
necessary persons without going to ex-
foreclosure sale would have brought
traordinary efforts to identify and lo-
cate them. § 9-611(c).
Rebuttable presumption rule. The 17 Revised Article 9 does not provide a rule for con-
sumer transactions. § 9-626(b).
14
An introduction to revised UCC Article 9
had some other person purchased the eral is intangible. § 9-620, Comment 7.
collateral at the sale instead of the The debtor retains its right to require
amount that the secured party or other the secured party to sell the collateral in
specified purchaser paid at the foreclo- a foreclosure sale by objecting to the se-
sure sale. A secured party should be cured party’s proposal to retain the col-
able to protect itself from this problem lateral. § 9-620(c)(2).
by credit bidding an amount that is at Article 9 rejects decisions that held
least the “strike price” that the secured that a secured party could discover that
party would credit bid if there were its extended possession of collateral
competitive bidding. without disposing of it could result in a
Noncash proceeds. A secured party constructive retention in full satisfac-
may sometimes receive something tion of the debt. § 9-620(b).
other than cash at a foreclosure sale – New Article 9 also clarifies that, ex-
such as a note from the foreclosure-sale cept in consumer transaction, the se-
buyer. The secured party does not have cured party and the debtor can agree
to apply the noncash proceeds to the that the secured party will retain the
debt unless not to do so would be collateral in partial satisfaction of the
commercially unreasonable. If a se- debt. § 9-620(a). An acceptance in par-
cured party does apply the noncash tial satisfaction can take place only if
proceeds to the secured debt, it must do the debtor affirmatively agrees to have
so in a commercially reasonable man- that happen.
ner. This gives the secured party some
flexibility in placing a value on the non- Consumer matters
cash proceeds and applying appropri- Introduction. Article 9 contains many
ate discounts. § 9-615(c). provisions providing special rules in
Retention in satisfaction of debt. For- consumer transactions. In some in-
mer Article 9 was ambiguous on stances, the compromise reached was to
whether a secured party could retain say nothing in Article 9 and to leave it
collateral in satisfaction of the debt if to the courts to decide what to do in a
the secured party did not have posses- consumer context.
sion of the collateral. This ambiguity Definition. Section 9-102(a)(26) de-
effectively limited the ability to retain fines a “consumer transaction” as one in
collateral in satisfaction of the debt to which:
tangible collateral. Except in a con- o an individual incurred an obliga-
sumer transaction, new Article 9 would
tion primarily for personal, family
permit the secured party to retain col-
or household purposes,
lateral in satisfaction of the debt even if
(i) the secured party was not in posses- o a security interest secures the ob-
sion of the collateral, or (ii) the collat- ligation, and
15
An introduction to revised UCC Article 9
o any18of the collateral is held pri- Transition rules
marily for personal, family, or Introduction. The many changes in Arti-
household purposes cle 9, especially the perfection rules, in-
Some of the consumer rules apply evitably make the transition rules com-
only to “consumer-goods transac- plex. Generally, unless Part 7 of new
tions,”19 which are consumer transac- Article 9 states an exception, new Arti-
tions where the collateral is goods and cle 9’s rules apply to all aspects of a
some rules apply only when the collat- transaction subject to the new Article 9.
eral is consumer goods. There are some important exceptions.
Creation of security interest. In a non- The uniform effective date of July 1,
consumer transaction, a security 2001 is intended to reduce any disrup-
agreement may, among other ways, de- tive effect of the transition rules by hav-
scribe the collateral by Article 9 type. § ing as many states as possible (46 and
9-108(b)(3). In a consumer transaction, the District of Columbia) have the new
a description by type is not sufficient if Article 9 go into effect on the same day.
the collateral is consumer goods, a se- Pre-effective date transactions (§ 9-702).
curity entitlement, or a securities ac- Earlier transactions outside of Article 9
count. § 9-108(e). that are now subject to Article 9 remain
effective except to the extent provided in
Enforcement. There are a variety of
Part 7. For example, a security interest
special notices that consumers receive
in a commercial tort claim effective un-
in connection with the foreclosure of a
der other law prior to the effective date
security interest. See generally §§ 9-612 –
of the new Article 9 remains effective
9-616. The “rebuttable presumption”
and secured party may enforce the se-
rule that applies to commercial transac-
curity interest under either non-Article
tions (§ 9-626(a)(3)) does not apply by
9 law or under the new Article 9. How-
statute to a consumer transaction. § 9-
ever, as discussed below, perfection
626(a). The courts are directed “not [to]
may lapse after one year.
infer” anything from the fact that the
rebuttable presumption rule does not Earlier perfected security interests (§ 9-
apply by statute to consumer transac- 703). A security interest perfected un-
tions and instead to apply the “proper” der former Article 9 or outside of for-
rule. The courts are free to adopt the mer Article 9 remains perfected if:
rebuttable presumption rule or any o the secured party perfected the
other rule. security interest under prior law
(under Article 9 or outside of Ar-
18 § 9-102, Comment 7 (not all of the collateral has to ticle 9), and
be held primarily for personal, family, or house-
hold purposes). o the acts of perfection (under for-
19 The “-” is officially part of the term. mer Article 9 or outside of Article
16
An introduction to revised UCC Article 9
9) would also perfect the security tached under new Article 9
interest under new Article 9 The security interest remains en-
Except for security interests perfected forceable after one year if the secured
by filing under former Article 9 (dis- party takes any necessary additional
cussed below), a security interest per- steps for attachment under new Article
fected under former Article 9 or outside 9 before or within one year after new
of former Article 9 maintains perfected Article 9 takes effect
status for only one year after new Arti- An attached, but unperfected, secu-
cle 9 comes into effect if: rity interest becomes perfected under
o the secured party perfected the new Article 9:
security interest under prior Arti- o when new Article 9 becomes ef-
cle 9 or outside of prior Article 9, fective, if the secured party took
and appropriate steps to perfect the
o those perfection steps do not suf- security interest under the rules of
fice to perfect the security interest the new Article 9 before new Arti-
under the new Article 9 cle 9 becomes effective,
Such a security interest will remain o when the secured party takes ap-
continuously perfected under new Arti- propriate steps to perfect the se-
cle 9 if: curity interest under the rules of
o the secured party had perfected the new Article 9 after new Article
the security interest under prior 9 becomes effective.
Article 9 or outside of former Ar- Effect of action taken before effective date
ticle 9, and (§ 9-705). A security interest becomes
o the secured party satisfies the perfected after the effective date of the
creation and perfection require- new Article 9 and remains perfected for
ments under new Article 9 within one year after the effective date of the
one year after the effective date of new Article 9 if:
the new Article 9 o the secured party has taken the
Earlier attached, unperfected security in- acts effective to perfect (other than
terests (§ 9-704). A security interest that by filing a financing statement)
has attached under prior Article 9 re- under prior Article 9 at the time of
mains attached (and enforceable) for one the effective date of new Article 9,
year only if: and
o the security interest has attached
o the security interest attaches after
(is enforceable) under prior law, the effective date of new Article
but 920
o the security interest has not at- 20 § 9-703 (discussed above) deals with the circum-
17
An introduction to revised UCC Article 9
An act to perfect a security interest to perfect a security interest in collateral
(other than by the filing of a financing arising after the effective date of the
statement) will perfect a security inter- new Article 9) until the earlier of:
est under new Article 9 for more than o the normal lapse date of the fi-
one year if: nancing statement (generally five
o security interest attaches under years after filing of financing
new Article 9, and statement), and
o the secured party has taken the o five years after the effective date
acts sufficient to perfect under of new Article 9
new Article 9 before or after the A secured party may file a “real”
effective date of the new Article 9 “continuation statement” under new
(and within the one year period) Article 9 to continue a financing state-
The filing of a financing statement ment filed under the prior Article 9 only
complying with revised Article 9 prior if:
to the effective date of new Article 9 is o the continuation statement is filed
effective to perfect a security interest in the state (and office in the state)
under new Article 9 to the extent it where the financing statement
would be effective under new Article 9, was filed under prior law,
effective July 1, 2001. This requires,
among other things: o that state and office are the correct
state and office for the filing of a
o using the correct name for the new financing statement under the
debtor under the rules of revised new Article 9, and
Article 9,
o the continuation statement “up-
o a description of collateral that suf- dates” the old financing statement
fices under the new Article 9, and to comply with all of the require-
o a filing in the correct state under ments of Revised Article 9
the new Article 9 Initial financing statement filed in lieu of
The filing of an effective financing a continuation statement (§ 9-706).
statement under prior Article 9 remains Unless a “real” “continuation” state-
effective under new Article 9 (including ment is filed under § 9-705 (as dis-
cussed above), a financing statement
stance of a security interest perfected before the filed under the prior Article 9 is “con-
effective date of the new Article 9 by a method tinued” by:
other than the filing of a financing statement.
Note that a security interest will not attach and o the filing of a fully complying ini-
thus not be perfected until the debtor has rights in tial financing statement under
the collateral. When the debtor acquires its rights
in the collateral after the effective date of the new
new Article 9,
Article 9, § 9-705 applies. o the initial financing statement is
18
An introduction to revised UCC Article 9
filed in the correct state under the product. We should all look forward to
new Article 9 and contains certain practicing under the new Article 9.
required information referring to
the continued financing statement January 1, 2005
in the other state, and
o the continuation statement “up-
dates” the old financing statement
to comply with all of the require-
ments of Revised Article 9
Effect of transition rules on priority (§ 9-
70921). Prior Article 9 governs priorities
if the relative priorities of the secured
parties were “established” before new
Article 9 came into effect. Otherwise,
the new Article 9 governs priorities.
Conclusion
Revised Article 9 brings Article 9 into
the age of intangible property and
adapts it to modern financing tech-
niques. The adoption process has
moved on to the states. The effective-
ness of the new Article 9 will:
o Facilitate financing,
o Reduce the cost of financing,
o Bring greater certainty to financ-
ing transactions, and
o Provide greater protections to
debtors in the foreclosure process.
The Chair, the Reporters, the Draft-
ing Committee, and the observers have
worked hard and delivered an excellent
21 The Standby Committee for Revised Article 9 ap-
proved a new § 9-707 to resolve an ambiguity in
Revised Article 9 dealing with how to amend or
terminate a financing statement filed under for-
mer Article 9. This resulted in the renumbering of
§§ 9-707 and 9-708 to §§ 9-708 and 9-709.
19
9
A C OMPARISON OF
F ORMER A RTICLE 9 AND
N EW A RTICLE 9
Steven O. Weise
Los Angeles
steve.weise@hellerehrman.com
January 1, 2005
Heller Ehrman LLP
The following chart highlights those provisions of Article 9 where the new
Article 9:
" materially changes former law, or
" resolves a significant controversy under former law.
The chart does not summarize all of Article 9. The chart is based on the final version1
of Article 9.2
The Drafting Committee3 has completed Article 9. The American Law Institute
approved Article 9 by acclamation at its annual meeting in May 1998 and the National
Conference of Commissioners on Uniform State Laws gave it final, unanimous
approval at its meeting in July 1998. New Article 9 has been adopted in all states, the
District of Columbia, and the U.S. Virgin Islands. It was effective in all jurisdictions on
July 1, 2001, except Connecticut (effective October 1, 2001), Alabama, Florida and
Mississippi (effective January 1, 2002), and the U.S. Virgin Islands (April 1, 2002).
January 1, 2005
1
Copies of the final draft may be purchased from the sponsors: NCCUSL, 312.915.0195; and ALI,
800.253.6397, x 7000 or online: http://www.ali.org/ali/com_ucc.htm. The final draft is also
available for purchase from the ABA (800.285.2221) and commercial publishers. Copies of the drafts
prior to the final draft may be obtained at no cost at:
http://www.law.upenn.edu/library/ulc/ulc.htm.
2
This chart (in updated form) and other materials discussing the new Article 9 will be distributed
from time-to-time. A request for copies or inclusion on the distribution list for these materials can
be sent to Steven O. Weise; Heller Ehrman White & McAuliffe LLP; 601 So. Figueroa Street, 40th Fl.;
Los Angeles, California 90017-5758; 213.244.7831; FAX : 213.614.1868; sweise@hewm.com. The
materials are also available at: http://www.hewm.com/news/articles/ucc.pdf. The author was the
ABA Advisor to the Article 9 Drafting Committee.
3
The Chair of the Drafting Committee was Bill Burke (wburke@shearman.com). The Reporters were
Steve Harris (sharris@kentlaw.edu) and Chuck Mooney (cmooney@oyez.law.upenn.edu).
COMPARISON OF OLD ARTICLE 9 TO NEW ARTICLE 9
TOPIC OLD § NEW § DESCRIPTION COMMENT
SCOPE: DEFINITION AND SALE OF PAYMENT RIGHTS
Accounts S 9-106 9-102(a)(2) “Accounts” include a wide variety of Article 9 continues to apply to the sale of “ac-
definition rights to payment arising out of the counts.” The expansion of the definition be-
9-109(a)(3)
transfer of rights in tangible and intangi- yond the payment rights arising out of the sale
ble personal property, including credit or lease of goods (under former Article 9) will
card receivables and license fees. facilitate securitization transactions, among
others.
Sale of 9-102(1)(b) 9-102(a)(61) Article 9 applies to the sale of payment Sales of payment intangibles are automatically
payment in- intangibles. perfected. § 9-309(a)(3). Note the expanded
9-109(a)(3)
tangibles definition of “accounts” described above.
These changes are designed to facilitate securi-
tization transactions, without interfering with
the sale of loan participations. The definition
will largely apply to loans not represented by
instruments and to participations in loans.
Sale of prom- 9-102(a)(65) Article 9 covers the sale of promissory Article 9 covers the sale of promissory notes in
issory notes notes; generally “promissory notes” are a manner similar to the sale of payment intan-
9-109(a)(3)
instruments that are not “order” paper gibles.
(e.g. checks) or CDs.
Hybrid chattel 9-102(a)(11) “Chattel paper” includes obligations Article 9 generally carries forward the rule of
paper secured by software to the extent the former Article 9 that chattel paper must in-
software is used in goods in which the volve a security interest in or lease of “specific
holder of the chattel paper also has a goods”
security interest.
Electronic 9-102(a)(31) The special priority rules for purchasers As discussed below, in addition to perfection
chattel paper of chattel paper apply through analo- through filing, a secured party can perfect a
9-330
2
TOPIC OLD § NEW § DESCRIPTION COMMENT
gous rules to purchasers of “electronic” security interest in electronic chattel paper by
chattel paper. “control.”
Insurance 9-104(g) 9-102(a)(46) Article 9 permits security interests in Article 9 does not cover generally security
claims health-care-insurance receivables interests in insurance claims as original
9-109(d)(8)
originally held by healthcare providers collateral. It retains the former rules for
as original collateral. security interests in insurance claims as
“proceeds.”
SCOPE : TYPES OF PROPERTY AND TRANSACTIONS
Consignments 2-326 9-102(a)(20) Article 9 applies to all consignment This rule applies to “true” consignments. The
transactions. Article 9 treats all definition of “security interest” in § 1-201(37)
9-114 9-102(a)(21)
consignments subject to Article 9 as a now includes a consignment. As a result,
9-109(a)(4) PMSI . Article 9's rules apply generally to these
transactions. The definition of “consignment”
excludes small transactions and consignments
of consumer goods.
Notes secured 9-102(3) 9-109(b) Article 9 applies to a security interest in Revised Article 9 approves those decisions that
by real estate a note secured by real estate. A security hold that Article 9 governs the creation and
9-203(g)
interest in a secured note will perfection of a security interest in a note
9-607(b) automatically attach to the security secured by real estate. § 9-109, Official
interest that secures the note. Comment 7. Article 9 contains provisions
facilitating the secured party’s enforcement of
the underlying real property mortgage in
appropriate circumstances.
Deposit 9-104(l) 9-102(a)(29) Article 9 permits a security interest in a As described below under “Perfection,” the
accounts deposit account as original collateral. secured party may perfect a security interest in
9-104
a deposit account only by “control.” Deposit
9-109(d)(13) accounts are excluded from the definition of
“general intangible.” Article 9 does not
9-312(b)(1)
3
TOPIC OLD § NEW § DESCRIPTION COMMENT
9-314 provide for a security interest in a deposit
account in a consumer transaction. Article 9
does not prevent the secured party from
obtaining a security interest in a consumer
deposit account under the law outside of
Article 9.
Letter-of-cred- 5-114 9-102(a)(51) A security interest may attach to “letter- See discussion below in this section of “support
it rights of-credit rights.” obligations.” A security interest in “letter-of-
9-109(c)(4)
credit rights” does not include a right to make
9-203(f)(2) a draw under a letter of credit. In the event of
any conflict with Article 5, Article 5 controls.
A security interest in letter-of- credit rights
may be perfected only by control.
Tort claims 9-104(k) 9-102(a)(13) Article 9 permits security interests in The creation of a security interest in other tort
“commercial tort claims” that arise out claims must take place outside of Article 9.
9-109(d)(12)
of the borrower’s business or profession, Once a tort claim is settled and becomes
9-204(b)(2) except for after-acquired tort claims and represented by a settlement agreement or
claims arising out of personal injury. other obligation, the general tort exclusion
should no longer apply. See below for special
rules on the description of a tort claim.
Agricultural 9-104(c) 9-102(a)(5) Article 9 applies to the perfection and Agricultural liens are nonconsensual liens on
liens priority of agricultural liens. farm products. The term does not include a
9-102(72)
consensual security interest in farm products.
9-109(a)(2) Agricultural liens do not include liens that
depend on possession to exist. The law
outside of Article 9 will govern the creation
and attachment of agricultural liens. An
“agricultural lien” is not a “security interest”
so that Article 9 applies only to the extent it
expressly refers to “agricultural liens.” The
4
TOPIC OLD § NEW § DESCRIPTION COMMENT
holder of an agricultural lien is a “secured
party.” Article 9 does not generally apply to
other “statutory liens.”
Investment 8-313 9-102(a)(49) Article 9 governs security interests in Under former Article 8, that article governed
property “investment property.” the perfection of a security interest in
8-321 9-106
securities. This change arises from the
9-115 9-312(a) provisions of the new Article 8, completed in
1994. It provides for Article 9 to govern a
9-302(1)(f) 9-314
security interest in a “security entitlement”
and a “security account.” As described below
under “Perfection,” a secured party can perfect
a security interest in investment property
(which includes a “security entitlement” and a
“security account,” as well as a “security”
(whether certificated or uncertificated), and a
commodity contract or commodity account) by
filing a financing statement, by obtaining
“control” of the investment property, or by
delivery of a security certificate. There are also
special priority rules discussed below.
Software 9-102(a)(44) Software that is “embedded” in goods To the extent “software” is treated as “goods”
and becomes a “part” of the goods will it may be treated as part of chattel paper or
9-102(a)(75)
constitute “goods.” purchase-money collateral and other rules
9-103 applicable to “goods” will apply to the
embedded software. Even where software is
not “embedded” in goods, there are rules
described below concerning limited
circumstances where a secured party can
obtain a PMSI in software and may treat a
software transaction as part of chattel paper..
5
TOPIC OLD § NEW § DESCRIPTION COMMENT
Supporting 9-102(a)(77) An obligation that is collateral may itself “Supporting obligations” include guaranties
obligations be backed by a letter of credit or a and letters of credit that support payment of
9-203(f)
and guaranty, or may itself be secured by another obligation. See “Perfection” below.
underlying 9-203(g) underlying collateral. A security interest
collateral in a supported obligation automatically
attaches to the supporting obligation
(including letter-of-credit rights) and
any underlying security interest.
SCOPE: MISCELLANEOUS
“Good faith” 1-102(19) 9-102(a)(43) Means “honesty in fact” and The former Article 9 definition did not include
“observance of reasonable commercial the “observance of reasonable commercial
standards of fair dealing.” standards of fair dealing” component. This
change conforms the definition to the one used
in most of the recent revisions to the UCC . A
new Article 1, which was completed in 2001,
will use this definition. The definition does not
create a negligence test.
“Authenticate 1-102(a)(39) 9-102(a)(7) This term replaces “sign” in most This will conform Article 9 to terminology
” instances. used in other revisions to the UCC . It permits
the use of “signatures” that are not
handwritten on paper and facilitates electronic
agreements, such as an electronic security
agreement.
Federal 9-104(a) 9-109(c)(1) Federal law will preempt Article 9 to the This clarifies the former Article 9 and rejects
preemption extent it preempts Article 9 (and no the erroneous interpretation of the former
more). Article 9 in decisions such as Peregrine that
held that Article 9 makes a complete “step
back” whenever federal law provides any rule.
This should permit Article 9 to govern security
6
TOPIC OLD § NEW § DESCRIPTION COMMENT
interests in software, films, and other
intellectual property to the extent that federal
law does not in fact preempt state law in this
area.
CREATION OF SECURITY INTEREST
Description of 9-110 9-108 A security agreement must “reasonably Super-generic descriptions (such as “all
collateral identify” collateral. Article 9 provides a personal property”) will not suffice for the
“safe harbor” for use of Article 9 types security agreement, although they will for the
(e.g. “inventory,” “accounts”). financing statement (see “Filing System”
below).
Description of 9-108(d) Descriptions of the various kinds of Article 9 anticipates some mistakes by
collateral S property that make up “investment practitioners not familiar with the new
investment property” will be sufficient to cover terminology. “Investment property” is not
property many types of investment property. within the definitions of “instruments” or
“general intangibles” and a secured party that
wants a security interest in that type of
property must refer to it. There are additional
rules for the description of investment
property in a consumer transaction.
Description of 9-102(a)(13) A description of collateral in a security General descriptions of collateral will not
collateral S agreement must be “specific” to describe include commercial tort claims. The exclusion
9-108(e)(1)
commercial a commercial tort claim; a description by of after-acquired tort claims should make this
tort claim “type” is not sufficient. requirement easy. See “Scope” for a
description of “commercial tort claims.”
Rights in the 9-203 9-203(b)(2) A consignee of goods and seller of This recognizes that although the consignee or
collateral and accounts, chattel paper, a promissory the seller does not “own” the property, for
9-318
power to note, or a payment intangible does not Article 9 purposes those persons still have the
transfer the 9-319 have to have “rights in the collateral” to “power” to grant an effective security interest
7
TOPIC OLD § NEW § DESCRIPTION COMMENT
collateral grant a subsequent “security interest” to in the property in favor of another person. The
a secured party of the consignee or to seller of an account, chattel paper, a
another buyer if the first consignor or promissory note, or a payment intangible does
buyer has not perfected its “security not retain a property interest in the sold
interest.” property. This rejects the much-criticized
holding in Octagon Gas Systems.
Anti- 9-318(4) 9-406 A secured party can obtain, perfect and These rules do not apply to the sale of a
assignment enforce a security interest in the rights of payment intangible or the sale of a promissory
provisions in a holder of an account, a payment note, though Article 9 does apply to those
rights to intangible, or a promissory note, transactions. See discussion of § 9-408 below,
payment notwithstanding a provision in the which does apply to those transactions.
agreement or other law prohibiting
these acts.
Anti- 9-318(4) 9-408 A secured party can obtain and perfect a Section 9-408 does not invalidate an otherwise
assignment security interest in the rights of a licensee effective contractual or statutory provision that
provisions in under a general intangible limits the secured party’s ability to enforce the
general notwithstanding a provision in the security interest. This section (and not § 9-406)
intangibles agreement or other law prohibiting also applies to the sale of a payment intangible
these acts. and to the sale of a promissory note.
“New 9-102(a)(56) A security agreement is operative with Under some circumstances, usually in a
debtors” respect to a person (a “new debtor”) that merger or other acquisition context, one
9-203(d)
“becomes bound” to a security person may “become bound” by a security
9-203(e) agreement entered into by another agreement that an acquired person has signed.
person. Article 9 generally looks to other law for this
determination.
PERFECTION: AUTOMATIC
When filing of 9-302 9-309(3) Filing not necessary or effective to “True” sales of payment intangibles and
financing perfect a security interest arising upon promissory notes are transactions subject to
9-309(4)
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TOPIC OLD § NEW § DESCRIPTION COMMENT
statement not the sale of a payment intangible or the Article 9, as discussed above under “Scope.”
necessary sale of a promissory note. A secured party that relies solely on its
automatic perfection of a security interest in a
promissory note upon the sale of the
promissory note has certain priority risks
against a subsequent purchaser (whether a
buyer or a lender) of the promissory note that
takes possession of the promissory note. See
“Priority” below.
Supporting 9-102(a)(77) An obligation may be backed by a letter Supporting obligations include guaranties and
obligations of credit or by a guaranty or itself may letters of credit that support payment of
9-203(f)
and be secured by underlying collateral. another obligation. The security interest in the
underlying 9-308(d) supported obligation automatically also
collateral The perfection of a security interest in a
automatically attaches to the supporting
9-308(e) supported obligation automatically
obligation. The security interest in the
perfects a security interest in the
obligation automatically attaches to any
supporting obligation and the perfection
security interest (in real or personal property)
of a security interest in an obligation
that secures that obligation.
automatically perfects a security interest
in any security interest (in real or
personal property) that secures that
obligation.
PERFECTION: CONTROL
Investment 8-106 8-106 Security interest in investment property The control rules are substantially those
property may be perfected by filing, control, or adopted in connection with the new Article 8.
9-115 8-301
delivery (possession) (for security “Control” exists when a securities
9-102(a)(49) certificates). intermediary (with the consent of the debtor)
has agreed with the secured party that the
9-106
intermediary will follow directions from the
9-312(a) secured party without further consent from the
debtor. A revised Comment 7 to § 8-106
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TOPIC OLD § NEW § DESCRIPTION COMMENT
9-313(e) clarifies that a secured party’s conditional right
to instruct the intermediary will not interfere
9-314
with the existence of “control” as long as the
satisfaction of the condition does not require
the debtor’s consent. As discussed below under
“Priority,” non-temporal priority rules may
apply depending on the method of perfection.
All states have adopted new Article 8.
Deposit 9-104(l) 9-102(a)(29) Security interest in deposit account as “Control” occurs automatically when the
accounts original collateral may be perfected only relevant depositary institution is the secured
9-104
by “control.” party. For third parties, it occurs either when
9-312(b) (i) the depositary institution (with the consent
of the debtor) has agreed with the secured
9-314
party that the depositary will follow directions
from the secured party without further consent
from the debtor, or (ii) the secured party
becomes the depositary institution’s
“customer” with respect to the account under
§ 4-104. There is no other method for
perfecting a security interest in a deposit
account as original collateral.
Electronic 9-102(a)(31) A security interest in electronic chattel A secured party cannot perfect a security
chattel paper paper may be perfected by filing or by interest in electronic chattel paper by
9-105
“control”: by placing a special electronic possession because there is nothing to possess.
9-312(a) “identification” of the secured party
“on” the “original” electronic copy of
9-314(a)
the chattel paper.
Letter-of- 9-102(a)(51) A security interest in letter-of-credit As discussed above under “Scope,” a secured
credit rights rights can be perfected only (i) by party can obtain a security interest in letter-of-
9-107
control, or (ii) as a result of the credit rights. See “Supporting Obligations”
10
TOPIC OLD § NEW § DESCRIPTION COMMENT
9-308(d) perfection of a security interest in a above. If the secured party perfects its security
supported obligation. interest in the letter-of-credit rights as a result
9-312(b)(2)
of perfecting a security interest in the
9-314(b) supported obligation, in the absence of
“control,” the secured party will not have a
9-409
ready means of enforcing its claim to the letter
of credit and its proceeds under Article 5.
Article 9 generally looks to Article 5 for the
meaning of “control,” which will usually
require the consent of the issuer or nominated
person. See UCC § 5-114. The perfection of a
security interest in letter-of-credit rights does
not give the secured party the right to make a
draw under the letter of credit. A transferee
beneficiary of the letter of credit has priority
over a secured party with contol of the letter-
of-credit rights. 9-109(c)(4).
PERFECTION: POSSESSION
Instruments 9-304 9-312(a) A security interest in an instrument may Former Article 9 permitted perfection in an
be perfected by possession or filing. instrument solely by possession. A security
9-313(a)
interest perfected by possession under new
9-330(d) Article 9 will have greater protection because it
should eliminate the risk of a holder in due
course defeating the rights of the secured party
that perfects only by filing. A security interest
arising upon the sale of a promissory note is
automatically perfected. A secured party that
perfects by possession generally will have
priority over a secured party that perfects only
by filing or by automatic perfection upon the
sale of the promissory note, even if the filing or
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TOPIC OLD § NEW § DESCRIPTION COMMENT
sale precedes the possession. See “Priority”
below.
Certificated 9-115 8-301 A security interest in certificated A secured party may also perfect a security
securities securities may be perfected by delivery interest in investment property by filing. A
9-312(a)
(possession), even without an secured party that has possession and an
9-313(a) indorsement (“delivery”). indorsement of the certificated security will
have “control” of the certificated security.
Perfection through control will give greater
priority against other secured parties than
perfection effected by possession (without an
indorsement) or filing alone. See discussion
below.
Perfection by 9-103 9-301(2) The law of the state of the location of The law of the debtor’s “location” generally
possession S collateral governs the perfection of a covers the perfection of a security interest
governing law security interest in collateral perfected perfected by filing. See discussion below
by possession. under “Filing System.”
Perfection by 9-305 9-313(c)(1) Perfection by possession of collateral in The acknowledgment requirement changes the
possession of the possession of a third party (a rule of some decisions under former law that
collateral in “bailee”) occurs when the third party in require only that the third party receive notice
hands of a possession acknowledges that it holds the of the security interest. The acknowledgment
third party collateral for the secured party’s benefit. requirement will not apply to goods in the
A lessee of collateral in the ordinary possession of a warehouse under Article 7.
course of the debtor’s business generally
will not qualify as a third party in
possession.
Perfection by 9-313(c)(2) A secured party need not obtain an This provision accommodates mortgage
possession S acknowledgment from a bailee where warehousing.
mortgage the secured party delivers the collateral
warehousing to a bailee that has previously
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TOPIC OLD § NEW § DESCRIPTION COMMENT
acknowledged that it will hold the
collateral for the secured party.
PERFECTION: PROCEEDS
Proceeds S 9-306 9-102(a)(64) “Proceeds” includes whatever is The definition expands the statutory scope of
definition acquired upon the sale, lease, license, the meaning of this term by not limiting the
exchange, or other disposition of definition to “dispositions.”
collateral; rights arising out of collateral;
and collections and distributions on
collateral.
Proceeds S 9-306 9-203(f) A security interest in collateral As under former Article 9, the security interest
perfection automatically attaches to the proceeds of may “detach” or become unperfected in
9-315(c)
the collateral and is automatically specified circumstances.
perfected in the proceeds.
Proceeds S 9-315(b)(2) Article 9 looks to non-UCC law for the It is expected that for money in deposit
tracing method of tracing. accounts the courts will use the lowest
intermediate balance rule. See Comment 3. See
below concerning the rights of transferees of
money and the rights of junior secured parties.
PERFECTION: THE FILING SYSTEM
Place of filing 9-103 9-301(1) All filings to perfect a security interest This replaces the former conflict-of-law rule
S which state are at the “location” of the debtor, that provides for filing at the location of
except for fixture filings, as-extracted collateral for goods and other tangible
collateral, and timber to be cut. collateral. The former conflict-of-law rule still
applies for perfection by possession. See
discussion above under “Perfection.” In
addition, the law of the location of tangible
collateral will govern the effect of perfection,
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TOPIC OLD § NEW § DESCRIPTION COMMENT
even if the secured party has perfected by filing
in another state. See discussion below in this
section. The meaning of “location” is
discussed below. The filing of a financing
statement to perfect an agricultural lien (which
is not a “security interest”) is made centrally in
the state where the farm products are located.
Place of filing 9-103 9-307(e) “Location” means the state of formation This replaces the rule that looks to the state of
S meaning of for a “registered organization” the debtor’s chief executive office. If collateral
9-316
“location” (generally entities that must register is transferred to a different debtor in another
with a state to come into existence). jurisdiction (including in a “reincorporation”
transaction), the perfection of the security
interest in the transferred collateral will lapse
after one year. Article 9 contains appropriate
language to keep the “location” from
evaporating while an entity is in the process of
dissolving and the like. § 9-307(d).
Place of filing 9-103 9-307(c) “Location” of a foreign debtor that The former rule allowing notification to
S meaning of would otherwise be “located” in a foreign account debtors permits “secret liens.”
“location” for jurisdiction without a public filing Note that a foreign organization cannot be a
certain foreign system would be set in one jurisdiction “registered organization.” 9-102(a)(70) and
debtors in the United States: Washington, D.C. (76).
Place of filing 9-401 9-501(a)(2) All filings will be central, other than This replaces the alternative language in
S within a “fixture filings,” and a filing to perfect a former law that permited local filings in
state security interest in timber to be cut and limited circumstances.
as-extracted collateral.
Choice of law 9-103 9-301(3) The location of goods, documents, and The law of the location of the debtor generally
S effect of instruments govern the effect of will continue to govern where to file financing
perfection S perfection. statement, § 9-301(1), but not perfection
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TOPIC OLD § NEW § DESCRIPTION COMMENT
tangible accomplished by possession. § 9-301(2).
collateral
Financing 9-402 9-502(a)(1) The financing statement must use the Article 9 again continues the rule that trade
statement S exact registered name of the debtor if names are neither sufficient nor necessary. § 9-
9-503
name of there is one; an incorrect name makes 503(c). The Drafting Committee decided not to
debtor 9-506(b) the financing statement ineffective if a provide a limited, specific list of acceptable
“standard” search would not find it. mistakes (e.g. “Corp.” instead of
9-506(c)
“Corporation”). The proposed model indexing
and search rules of the International
Association of Corporation Administrators
(IACA) for filing offices are available at
iaca.org.
Financing 9-402 9-102(a)(72) Where a security interest is granted in This rejects the implicit holding of some
statement S favor of an agent, the agent is the decisions under former Article 9 that a
9-502(a)(2)
name of “secured party.” A financing statement financing statement must indicate the agency
secured party 9-503(d) may name the agent or a representative or representative status of the “secured party”
of a secured party without indicating named in the financing statement if the
that capacity. secured party is supposed to perfect for others.
This rule will make it easier to perfect in multi-
party or syndicated credit transactions.
Financing 9-402 9-504(2) A financing statement may describe Former law requires description by item or
statement S collateral as “all assets” or “all personal type. The security agreement must still describe
description of property.” collateral with a description more specific than
collateral “all personal property.”
Financing 9-402 9-502 The debtor’s signature is not required on See 9-502, Comment 3. Although former law
statement S the financing statement; the debtor must probably permits electronic filings so long as
9-509
debtor’s authorize the filing of a financing the debtor has “signed” something along the
signature statement. The debtor’s authentication way, this change will facilitate electronic
of a security agreement automatically filings. See PEB Commentary No. 15.
15
TOPIC OLD § NEW § DESCRIPTION COMMENT
authorizes the filing of a conforming
financing statement.
Financing 9-402(7) 9-507(c) If the debtor changes its name so that the If the secured party does not file the
statement - financing statement becomes “seriously amendment, the secured party’s security
change in misleading,” the secured party has four interest will not be perfected in collateral
name of months to file an amendment to the acquired by the debtor more than four months
debtor financing statement with the correct after the name change. The effect of post-
name. closing events is discussed in greater detail in
another part of these materials.
Financing 9-102(a)(56) A financing statement may be effective This complements the rule of § 9-203(d) and (e)
statement - to perfect a security interest in collateral that makes the security agreement effective
9-203(d)
new debtor acquired by a “new debtor” that against the person who “becomes bound.” As
9-508 “becomes bound” by another’s security to the necessity of the filing in the location of
agreement, assuming the information in the new debtor, see § 9-316, Comment 2,
a financing statement is not “seriously Example 5; § 9-508, Comment 4.
misleading” and the financing statement
has been filed in the “location” of the
new debtor
Financing 9-403 9-516(b) Article 9 provides only a limited number This is designed to relieve the filing office of
statement S of reasons that a filing office may use to any obligation to evaluate the substance of the
9-520(a)
reasons for reject a financing statement and requires financing statement.
rejection the filing office to file all other tendered
financing statements.
Effect of 9-403 9-516(d) A wrongful refusal by a filing office to Former law makes a filing effective if
wrongful accept a financing statement does not wrongfully refused. However, most decisions
failure to prevent the financing statement from under former law protect the first filer against
accept filing being effective to perfect the security subsequent searchers, even if the subsequent
interest; a subsequent purchaser searcher reasonably relies on the absence of a
(including a secured party) that gives filing. The change is based on the view that
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TOPIC OLD § NEW § DESCRIPTION COMMENT
value in reasonable reliance on the the first filer is in the best position to
absence of the financing statement has determine if the filing office accepted the
priority. filing. Even where the subsequent secured
party has priority, the first secured party
remains perfected as against a lien creditor
(including the trustee in bankruptcy).
Effect of 9-517 If the filing office accepts a financing Compare the result (immediately above) if the
incorrect statement, but does not index it properly, filing office incorrectly rejects the filing.
indexing a subsequent purchaser (including a
secured party) that does a search and
does not find it will lose to the first
secured party.
Effect of 9-338(2) A financing statement that fails to This rule does not affect the perfection of the
incorrect, include certain non-material information first security interest as against the debtor and
9-520(c)
non-essential is subordinate to a secured party that other third parties, such as a lien creditor.
information gives value in reliance on incorrect
information and perfects its own security
interest.
Financing 9-509(d) Each secured party of record may file These rules may affect the decision of which
statement S amendments with respect to its own secured party goes “of record” in multiple
9-511
multiple interests. lender transactions.
secured
parties
Termination 9-404 9-509(d)(2) A debtor may file an effective This section and the “bogus filing” section
statements termination statement only if the secured discussed immediately below are designed in
9-513
party itself otherwise has a duty to file a part to address the problems of “political”
termination statement and has failed to filings. Legitimate secured parties are
do so. protected because the debtor’s filing of a
termination statement is effective only if the
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TOPIC OLD § NEW § DESCRIPTION COMMENT
secured party actually had a duty to file a
termination statement. As noted in the
following row, for at least one year following
the date a financing statement would lapse in
the absence of termination, a secured party
conducting a search will find both the
financing statement and all termination
statements that have been filed.
Bogus filings 9-518 A person who believes that a record was The filing of the correction statement does not
misindexed against the person or affect the effectiveness of the related financing
9-522
wrongfully filed may file a “correction” statement. It only provides information to
statement identifying the error. persons reviewing the filing records. The
filing office will continue must hold all
financing statements until at least one year
after the financing statement would lapse in
the absence of a termination.
PRIORITY AGAINST OTHER SECURED PARTIES
Security 9-308 3-306 A secured party that perfects a security This rule follows the rule applicable to a
interest in interest in a promissory note by security interest in investment property
9-330(d)
promissory possession (even if not a holder in due (discussed immediately below). This gives the
notes 9-331(a) course under Article 3) has priority over secured party with possession greater
a secured party that perfects only by protection than it would have under former §
filing if the secured party in possession 9-309 (protecting only a holder in due course
took possession in good faith and of an instrument) or former § 9-308 (protecting
without knowledge that the transaction a purchaser of chattel paper without
violates the rights of the other secured knowledge of the prior perfected security
party. A holder in due course of course interest).
defeats a secured party that perfects
only by filing.
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TOPIC OLD § NEW § DESCRIPTION COMMENT
Security 9-115 9-328 A secured party that perfects a security A secured party that perfects by filing has
interest in interest in investment property by priority over (i) secured parties that perfect
investment control has priority over a secured party later only by filing, and (ii) subsequent lien
property that perfects only by filing. Secured creditors. The rule that multiple secured
parties that perfect by “control” rank parties that have control rank temporally
temporally. changes the rule of new Article 8 that they
rank equally.
Consignments 9-107 9-103(d) Consignments are treated as a PMSI . This gives consignments the opportunity for
as PMSI s superpriority given to a PMSI . As noted above
under “Scope,” Article 9 applies to all
consignment transactions.
Multiple 9-107 9-324(g) The PMSI for the price has priority over This plugs a hole in former Article 9.
PMSI s an enabling loan. Multiple enabling
PMSI s rank in order of filing.
PMSI and 9-107 9-103(b)(2) For inventory only, a PMSI in inventory The former statute cuts off the PMSI in this
multiple remains a PMSI to the extent it secures circumstance.
shipments of purchase money obligation for other
inventory inventory.
PMSI in 9-107 9-103(c) For software that is not “goods,” a PMSI In a similar manner, software may be part of
software can exist in the software to the extent the chattel paper. See discussion of software under
secured party finances the software and “Scope” above.
the related equipment in which the
software will be used in an “integrated”
transaction.
PMSI proceeds 9-312(3) 9-324(b) The PMSI priority in inventory extends to The cash proceeds rule continues former law.
(i) chattel paper proceeds if the secured The chattel paper rule resolves a problem
9-330(e)
party subsequently purchases the chattel under former law by deeming the purchase to
paper, and (ii) cash proceeds received on be for “new value.” PMSI priority does not
19
TOPIC OLD § NEW § DESCRIPTION COMMENT
or before delivery of the inventory to a extend to trade-ins.
buyer.
Deposit 4-104 A depositary institution’s security The non-depositary secured party can avoid
accounts interest in an account maintained by the this result by (i) obtaining a subordination
9-104
debtor at the depositary will always agreement from the depositary institution, or
9-327(3) have priority over another perfected (ii) becoming the depositary institution’s
security interest in the deposit account customer with respect to the deposit account.
(absent a subordination agreement). This is similar to the rules for investment
property. These rules are part of the effort in
Article 9 to protect the payment system from
interference by Article 9. See discussion below
of the depositary’s set-off rights.
Letter-of- 9-107 A secured party that perfects a security This is consistent with Article 9’s general rule
credit rights interest in letter-of-credit rights by that perfection by control (where available)
9-329
control prevails over one that perfects by will defeat perfection by other means. A
other means. security interest in letter-of-credit rights may
be perfected by a method other than control
through the automatic perfection of a security
interest in supporting obligations and in
proceeds. The rights of the transferee
beneficiary are different from those of a
secured party and are independent and
superior. § 5-114.
RIGHTS OF CERTAIN TRANSFEREES OF COLLATERAL
Rights of 9-306 9-315(a)(1) A transferee takes free of a security The statute makes clear that the secured party
transferees of interest if the secured party authorizes must intend to release its security interest in
collateral the disposition “free of the security connection with its “authorization” of the
interest.” disposition.
20
TOPIC OLD § NEW § DESCRIPTION COMMENT
Rights of 9-307 9-320(e) A buyer in ordinary course of business Article 9 carries forward the general BIOCOB
buyers of of goods will continue to take free of a rule. The special rule for a secured party in
goods security interest created by its seller, but possession overrules the Tanbro decision.
does not defeat the rights of a secured There are corresponding changes to §§ 2-502
party of the seller when that secured and 2-716 that provide additional protections
party has perfected by possession. to buyers of consumer goods.
Purchasers of 9-308 9-330(a) Purchasers of chattel paper have priority This substantially continues the former rules.
chattel paper in chattel paper claimed “merely” as Note the slight expansion of the definition of
proceeds of inventory if the purchaser of chattel paper to include software in “hybrid”
the chattel paper (i) purchases in transactions (see “Scope” above).
ordinary course of its business, (ii) gives
new value, and (iii) takes possession or
control. In addition, the inventory
secured party must not have marked the
chattel paper to indicate the secured
party’s security interest. A similar rule
applies to “electronic chattel paper.”
Purchasers of 9-309 9-331 Articles 3 and 8 govern priority as This generally continues the rules of former
Articles 3 and between a secured party and a law.
8 property purchaser of property subject to those
Articles to the extent those articles give
priority over a secured party.
Purchasers of 9-308 9-330(d) The holder of a security interest in an Although the sale of a promissory note will be
instruments instrument perfected by possession automatically perfected, this rule will still
generally has priority over one perfected protect a later buyer that takes possession and
only by another method, such as by meets the other tests of this subsection. In
filing. addition, a holder in due course would still
prevail. § 9-331. The relative rights of a senior
and a junior secured party in a check that
represents the proceeds of an account are
21
TOPIC OLD § NEW § DESCRIPTION COMMENT
discussed below.
Nonexclusive 9-321 A nonexclusive licensee in ordinary A nonexclusive sublicensee will not “take free”
licensee in course of business “takes free” of a of a security interest created by the licensor to
ordinary security interest created by its the nonexclusive licensee’s sublicensor where
course immediate licensor. the first license was “exclusive.”
Retention of 9-502 9-330(d) A junior secured party that receives a A junior secured party might have difficulty
proceeds of check as proceeds of an account does not qualifying as a holder in due course in any
9-331
collateral by defeat the rights of a senior secured event because it would often have notice of the
junior secured party, unless (i) the junior is a holder in senior’s claim to the check. See Comment 5 to
party due course, or (ii) the junior secured § 9-331.
party does not know that the retention
of the check violates the rights of the
senior secured party.
Transferee of 9-332(b) A transferee of funds from a deposit Article 8 (§ 8-115, Comment 5) uses the
funds from account takes free of a security interest “collusion” concept and refers to Restatement
deposit in the money unless the transferee acted (Second) of Torts § 876 for the meaning of
account in “collusion” with the debtor. “collusion.”
Transferee of 9-332(a) Transferees of money take free of a Article 9 recognizes the negotiability of money.
money security interest unless the transferee
acted in “collusion” with the debtor to
violate the rights of the secured party.
ENFORCEMENT
Application to 9-501 9-102(a)(59) The default rules generally apply to This continues the rule of former law in most
guarantors secondary obligors. states.
9-102(a)(71)
9-602
Waiver by 9-501(3) 9-602 A secondary obligor may not waive This rule continues the rule applied in most
22
TOPIC OLD § NEW § DESCRIPTION COMMENT
guarantors rights to the extent a borrower could not decisions under former Article 9.
waive its rights under Article 9.
Collection of 9-502 9-607 A secured party may enforce claims This permits the secured party to enforce
claims S third against third persons obligated on the claims against guarantors of the account
parties account debtor’s obligation. debtor. Note that a holder of a security
interest in letter-of-credit rights cannot take
action directly against the issuer of the letter of
credit unless the secured party becomes a
transferee beneficiary under Article 5. UCC §
5-114(e).
Collection of 9-502 9-607(a) A secured party may enforce all of the This result was not clear under former law,
claims S debtor’s rights against an account and was often achieved by agreement in the
enforcement debtor, including proceeding against loan documents.
action collateral provided by the account
debtor.
Disposition of 9-504 9-610(a) A secured party “may” dispose of Although the language of the statute is
collateral S collateral “in its then condition or permissive, Comment 4 indicates that the
preparation of following any commercially reasonable secured party should engage in a cost-benefit
collateral preparation or processing.” analysis to determine whether some
preparation is appropriate, taking into account
the secured party’s risk of not being able to
recover preparation costs from the proceeds of
the collateral or from the debtor.
Disposition of 9-504 9-615(f) The calculation of a deficiency following The Drafting Committee chose this approach
collateral – a commercially reasonable sale of rather than adopting a rule that would treat
certain low collateral to the secured party, a person the price as a term of the sale. This rule only
priced sales related to the secured party, or a applies in circumstances where the other
guarantor at a price “significantly” aspects of the sale were commercially
below the range of prices that a reasonable. A low price may suggest that the
23
TOPIC OLD § NEW § DESCRIPTION COMMENT
commercially reasonable foreclosure court should look carefully to determine if the
disposition to a third party would have sale was commercially reasonable to begin
brought, is based on the amount that with. § 9-610, Comment 10 (a “low price
would have been obtained had a third suggests that a court should scrutinize
person purchased the collateral. carefully all aspects of a disposition”). See also
Comment 2 to § 9-627.
Disposition of 2-312, 9-610(d) A secured party automatically gives This clarifies former law.
collateral S Comment 5 “title” warranties unless disclaimed; the
9-610(e)
warranties by statute provides sample disclaimer
secured party 9-610(f) language.
Disposition of 9-615(c) The secured party does not have to This gives the secured party the ability to
collateral S apply non-cash proceeds to the debtor’s accept a note from a buyer at a foreclosure sale
noncash obligation unless it would be and establish a commercially reasonable
proceeds commercially unreasonable not to do so. discount value or to credit the debtor as the
If the secured party does so, it must secured party receives payments. If the
apply the non-cash proceeds in a secured party “regularly generates” this type
commercially reasonable manner. of note in the course of its financing business
the secured party may be required
immediately to credit the debtor with the
amount of the note. See Comment 3. If the
secured party does not apply the non-cash
proceeds and subsequently disposes of the
non-cash proceeds, the subsequent disposition
itself is subject to the Article 9 disposition
rules.
Disposition of 9-504 9-611(c) The secured party must give notice of The statute provides practical rules indicating
collateral S the foreclosure sale to other secured which secured parties of record are entitled to
notice to other parties of record that claim a security notice. This changes former law and returns
secured interest in the same collateral. the rule to that of Article 9 before the 1972
parties amendments.
24
TOPIC OLD § NEW § DESCRIPTION COMMENT
Disposition of 9-504 9-613(5) The statute provides a “safe harbor” Former law does not provide a statutory form.
collateral S form for giving notice to the debtor of a
form of notice private or public sale.
Acceptance of 9-505 9-620 The secured party may accept collateral Former law allows retention only if the secured
collateral S in satisfaction of the debt even if the party already has possession of the collateral.
possession of secured party does not have possession The new rule does not apply to consumer
collateral of the collateral. goods.
Acceptance of 9-505 9-620 The secured party may accept collateral Former law is not clear on whether the secured
collateral S in partial satisfaction of the debt with party and the debtor may agree to a partial
partial the authenticated consent of the debtor. satisfaction. This rule does not apply in
satisfaction consumer transactions, where revised Article 9
does not provide a rule. See discussion below.
Acceptance of 9-505 9-620(c) A secured party may not make a This rejects decisions under former law that
collateral S “constructive” acceptance of collateral. permit an implied acceptance, usually based
implied on an extended retention of possession by the
acceptance secured party without taking any action.
Instead, the duration of any delay by the
secured party goes to the question of the
commercial reasonableness of the disposition.
See Comment 5. Note that a conclusion that a
delay was not commercially reasonable could
have the same effect as would occur if the
secured party did “accept” the collateral in full
in a state that chooses to apply the “absolute
bar” rule in consumer transactions where the
secured party did not act in a commercially
reasonable manner.
Effect of non- 9-507 9-626(a)(3) Article 9 adopts the rebuttable This adopts the rule of a majority of
compliance presumption rule for non-consumer jurisdictions under former law. Article 9 does
25
TOPIC OLD § NEW § DESCRIPTION COMMENT
transactions. not state a rule either way for consumer
transactions. See discussion below.
SET-OFF AND WAIVER OF DEFENSES
Waiver of 9-206 9-403(b) The ability to obtain an effective waiver Some decisions under former Article 9 applied
defenses of defenses applies to all account this rule only to buyers and lessees of goods.
debtors. These rules are subject to any different rules
for consumer transactions.
Waiver of 9-206 9-403(f) This section does not state the exclusive Article 9 will also recognize waivers to the
defenses means of creating a waiver by an extent permitted by “other law.” This rejects
account debtor. the results of some decisions under former
law. Different rules will apply in some
consumer transactions.
Set-off by 9-340 A depositary institution’s set-off and This result is consistent with the priority rules
depositary recoupment rights against a deposit that apply to a depositary’s security interest in
institution account maintained at that institution a deposit account and a securities
defeat an existing, perfected security intermediary’s rights against its customer.
interest in favor of a third party secured
party, except against a secured party
that has become the depositary
institution’s customer with respect to the
deposit account (§4-104).
Affirmative 9-318 9-404(b) An account debtor with a claim against This follows the better-reasoned decisions
claims by the assignor of an obligation may not under former law. There are some special
account obtain an affirmative recovery from the rules in consumer transactions.
debtors assignee of an account, chattel paper, or
a payment intangible .
Partial 9-318 9-406(b)(3) The account debtor does not have to This protects the account debtor from having
assignments
26
TOPIC OLD § NEW § DESCRIPTION COMMENT
recognize a notice to pay to a secured to make multiple payments during each
party less than the full amount of the payment period.
account debtor’s obligation.
Payments by 3-301 The Drafting Committee considered whether
maker of Article 9 should provide that the obligor under
instrument a note (especially a note secured by real
property) should be permitted to pay a seller
of a note (even if the note is negotiable)
following the sale and delivery of the note (so
the seller is no longer a “holder”) until the
buyer notifies the obligor to pay the buyer.
The Article 9 Drafting Committee decided to
refer this question to the Article 1 Drafting
Committee, which in turn has referred it to the
Drafting Committee for Articles 3 and 4.
CONSUMER SECURED TRANSACTIONS
Definition of 9-109(1) 9-102(a)(22) Defined to cover any secured transaction There is no a dollar “cap.” There are also
“consumer if (i) the secured obligation is incurred definitions of “consumer-goods transactions”
9-102(a)(23)
transaction” primarily for personal, family or and “consumer goods.” Some of the
9-102(a)(24) household purposes, and (ii) any of the “consumer rules” apply in some of these when
collateral is held or acquired primarily those transactions or goods are involved.
for personal, family or household
purposes. The term includes a
“consumer-goods” transaction.
Description of 9-108(e)(2) In a consumer transaction, a description This requires more specificity than required for
collateral of collateral by “type” alone does not a commercial transaction.
suffice for consumer goods, a security
entitlement, or a securities account.
27
TOPIC OLD § NEW § DESCRIPTION COMMENT
PMSI S “dual 9-103(h) Article 9 leaves to case law whether the Article 9 adopts the dual-status, instead of the
status” rule dual-status rule exists in consumer- transformation, rule for commercial PMSI
goods transactions. transactions. It leaves to the courts to
determine the “proper” rule applies in
consumer-goods transactions.
FTC “holder 9-403(d) Article 9 applies the effect of the FTC There are additional restrictions in this section
in due course” “holder in due course” rule, denying and § 9-404 that protect individuals in certain
rule holder in due course treatment, in all consumer transactions.
circumstances where it should apply
even though the obligation does not
contain the required legend.
Foreclosure 9-614 The debtor in a consumer goods secured The additional information is mandatory and
sale notice transaction is entitled to additional includes the description of any liability for a
information in the notice of foreclosure deficiency and the amount the debtor must
sale. pay to reinstate.
Notice of 9-616 The secured party in a consumer goods The notification would include the amount
deficiency secured transaction has to provide an and calculation of the deficiency. A violation
calculation “explanation” of the calculation of any of this requirement would trigger a right to
deficiency if the secured party seeks to $500 statutory damages under § 9-625 if the
collect a deficiency from a consumer or violation is part of a pattern or consistent with
if requested by the consumer. a practice of non-compliance, or if a request for
information was made to the secured party
and the secured party did not comply with the
request.
Commercial 9-610 Comment 10 to § 9-610 and Comment 2 These Comments apply to commercial and
reasonablenes to § 9-627 state that a low price consumer transactions.
9-627
s of “suggests” the appropriateness of giving
foreclosure special scrutiny to the commercial
sales reasonableness of the sale.
28
TOPIC OLD § NEW § DESCRIPTION COMMENT
Commercially 9-626(b) In a consumer transaction, Article 9 does Article 9 will expressly apply the “rebuttable
unreasonable not address whether the court should presumption” rule in commercial transactions.
foreclosure apply the rebuttable presumption rule In consumer transactions the courts will have
sales or the absolute bar rule. to decide the “proper” rule.
Partial strict 9-620(g) A secured party may not obtain the This is permissible in a non-consumer
foreclosure agreement of the debtor to a partial strict transaction.
foreclosure.
MISCELLANEOUS
Effective date 9-701 The uniform effective date is July 1, 46 states adopted Article 9 with the July 1, 2001
2001. effective date. The use of a common effective
date eases the effect of the necessarily complex
transition rules.
Transition 9-702 et seq. A security interest that is perfected This will require searching in the “correct”
rules under former Article 9 will remain state under the old and new Article 9 for five
perfected under the new Article 9, years after July 1, 2001. Any rule cutting off
though not necessarily for the period it the effectiveness of existing financing
would have remained perfected under statements would seem to be unfair to persons
former Article 9. A financing statement who filed financing statement under the
filed in the correct state under the former Article 9, especially non-institutional
former Article 9 will remain effective lenders. There are many other important
(even though the filing would occur in a transition rules. They are described in detail in
different state under the new Article 9) a separate outline available from the author of
until the earlier of (i) the time the this memorandum.
financing statement would lapse, or (ii)
The Standby Committee for Revised Article 9
five years after the effective date of the
has approved a new § 9-707 to resolve an
new Article 9 (i.e. June 30, 2006 in almost
ambiguity in revised Article 9 dealing with
all cases). Perfection before the effective
how to amend or terminate a financing
date of revised Article 9 by a method
statement filed under former Article 9. This
other than the filing of a financing
has resulted in the renumbering of §§ 9-707
29
TOPIC OLD § NEW § DESCRIPTION COMMENT
statement will remain effective only for and 9-708 to §§ 9-708 and 9-709.
one year after the effective date of the
new Article 9, unless the requirements of
new Article 9 are met during that year.
Name of 9-101 9-101 The Drafting Committee voted to
Article 9 rename Article 9 “Secured
Transactions”!
30
9
P REPARING FOR
R EVISED UCC ARTICLE 9:
THE T RANSITION R ULES
Steven O. Weise
Los Angeles
steve.weise@hellerehrman.com
January 1, 2005
Heller Ehrman LLP
I. How the transition rules will work1
A. Timelines
1. Timelines graphically illustrating the principal transition rules
appear from time-to-time in this outline.
B. Effective date of July 1, 2001 (§§ 9-701 and 9-702)
1. Applies to earlier transactions, except to the extent Part 7 pro-
vides a special rule
2. Earlier transactions outside of Article 9 that are now subject to
Article 9 remain effective except to the extent provided in Part
7
o E.g., security interest in commercial tort claims remains
effective and a secured party may enforce the security
interest under non–Article 9 law or under new Article 9;
however the pre-effective date perfection of that secu-
rity interest outside of Article 9 may end one year after
the effective date of the new Article 9 (as discussed be-
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Security interest created outside of A9 remains enforceable under non-A9 rules,
even if covered by new A9 (e.g. security interest in commercial tort claim);
however, perfection may last for only one year (see below)
The Standby Committee for Revised Article 9 approved a new § 9-707 to resolve an ambiguity
1
in Revised Article 9 dealing with how to amend or terminate a financing statement filed under former
Article 9. This has resulted in the renumbering of §§ 9-707 and 9-708 to §§ 9-708 and 9-709.
Revised Article 9: the transition rules
low)
3. New Article 9 does not affect a pending action
C. Earlier perfected security interests (§ 9-703)
1. Security interest remains perfected if:
o the security interest was ‘perfected’ under prior law
(under Article 9 or outside of Article 9), and
o the acts that operated to perfect the security interest
prior to the new Article 9 would also perfect the security
interest under the new Article 9
2. Except as provided in § 9-705 (with respect to perfection by fil-
ing) (discussed below), a security interest maintains its per-
fected status for only one year after the new Article 9 comes
into effect if:
o the security interest was perfected under prior Article 9
or outside of prior Article 9, and
o the method of perfection would not perfect the security
interest under new Article 9
3. Examples:
o security agreement describes collateral as ‘all of [con-
sumer’s] securities accounts’
o oral agreement (‘security agreement’) for sale of pay-
ment intangible
o perfection by notification to bailee, without acknowl-
edgement by bailee
o security interest in commercial tort claim perfected out-
side of former Article 9
4. The security interest will remain continuously perfected under
new Article 9 if:
2
Revised Article 9: the transition rules
o the security interest was perfected under prior Article 9
or outside of former Article 9, and
o the secured party satisfies the creation and perfection
requirements under new Article 9 before one year after
the effective date of revised Article 9
o e.g., where a secured party perfected under former Arti-
cle 9 by giving notice to a bailee, the secured party ob-
tains the bailee’s acknowledgement prior to July 1, 2002,
as required by new Article 9
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Non-filing perfection under
current A9: attachment and
perfection comply w/current
A9; perfection does not
Perfection will extend beyond 1 year if
comply w/new A9; effective
for pre- and post-7/1/2001 secured party takes sufficent steps to perfect
under new A9 (e.g. obtain acknowledgement
collateral until 7/1/2002,
from bailee)
then not perfected in any
collateral (e.g. perfection by
notice to bailee, no
acknowledgement)
e.g. where secured party perfected a security interest in a
commercial tort claim outside of former Article 9 and then
files a financing statement under new Article 9 prior to July 1,
2002
3
Revised Article 9: the transition rules
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Non-A9 perfection: attachment
and perfection comply w/non
-A 9 rules; perfection does not
Perfection will extend beyond 1 year if
comply w/new A9; effective for
secured party takes sufficent steps to perfect
pre- and post-7/1/2001
collateral until 7/1/2002, then under new A9 (e.g. file financing statement
regarding commercial tort claim)
not perfected in any collateral
(e.g. security interest in
commercial tort claim)
5. Assume that prior Article 9 terminology used in prior security
agreement intended, as a matter of contract law, the meaning
given to terms under Article 9 in effect at the time of the exe-
cution of the security agreement or financing statement
o e.g., security agreement under prior law refers to ‘ac-
counts’ – parties probably intended as a matter of con-
tract law that the meaning of ‘accounts’ under prior Ar-
ticle 9 and the security interest probably would not ex-
pand to include ‘accounts’ under broader definition of
new Article 9; however a financing statement filed be-
fore July 1, 2001 that refers to ‘accounts’ would perfect a
security interest in ‘accounts’ as defined under new Ar-
ticle 9, § 9-704(3)(A), Comment, Example.
o e.g., however, if the parties as a matter of contract law
intend a broader meaning of the term ‘accounts’, e.g. if
the security agreement said ‘accounts as presently or
hereafter defined in the UCC,’ the meaning of ‘ac-
counts’ would expand on July 1, 2001
D. Earlier attached, unperfected security interests (§ 9-704)
1. The security interest remains attached (and enforceable) only
for one year if:
4
Revised Article 9: the transition rules
o the security interest has attached (is enforceable) under
prior law, but
o has not attached under new Article 9
2. The security interest remains enforceable after one year if:
o the secured party takes any necessary additional steps
for attachment before or within one year after new Arti-
cle 9 takes effect (or attachment occurs automatically)
3. The security interest becomes perfected under new law:
o when the new Article 9 takes effect if the secured party
took appropriate steps to perfect under new Article 9
before new Article 9 becomes effective
o when the secured party takes appropriate steps under
new Article 9, if the secured party takes those steps after
the new Article 9 becomes effective
4. Examples:
o financing statement filed under old law refers to ‘all
personal property’ (and that description is not sufficient
under applicable law) and the filing is in the state that
would be the proper place to file a financing statement
under new Article 9
o financing statement filed under old law refers to ‘in-
struments’ and filing is in state that would be the
proper place to file under new Article 9
5
Revised Article 9: the transition rules
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Filing: does not
comply w/
current A9;
does comply
w/new A9;
Financing statement becomes
effective to
effective 7/1/2001
perfect
beginning
7/1/2001 (e.g.
filing on
instruments)
o a financing statement filed before new Article 9 be-
comes effective refers to ‘accounts’ in an erroneous at-
tempt to cover license fees (‘general intangible’ under
old law and ‘account’ under new law); security interest
becomes perfected on effective date of new Article 9
(assuming security agreement properly describes the li-
censee fees and the financing statement is filed in the
right state under revised Article 9)
E. Effect of action taken before effective date (§ 9-705)
1. A security interest remains perfected for one year (only) after
effective date if:
o the acts necessary to perfect (other than by filing a fi-
nancing statement) the security interest under prior Ar-
ticle 9 have been taken at time of effective date of new
Article 9 and those acts are not sufficient to perfect un-
der revised Article 9, and
o the security interest attaches after effective date of new
Article 9
2. Example:
6
Revised Article 9: the transition rules
o the secured party has a security interest in goods per-
fected under former Article 9 solely by notice to bailee
(without acknowledgement) and debtor acquires addi-
tional goods after new Article 9 becomes effective so
that the security interest attaches to the after-acquired
goods after new Article 9 in effect, then the security in-
terest will be perfected in the goods acquired after the
effective date of the new Article 9 until one year after
the effective date of the new Article 9 (the perfection
will continue beyond the one year period if the secured
party obtains the bailee’s acknowledgement (as r e-
quired by new Article 9) before the end of the year)
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Non-filing perfection:
method of perfection
complies w/current A9;
perfection does not comply
w/new A9; attachment Perfection will extend beyond 1 year if
occurs after effective date secured party takes sufficent steps to perfect
effective for post-7/1/200 under new A9 (e.g. obtain acknowledgement
collateral until 7/1/2002, from bailee)
then not perfected in any
collateral (e.g. perfection
by notice to bailee, no
acknowledgement)
3. The acts taken to perfect a security interest (other than the fil-
ing of a financing statement) will perfect a security interest
under the new Article 9 if:
o the security interest has attached under the new Article
9, and
o the acts, whether taken before or after the effective date
of the new Article 9, are sufficient to perfect the security
interest under new Article 9
7
Revised Article 9: the transition rules
4. The filing of a financing statement prior to the effective date of
the new Article 9 is effective to perfect a security interest after
the effective date to the extent the financing statement would
be effective under new Article 9. This would require full
compliance with the filing rules of revised Article 9, including:
o a description of collateral sufficient under the new Arti-
cle 9
o a filing in proper state under the new Article 9
o e.g., the filing of a financing statement before the effec-
tive date of new Article 9 describing ‘instruments’ will
operate to perfect the security interest beginning on the
effective date of the new Article 9
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Filing: does not
comply w/
current A9;
does comply
w/new A9;
Financing statement becomes
effective to
effective 7/1/2001
perfect
beginning
7/1/2001 (e.g.
filing on
instruments)
5. The filing of a financing statement that was effective to perfect
a security interest under prior Article 9 remains effective un-
der new Article 9 to perfect a security interest in collateral ac-
quired before and after the effective date of the new Article 9
until the earlier of:
o the normal lapse date (generally five years after filing of
financing statement), and
8
Revised Article 9: the transition rules
o five years after the effective date of new Article 9
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Financing Statement properly filed
under current A9: Effective to perfect
pre- and post-7/1/2001 collateral until
normal lapse date
6. A secured party may file a ‘real’ ‘continuation statement’ un-
der new Article 9 to continue a financing statement filed un-
der prior Article 9 prior to July 1, 2001 only if:
o the continuation statement is filed in the same state
(and office) as where the financing statement was filed
(under prior law), and
o that state (and office) is the correct state (and office) for
the filing of a new financing statement under the new
Article 9
The continuation statement must be filed during the six-
month ‘window’ prior to the lapse date of the old financing
statement and must ‘update’ the old financing statement to
bring it into compliance with revised Article 9.
Otherwise a the secured party should file an initial financing
statement in lieu of a continuation statement, as discussed in
the next section
F. Initial financing statement filed in lieu of a continuation statement (§ 9-
706)
1. Unless a ‘real’ ‘continuation’ statement is filed under § 9-705,
a financing statement filed before July 1, 2001 (under the prior
Article 9) is ‘continued’ by the filing of an initial financing
9
Revised Article 9: the transition rules
statement (meeting all of the requirements of revised Article 9)
‘in lieu’ of a continuation statement
2. The initial financing statement ‘in lieu’ of a continuation
statement must be filed in the proper state under the new Ar-
ticle 9, must comply in all respects with the requirements of an
initial financing statement, and must make certain identifying
references to the continued financing statement in another
state and update the old financing statement to bring it into
full compliance with revised Article 9
3. The initial financing statement ‘in lieu’ of a continuation
statement may be filed at any time prior to the lapse date of the
old financing statement and if timely filed will ‘relate back’ to
the filing date of the continued financing statement
4. An initial financing statement filed as other than an ‘in lieu’
continuation statement may perfect the security interest but
not ‘continue’ it; thus the initial financing statement would
not have the same filing date for priority purposes as the fi-
nancing statement filed under former Article 9
5. An initial financing statement filed as an ‘in lieu’ continuation
statement has its own ‘life’ and must itself be continued within
five years of its filing date (not within six months prior to one
of the five year anniversaries of the filing date of the original
financing statement filed under former Article 9)
9/1/1999:
Assumed
date of 9/1/2004:
filing, 7/1/2001: 7/1/2002:
Five years
possession, Effective End of first
from
or other date year under
assumed
relevant act new A9 new A9
date of filing
1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06
Financing Statement filed in
Filing: does comply lieu of continuation statement;
w/new A9; effective extends perfection until 5 years
for 5 yrs; 'in lieu' new after filing of 'in lieu' continuation
filing relates back, statement; filing relates back to
but has own 5 yr life date of filing of original financing
statement
10
Revised Article 9: the transition rules
G. Amending or terminating a financing statement filed under former Article
9 (9-7072)
1. A financing statement filed under former Article 9 may be
terminated (but not otherwise amended) after the effective
date of revised Article 9 by a filing in the state where it was
filed, even if that would not be the correct state under revised
Article 9
o Once an initial financing statement has been filed as an
‘in lieu’ continuation statement under § 9-706, the old
financing statement may be terminated only by a filing
in the correct state under revised Article 9
2. A financing statement filed under former Article 9 may also
be terminated (or otherwise amended) after the effective date
of revised Article 9 by a filing in the state indicated under re-
vised Article 9 by:
o Filing an initial financing statement in the correct state
under revised Article 9 that meets the requirements of §
9-706(c) for an ‘in lieu’ continuation statement, and
o Then filing the amendment in the correct state under
revised Article 9
H. Effect of transition rules on priority (§ 2-7093)
1. Prior Article 9 governs priorities if:
o if the relative priorities were ‘established’ before the
new Article 9 came into effect
2 As noted in footnote 1, this is a new section and may not appear in all published versions of re-
vised Article 9.
3As noted in footnote 1, this section was formerly § 9-708 and may not appear as § 9-709 in all
published versions of revised Article 9.
11
Revised Article 9: the transition rules
o e.g., first secured party files financing statement before
new Article 9 becomes effective referring to ‘accounts’
in attempt to describe license fees ( ‘general intangible’
under old law and ‘account’ under new law); the sec u-
rity interest becomes perfected on effective date of new
Article 9; however, before new Article 9 became effec-
tive, the second secured party obtains a security interest
in same license fees and files financing statement cor-
rectly referring to the license fees as ‘general intangi-
bles’; the second secured party r etains priority
2. Otherwise, new Article 9 governs priorities
o e.g., both secured parties incorrectly describe the license
fees as ‘accounts,’ and both become perfected at the ef-
fective date of the new Article 9; for license fees that
come into existence before revised Article 9 goes into ef-
fect, the first secured party to have its security interest
attach will have ‘established’ its priority (former § 9-
312(5)(b)); new Article 9 applies to license fees that
come into existence after the effective date of revised
Article 9 and the first secured party to have filed or per-
fect (here, file) wins
3. Priority dates from time requirements satisfied under new Ar-
ticle 9 (generally the effective date of revised Article 9) if per-
fection occurs under § 9-704 (generally pre-effective date fi-
nancing statement becoming effective to perfect on the effec-
tive date of revised Article 9), unless:
o all secured parties rely on perfection under 9-704 (in
which case the filing date of the financing statement
prior to the effective date of revised Article 9 governs
priority)
II. What to check for in your ‘old’ security agreements to address new Arti-
cle 9
A. Expanded definition of ‘accounts’
B. Deposit accounts
12
Revised Article 9: the transition rules
C. Commercial tort claims
D. Health-care-insurance receivables
E. Letter-of-credit rights
F. Electronic chattel paper
G. Sales of:
1. Accounts (expanded definition)
2. Payment intangibles
3. Promissory notes
H. Purchase money security interests
1. Allocation of payments
2. Cross-collateralization
I. Descriptions of collateral by Article 9 category (including expanded defini-
tions of some categories)
J. Authorization of secured party to file financing statement
K. Representations and warranties concerning nature of debtor and debtor‘s
state of formation
III. What to check for in your old financing statements to address new Arti-
cle 9
A. Exact name of debtor
B. Commercial tort claims
C. Health-care-insurance receivables
D. Investment property (carried forward from Article 8 revisions)
E. Instruments
F. ‘All assets’ descriptions
13
Revised Article 9: the transition rules
IV. Where to have filed your old financing statement to address new Article
9
A. State of debtor’s formation
B. Foreign debtors in Washington, D.C.
V. How to have perfected security interests before the effective date to an-
ticipate the new Article 9
A. Financing statements for:
1. Investment property (carried forward from Article 8 revisions)
2. Instruments
3. Sale of accounts (as expanded)
4. Commercial tort claims
B. Obtain control for:
1. Investment property (carried forward from Article 8 revi-
sions)
2. Deposit accounts
3. Letter-of-credit rights
4. Electronic chattel paper
C. Possession for:
1. Investment property
2. Instruments
3. Sale of promissory notes
D. Obtain bailee acknowledgement for security interest perfected by notice to a
bailee
VI. How to conduct your foreclosure sales under the new Article 9
A. Notices to guarantors
14
Revised Article 9: the transition rules
B. Disclaimers of warranties
C. Right to sell on credit and defer credit to debtor
D. Secured party purchase price not ‘significantly below’ range of prices a
third party would pay in a commercially reasonable foreclosure sale
04/22/05 1:40 PM
15
Revised UCC Article 9: Staying Perfected Through the Transition
Steve Weise; steve.weise@hellerehrman.com January 1, 2005
File 'real' CS
Old FS
Perfected (during 6 mo.
Transaction Perfected filed in right
subject to RA9?
Yes before July 1 (under Yes by Old FS?
Yes state + office
Yes 'window' before
or outside old A9)? earlier Old FS
under RA9?
lapses/7.1.2006)
File IFS 'in lieu' CS
(before earlier
No of normal lapse
date of Old FS
+ 7.1.2006)
Perfection
No method Do nothing
sufficient
Yes special
under RA9?
Take additional
steps provided for by
No RA9 or file New FS (if
allowed) (before
7.1.2002)
File New FS (if
allowed) or take other
No perfection steps
provided for by RA9
(before 7.1.2001)
Do nothing
No special
Legend: A9 = Article 9; RA9 = Revised A9; FS = Financing Statement; Old FS = FS filed under old A9; New FS = FS filed under RA9 rules
(when appropriate method of perfection under RA9); CS = Continuation Statement; IFS = Initial Financing Statement
9
A COMPARISON OF A
SECURITY AGREEMENT UNDER
FORMER A RTICLE 9 AND
N EW A RTICLE 9
Steven O. Weise
Los Angeles
steve.weise@hellerehrman.com
January 1, 2005
Heller Ehrman LLP
The following annotated Security Agreement is presented as a sample for
purposes of understanding the operation of the new Article 9 by looking at
how it may affect the preparation of a security agreement. The security
agreement is intended to provide a different way of thinking about new
Article 9 and to assist persons studying the new Article 9. The Security
Agreement is not intended as a model form.
The Security Agreement is based on the final draft[1] of Article 9.[2] The
Drafting Committee[3] has completed its substantive work. The American Law
Institute approved Article 9 at its annual meeting in May 1998 and the Na-
tional Conference of Commissioners on Uniform State Laws gave its final
approval at its meeting in July 1998. Article 9 has been adopted in and is in
effect in every state, the District of Columbia, and the U.S. Virgin Islands.
January 1, 2005
1
Copies of the final draft may be purchased from the sponsors: NCCUSL, 312.915.0195; and ALI,
800.253.6397, x 7000 or online: http://www.ali.org/ali/com_ucc.htm. The final draft is also
available for purchase from the ABA (800.285.2221) and commercial publishers. Copies of the
drafts prior to the final draft may be obtained at no cost at:
http://www.law.upenn.edu/library/ulc/ulc.htm.
2
This security agreement (in updated form) and other materials discussing the new Article 9 will be
distributed from time-to-time. A request for copies or inclusion on the distribution list for these
materials can be sent to Steven O. Weise; Heller Ehrman White & McAuliffe LLP; 601 So. Figueroa
Street, 40th Fl.; Los Angeles, California 90017-5758; 213.244.7831; FAX : 213.614.1868;
sweise@hewm.com. The materials are also available at:
http://www.hewm.com/news/articles/ucc.pdf. The author was the ABA Advisor to the Drafting
Committee.
3
The Chair of the Drafting Committee was Bill Burke (wburke@shearman.com). The Reporters were
Steve Harris (sharris@kentlaw.edu) and Chuck Mooney (cmooney@oyez.law.upenn.edu).
S ECURITY A GREEMENT
T HIS S ECURITY A GREEMENT (“Security Agreement”) is 1. The Drafting Committee has completed its work and obtained ALI and
made the 30th 1st day of June July, 2001,[1] between Vend- NCCUSL approval in 1998. All statutory references in this document refer to
the final Draft of Article 9. Note that in many instances different rules will
ing Machine Manufacturing Co., a Delaware Corporation
apply in consumer transactions. See § 9-102(a)(26).
(“Debtor”) and Finance Company, an Illinois Corporation
(“Secured Party”), as Agent for the lenders listed on Ex- 2. The “secured party” includes a “representative” of the “secured party.” § 9-
102(a)(72)(E). A financing statement may name a representative of the
hibit A.[2] secured party without indicating that capacity. §§ 9-502(a)(2), 9-503(d).
This rule should also apply to the security agreement if the obligations
described cover those held by all participants.
This Security Agreement is entered into with respect
to:
(i) a loan (the “Loan”) to be made by Secured 3. If the “debtor” is a guarantor securing its obligations under a guaranty the
Party to Debtor[3] pursuant to a Loan Agree- guarantor will have the rights of a “debtor” for the collateral that it supplies
and also as an “obligor”if the primary obligor has also supplied collateral. §§
ment (the “Loan Agreement”) dated the same
9-102(28) and (59) and 9-602. Either way it cannot waive its rights to the
date as this Security Agreement; extent a debtor cannot waive its rights. § 9-602.
(ii) the sale by Debtor and the purchase by Se- 4. Article 9 continues to apply to the sale of accounts. § 9-109(a)(3). Note the
cured Party of Accounts[4]; expanded definition of “accounts,” described below. § 9-102(a)(2).
(iii) the sale by Debtor and the purchase by Se- 5. Article 9 continues to apply to the sale of chattel paper. § 9-109(a)(3). The
cured Party of Chattel Paper[5]; definition of “chattel paper” now includes transactions involving a combina-
tion of goods and software, to a limited extent. § 9-102(a)(11).
(iv) the sale by Debtor and the purchase by Se- 6. Article 9 applies to the sale of “payment intangibles.” § 9-109(a)(3). The
cured Party of Payment Intangibles[6]; and definition is discussed below. Sales of payment intangibles are automatically
perfected under § 9-309(a)(3). These changes are designed to facilitate
securitization transactions without interfering with the sale of loan
participations.
(iv) the sale by Debtor and the purchase by 7. Article 9 applies to the sale of “promissory notes.” § 9-109(a)(3). The
Secured Party of Promissory Notes[7]. definition is discussed below. § 9-102(a)(65). Sales of promissory notes are
automatically perfected under § 9-309(a)(4).
Secured Party and Debtor agree as follows:
1. Definitions.
1.1 “Collateral.” The Collateral shall consist of all 8. A financing statement may use a “supergeneric” description, such as “all my
of the following personal property[8] of personal property.” § 9-504(2). A security agreement may not. § 9-108(c).
Article 9 provides a “safe-harbor” for describing collateral by an Article 9
Debtor, wherever located, and now owned or
category in a security agreement or in a financing statement. § 9-108(b)(3).
hereafter acquired[9] ,including:
9. A security interest cannot apply to after-acquired commercial tort claims. §
9-204(b)(2).
(i) Accounts[, including health-care- 10. “Accounts” include a wide variety of rights to payment arising out of the
insurance receivables][10] all amounts transfer of rights in tangible and intangible personal property, including
credit card receivables and license fees. § 9-102(a)(2). Article 9 now covers
owed to Debtor for the licensing of
security interests in rights under an insurance policy if the right is a “health-
intellectual property rights; care-insurance receivable.” §§ 9-102(a)(46) and 9-109(d)(8). A separate
reference to “health-care-insurance receivables” is not necessary.
(ii) Chattel paper[11], including equipment 11. “Chattel paper” includes tangible and electronic chattel paper. § 9-
leases and conditional sales agreements; 102(a)(11), (31), and (78). This results in some special perfection and
priority rules discussed below. The definition of “chattel paper” now
includes transactions involving a combination of goods and software, to a
limited extent. § 9-102(a)(11).
(iii) Inventory[12], including property held 12. “Goods,” and therefore inventory, includes software “embedded” in goods. §
for sale or lease and raw materials; 9-102(a)(44) and (75).
(iv) Equipment[13], including property used 13. “Equipment” no longer has its own definition, it is the residual category of
in the Debtor’s business, machinery and goods (goods that are not inventory, farm products, or consumer goods). § 9-
102(a)(2). “Goods,” and therefore equipment, includes software embedded in
production machines;
the goods. § 9-102(a)(44) and (75).
(v) Instruments[, including Promissory 14. “Instruments” continue to include non-Article 3 payment obligations that
Notes][14] notes, negotiable instruments, are “of a type that in ordinary course of business [are] transferred by delivery
with any necessary indorsement or assignment.” A reference to
and negotiable certificates of deposit;
“instruments” includes “promissory notes.” § 9-102(a)(47). A separate
reference to “promissory notes” is not necessary. As noted above, Article 9
applies to the sale of promissory notes. § 9-109(a)(3). A “promissory note” is
an “instrument” that is not “order” paper or a certificate of deposit. § 9-
102(a)(65).
2
(vi) Securities Investment Property;[15] 15. “Investment property” is the term used to cover what used be securities. See
new Article 8 and former § 9-107. A reference to “general intangibles” (§ 9-
102(a)(42)) or “instruments” (§ 9-102(a)(47)) will not include “investment
property.”
(vii) Documents, including a documents of
title, a warehouse receipt, and a bill of
lading;
(viii) Deposit accounts;[16] 16. Article 9 permits a security interest in a deposit account as original
collateral. A reference to “general intangibles” will include “payment
intangibles,” but will not include a “deposit account.” § 9-102(a)(42).
There are special perfection rules, discussed below.
(ix) Debtor’s claim for interference with 17. Article 9 covers a security interest in a tort claim if the claim is a
contract against Big Soda Pop “commercial tort claim.” §§ 9-102(a)(13), 9-109(d)(12). The description of
the collateral must refer to a specific tort claim and cannot describe the claim
Company;[17]
by “type.” § 9-108(e)(1). The security interest can not cover after-acquired
tort claims. § 9-204(b)(2). A reference to “general intangibles” will not
include a “commercial tort claim.” § 9-102(a)(42).
(x) Letter-of-credit rights,[18] 18. Letter-of-credit rights are the right to payment under a letter of credit. § 9-
102(a)(51). Article 5 controls the right to draw under a letter of credit. § 5-
114. A reference to “general intangibles” will not include letter-of-credit
rights. § 9-102(a)(42). There are special perfection rules discussed below.
(xi) General intangibles[, including payment 19. A reference to “general intangibles” does not include some types of collateral
intangibles][19] licenses, intellectual that may sound like a “general intangible,” such as commercial tort claims,
deposit accounts, investment property, and letter-of-credit rights. The term
property, and tax returns;
does include payment intangibles and software. § 9-102(a)(42). A separate
reference to those types of collateral is not necessary. A “payment
intangible” is a general intangible where the account debtor’s principal
obligation is the payment of money. § 9-102(a)(61).
(xii) [Supporting obligations] Rights 20. “Supporting obligations” include guaranties and letter-of-credit rights that
ancillary to, or arising in any way in support payment of another obligation, such as an account or an instrument.
§ 9-102(a)(77). A security interest in an obligation automatically attaches to
connection with, any of the foregoing,
a related supporting obligation. § 9-203(f). A security agreement does not
including security agreements securing need a separate reference to “supporting obligations.” The security interest
any of the foregoing, guaranties in the supporting obligation is automatically perfected if the security interest
3
guarantying any of the foregoing, in the supported collateral is perfected. § 9-308(d). The same is true for a
documents, notes, drafts representing security interest in a security interest that secures an obligation that itself is
collateral. §§ 9-203(g) and 9-308(e).
any of the foregoing, the right to
returned goods, warranty claims with
respect to any of the foregoing, amounts
owed in connection with the short-term
use or licensing of any of the foregoing,
government payments in connection
with the purchase or agreement not to
produce any of the foregoing;[20]
(xiii) books and records pertaining to the
foregoing and the equipment containing
the books and records; and
(xiv) [to the extent not listed above as original 21. “Proceeds” is broadly defined in Revised Article 9 to include whatever is
collateral, proceeds and products of the acquired upon the sale, lease, license, exchange, or other disposition of
collateral; rights arising out of collateral; and collections and distributions on
foregoing], including money, deposit
collateral. § 9-102(a)(64). This is much broader than under former law.
accounts, goods, insurance proceeds Article 9 looks to non-UCC law for the method of tracing. § 9-315(b)(2). It
and other tangible or intangible is expected that for money the courts will use the lowest intermediate balance
property received upon the sale or other rule. § 9-315, Comment 3. A security interest in collateral automatically
disposition of the foregoing.[21] attaches to proceeds (§ 9-203(f)), continues in collateral following its sale (§
9-315(a)(1)), and initially remains perfected (§ 9-313(c) and (d)). A security
agreement does not need a separate reference to “proceeds.”
1.2 “Obligations.” This Security Agreement
secures the following:
(i) Debtor's obligations under the Loan, the
Loan Agreement, and this Security
Agreement;
(ii) the repayment of (a) any amounts that 22. A security interest automatically secures expenses relating to the foreclosure
4
Secured Party may advance or spend for sale, other than attorneys fees. The security interest secures attorneys fees if
the maintenance or preservation of the provided for by contract and permitted by applicable law. § 9-615(a)(1). The
secured party is automatically entitled to attorneys fees incurred in enforcing
Collateral[22] and (b) any other expendi-
collection from an account debtor or obligor on an instrument. § 9-607; see
tures that Secured Party may make also Comment 10.
under the provisions of this Security
Agreement or for the benefit of Debtor;
(iii) all amounts owed under any
modifications, renewals or extensions of
any of the foregoing obligations;
(iv) all other amounts now or in the future 23. A security agreement may secure future advances. § 9-204(c). Article 9
owed by Debtor to Secured Party, rejects decisions that have held that “other indebtedness” must be of the same
“kind” or “class” or be “related” to the original debt secured. § 9-204,
whether or not of the same kind or class
Comment 5.
as the other obligations owed by Debtor
to Secured Party;[23] and
(v) any of the foregoing that arises after the
filing of a petition by or against Debtor
under the Bankruptcy Code, even if the
obligations due not accrue because of
the automatic stay under Bankruptcy
Code § 362 or otherwise.
This Security Agreement does not secure any 24. This is designed to avoid problems under state real property anti-deficienly
obligation described above which is secured by a laws, such as those that exist in California. See generally § 9-604.
consensual lien on real property.[24]
1.3 UCC. Any term used in the Uniform 25. Under the former Article 9 these is some risk in using terms defined under
Commercial Code (“ UCC ”) and not defined in the UCC because of the relatively narrow scope of those terms. These include
this Security Agreement has the meaning “accounts” and “proceeds.” The expansion of the defintions of those terms
(as discussed above) considerably reduces the risk of incorporating defined
given to the term in the UCC .[25]
terms by reference. Care should continue to be taken that an incorporated
definition has the meaning the parties intend to give to that word.
2. Grant of Security Interest.
5
Debtor grants a security interest in the Collateral to 26. Article 9 still does not use the word “grant” for the creation of a security
Secured Party to secure the payment or performance interest. §§ 9-102(a)(73), 9-203. It is likely that practice will continue to
use the term “grant.”
of the Obligations.[26]
3. Perfection of Security Interests.
3.1 Filing of financing statement.
(i) Debtor shall sign authorizes Secured 27. The debtor does not have to sign the financing statement. § 9-502. Although
Party to file[27] a financing statement (the former law probably permits electronic filings so long as the debtor has
“signed” something along the way, this change will facilitate electronic
“Financing Statement”) describing the
filings. See PEB Commentary No. 15. The secured party will need the
Collateral. debtor to authorize the secured party to file a financing statement (or ratify it
later). The debtor’s authentication of the security agreement “authorizes”
the secured party to file a financing statement covering the collateral
described in the security agreement. § 9-509(b)(1). The sample affirmative
statement to the left is not necessary. Where the secured party has a
“blanket” security interest in all of the debtor’s personal property, the
secured party may want to add an authorization for the financing statement
to describe the collateral as “all personal property.”
(ii) Debtor authorizes Secured Party to file a 28. An “agricultural lien” is a lien created by statute, involving agriculture and
financing statement (the “Financing not dependent on possession. § 9-102(a)(5). It is not a “security interest.”
Non-UCC law will continue to govern the creation and attachment of
Statement”) describing any agricultural
agriculture liens and thus govern their enforceability between the holder of
liens or other statutory liens held by the lien and the debtor. A “secured party” includes the holder of an
Secured Party.[28] agricultural lien. §§ 9-102(a)(72)(B), 9-109(a)(2). Perfection will occur
under Article 9. §§ 9-308(b). Non-UCC law will govern the creation and
perfection of other statutory liens. § 9-109(d)(2).
(iii) Secured Party shall receive prior to the 29. As defined below in the security agreement, the “Debtor State” is the state of
Closing an official report from the the debtor’s incorporation. Under new Article 9 a secured party will file a
financing statement for all types of collateral in the state of the debtor’s
Secretary of State of each Collateral
“location,” except for fixture filings, to perfect a security interest in as-
State, and the Chief Executive Office extracted collateral and in timber to be cut, and to perfect an agricultural lien
State, and the Debtor State[29] (each as (which is not a security interest). § § 9-301 and 9-302. For debtors that are
defined below) (the “SOS Reports”) a “registered organization” (those formed by a filing with a state), the
indicating that Secured Party’s security debtor’s “location” is the state of its organization. § 9-307(e). However, the
interest is prior to all other security secured party will need to continue to search in the applicable states under
old Article 9 for five years after the effective date of revised Article 9 (i.e.
6
interests or other interests reflected in until July 1, 2006) because financing statements filed under old Article 9
the report. remain effective until their natural lapse date, but not for more than five
years after the effective date of Revised Article 9. § 9-705(c).
3.2 Possession.
(i) Debtor shall have possession of the 30. For a security interest perfected by possession, the law of the location of the
Collateral, except where expressly collateral governs the perfection of the security interest. § 9-301(2). A
security interest in an instrument may be perfected by filing. § 9-312(a). A
otherwise provided in this Security
security interest in an instrument (and other tangible property) may also be
Agreement or where Secured Party perfected by possession. § 9-313(a). Perfection by possession may confer
chooses to perfect its security interest by better protection against the claim of another purchaser (including a secured
possession in addition to the filing of a party). Possession of an instrument will eliminate the risk of a holder in due
financing statement.[30] course defeating the rights of the secured party that perfects only by filing. §
9-331(a). In addition, a security interest in an instrument perfected by
possession generally will prevail over one perfected only by filing. § 9-
330(d). There are similar rules for chattel paper. § 9-330. A security
interest arising upon the sale of a promissory note is automatically perfected.
§ 9-309(4).
(ii) Where Collateral is in the possession of 31. If a third party has possession of the collateral, perfection occurs when the
a third party, Debtor will join with third party “acknowledges” in an authenticated record that it holds the
collateral for the secured party’s benefit. § 9-313(c)(1) and (2). A lessee of
Secured Party in notifying the third
collateral in the ordinary course of the debtor’s business may not qualify as a
party of Secured Party’s security interest third party in possession. The acknowledgment requirement changes former
and obtaining an acknowledgment in an law which requires only that the third party receive notice of the security
authenticated record from the third interest.
party that it is holding the Collateral for
the benefit of Secured Party.[31]
3.3 Control. Debtor will cooperate with Secured 32. Article 9 borrows the concept of using control as a perfection device for
Party in obtaining control[32] with respect to investment property under former law for use in several circumstances under
the new Article 9. See former §§ 8-106 and 9-115.
Collateral consisting of:
(i) Deposit Accounts;[33] and 33. A security interest in deposit account may be perfected only by “control.” §
9-312(b). “Control” occurs automatically when the depositary institution
with respect to the deposit account is the secured party. For third parties, it
occurs either (i) when the depositary institution has agreed with the secured
party that the depositary will follow instructions from the secured party
7
without further consent from the debtor, or (ii) the secured party becomes the
bank’s customer (§ 4-104(a)(5)) with respect to the deposit account. § 9-104.
The existence of control does not of itself prevent the debtor from transferring
funds from the account. See § 9-104(b). A transferee of funds from a deposit
account that does not act in “collusion” with the debtor will take the funds
free of any security interest in the funds. § 9-332.
(ii) Investment Property;[34] 34. A security interest in investment property may be perfected by filing,
delivery (possession of a certificated security), or control. §§ 9-312(a), 9-
313(e), 9-314(a). Generally, “control” of a security entitlement exists when
(i) a securities intermediary has agreed with the secured party that the
intermediary will follow entitlement orders from the secured party without
further consent from the debtor, or (ii) the secured party puts the securities
account in its name. § 9-106. Generally control of a certificated security
occurs by delivery with any necessary indorsement. § 9-106. “Delivery” (as
defined in § 8-301) without an indorsement (unless the certificate is indorsed
in blank) will constitute perfection by “possession,” but not “control.” § 9-
313. A secured party with control of investment property will generally have
priority over a secured party that perfects solely by the filing of a financing
statement. § 9-328(1).
(iii) Letter-of-credit rights; and[35] 35. “Control” is the only way to perfect a security interest in letter-of-credit
rights, § 9-312(b)(2), except to the extent the letter-of-credit rights are a
supporting obligation for other collateral. § 9-308(d). Control requires the
consent of the issuer of the letter of credit or compliance with other practice.
§§ 5-114(c), 9-107.
(iv) Electronic chattel paper.[36] 36. A security interest in electronic chattel paper may be perfected by filing or
control. §§ 9-312(a), 9-314(a). “Control” requires compliance with special
rules for the electronic identification of the secured party “on” the “original”
of the electronic chattel paper. § 9-105. A secured party that perfects a
security interest in electronic chattel paper by control will generally defeat a
secured party that has perfected its security interest only by filing. § 9-
330(b).
3.4 Marking of Chattel Paper and Instruments. 37. Purchasers of chattel paper will have priority in chattel paper claimed
Debtor will not create any Chattel Paper “merely” as proceeds of inventory if the purchaser (i) purchases in the
ordinary course of its business, (ii) acts in good faith, (iii) gives new value,
without placing a legend on the Chattel Paper
and (iv) takes possession. In addition, the inventory secured party must not
acceptable to Secured Party indicating that have marked the chattel paper (by “indicating” the security interest of that
8
Secured Party has a security interest in the secured party). § 9-330. Marking tangible chattel paper (and instruments)
Chattel Paper.[37] does not operate to perfect the security interest, as does the electronic
identification that a secured party can use to perfect a security interest in
electronic chattel paper by obtaining “control” of the chattel paper.
4. Post-Closing Covenants and Rights Concerning
the Collateral.
4.1 Inspection. The parties to this Security
Agreement may inspect any Collateral in the
other party’s possession, at any time upon
reasonable notice.
4.2 Personal Property. The Collateral shall remain
personal property at all times. Debtor shall
not affix any of the Collateral to any real
property in any manner which would change
its nature from that of personal property to
real property or to a fixture.
4.3 Secured Party’s Collection Rights. Secured Party 38. A secured party may enforce all of debtor’s rights against an account debtor,
shall have the right at any time to notify any including proceeding against collateral provided by the account debtor. § 9-
607(a). The secured party may enforce claims against third persons obligated
account debtors and any obligors under
on the account debtor’s obligation. A junior secured party that collects a
instruments to make payments directly to check as proceeds of an account or inventory may defeat the senior if the
Secured Party. Secured Party may at any time junior qualifies as a holder in due course. § 9-331. The junior would have
judicially enforce Debtor's rights against the even greater protection if the common debtor deposited the account debtor’s
account debtors and obligors.[38] check in the debtor’s deposit account and then wrote its own check to the
junior secured party. In that case the junior would prevail unless it acted in
“collusion” with the debtor to violate the rights of the senior secured party. §
9-332(b).
4.4 Limitations on Obligations Concerning
Maintenance of Collateral.
(i) Risk of Loss. Debtor has the risk of loss 39. Revised Article 9 clarifies that the debtor generally bears most risks
of the Collateral. Secured Party shall concerning the collateral. § 9-207.
not be responsible for any injury to, loss
9
to, or loss in value of, the Collateral, or
any part thereof, arising from any act of
nature, flood, fire or any other cause
beyond the control of Secured Party.[39]
(ii) No Collection Obligation. Secured Party
have no duty to collect any income
accruing on the Collateral or to preserve
any rights relating to the Collateral.
4.5 No Disposition of Collateral. Except as to 40. A transferee takes free of a security interest if the secured party authorizes
inventory held for sale or lease in ordinary the disposition “free of the security interest.” § 9-315(a). The statute makes
clear that the secured party must intend to release its security interest in
course of business, Debtor has no right to sell,
connection with its approval of the disposition. The express prohibition on
lease or otherwise dispose of any of the transfer in the security agreement has been broadened to cover all types of
Collateral. Secured Party does not authorize, collateral. Article 9 now protects ordinary course nonexclusive licensees of
and Debtor agrees not to: general intangibles and lessees of goods, as well as buyers of goods. §§ 1-
201(a)(9), 9-320 and 9-321. The language in the security agreement is
(i) make any sales or leases of any of the intended to create circumstances so that the debtor will “violate” the rights of
Collateral, the secured party if the debtor makes a transfer, thereby giving the secured
party greater protection against certain transferees. As noted above, a junior
(ii) license any of the Collateral; or secured party may obtain prior rights in proceeds of collateral where the
proceeds are negotiable instruments or money.
(iii) grant any other security interest in any
of the Collateral.[40]
4.6 Purchase Money Security Interests. To the extent 41. For inventory only, a PMSI in inventory remains a PMSI to the extent it
Debtor uses the Loan to purchase Collateral, secures purchase money obligation for other inventory. § 9-103(b)(2). A
secured party may have a PMSI in software to the extent the secured party
Debtor’s repayment of the Loan shall apply on
finances the software in an “integrated” transaction with the goods in which
a “first-in-first-out” basis so that the portion of the software will be used. § 9-103(c). “Embedded” software will constitute
the Loan used to purchase a particular item of part of the “goods” themselves. § 9-102(a)(44) and (75). Article 9
Collateral shall be paid in the chronological authorizes the parties to agree on a “reasonable” method of determining how
order the Debtor purchased the Collateral.[41] much of the secured obligation is a “purchase money obligation.” § 9-103(e).
The PMSI for the price will have priority over an enabling loan. § 9-324(g).
Multiple enabling PMSI s will rank in order of filing. § 9-322(a) and 9-
324(g)(2).
5. Debtor's Representations and Warranties.
10
Debtor warrants and represents that:
5.1 Title to and transfer of Collateral. Its It has rights 42. A consignee of goods or a seller of accounts or chattel paper does not have to
in or the power to transfer the Collateral and have “rights in” the collateral to have the ability to grant another security
interest or to make another sale if the consignor or the buyer has not
its title to the Collateral is free of all adverse
perfected its security interest. § 9-203(b)(2). This recognizes that although
claims, liens, security interests and restrictions the consignee or the seller may not “own” the property, those persons still
on transfer or pledge except as created by this have the “power” to grant an effective security interest in the property. See
Security Agreement.[42] §§ 9-318 and 9-319. Generally, §§ 9-406 – 9-409 invalidate contractual and
statutory restrictions on the transfer of contractual rights to the extent those
restrictions would impair the creation or perfection of the security interest in
those rights or permit the creation or perfection to constitute a breach of the
debtor’s agreement with the other party to the agreement. For certain
contract rights, such as the right to receive money, Article 9 also in most
instances disregards contractual or legal restrictions on enforcement of the
right to enforce the security interest.
5.2 Location of Collateral. All collateral consisting 43. As explained in the following note, new Article 9 generally provides for the
of goods is located solely in the States (the filing of a financing statement in the state where the debtor is incorporated.
However, the secured party will need to continue to search in the applicable
“Collateral States”) listed in Exhibit C B.[43]
states under old Article 9 for five years after the effective date of Article 9 (i.e.
until July 1, 2006) because financing statements filed under old Article 9
remain effective until their natural lapse date, but not for more than five
years after the effective date of Revised Article 9. § 9-705(c).
5.3 Location, State of Incorporation and, Name of 44. All filings (except for fixture filings, and filings to perfect a security interest
Debtor. Debtor’s: in as-extracted collateral and timber to be cut and to perfect an agricultural
lien) are at the “location” of the debtor. § 9-301(1). This replaces the former
(i) chief executive office is located in the rule that provides for filing at the location of collateral for goods. “Location”
State (the “Debtor Chief Executive of the debtor means the state of formation for “registered organizations”
Office State”) identified in Exhibit B; (entities that register to come into existence). § 9-307(e). This replaces the
former rule that looks to the state of the debtor’s chief executive office. For a
(ii) state of incorporation is the State (the security interest perfected by possession, the location of the collateral
“Debtor State”) identified in Exhibit B; determines the applicable law. § 9-301(2). The financing statement must
use the registered name of debtor if there is one; the use of an incorrect name
and
is seriously misleading as a matter of law if a standard search does not find it.
(iii) exact legal name is as set forth in the The statute again confirms that trade names are neither sufficient nor
necessary. §§ 9-502(a)(1), 9-503, 9-506(b). A secured party will probably
first paragraph of this Security
want to obtain a formal certified copy of the debtor’s articles of incorporation
Agreement.[44] to confirm the state of incorporation and the exact name of the debtor. A
11
financing statement does not have to indicate the representative capacity of
the secured party. § 9-503(d). As noted above, for five years after the
effective date of the new Article 9, a secured party will want to conduct
searches in the states that would have been appropriate under the former
Article 9.
6. Debtor’s Covenants.
Until the Obligations are paid in full, Debtor agrees
that it will:
6.1 preserve its corporate existence and not, in 45. Article 9 now contains a set of rules that concern when a “new debtor”
one transaction or a series of related becomes bound by the security agreement and when a financing statement
naming the original debtor is effective to perfect a security interest in
transactions, merge into or consolidate with
collateral acquired by the new debtor. See §§ 9-102(a)(56), 9-102(a)(60), 9-
any other entity, or sell all or substantially all 203(d), 9-326, 9-508. Generally, under these provisions, the security interest
of its assets;[45] created by the new debtor in favor of its secured party will prevail over that
created by the original debtor in favor of its secured party in collateral
acquired by the “new debtor.”
6.2 not change the state where any Collateral 46. If the debtor transfers the collateral to a person incorporated in another state
consisting of goods is located, except to (including in a “reincorporation” transaction) the secured party has one year
to file a financing statement in that state. § 9-316(a)(3).
another Collateral State; where it is located;[46]
and
6.3 not change the state of its chief executive 47. As noted above, Article 9 no longer requires a filing in the state of the
office; and[47] debtor’s chief executive office for registered organizations. § 9-301(1).
6.4 not change its corporate name without 48. The secured party has four months to file an amendment to the financing
providing Secured Party with 30 days' prior statement if the debtor changes its name in a manner that makes the
financing statement “seriously misleading.” § 9-507(b). The debtor does not
written notice.[48]
have to authenticate the amendment.
7. Events of Default.
The occurrence of any of the following shall, at the
option of Secured Party, be an Event of Default:
7.1 Any default,[49] Event of Default (as defined) 49. As with former Article 9, the new Article 9 does not contain a definition of
12
by Debtor under the Loan Agreement or any “default.”
of the other Obligations;
7.2 Debtor's failure to comply with any of the
provisions of, or the incorrectness of any
representation or warranty contained in, this
Security Agreement, the Note, or in any of the
other Obligations;
7.3 Transfer or disposition of any of the
Collateral, except as expressly permitted by
this Security Agreement;
7.4 Attachment, execution or levy on any of the
Collateral;
7.5 Debtor voluntarily or involuntarily becoming
subject to any proceeding under (a) the
Bankruptcy Code or (b) any similar remedy
under state statutory or common law; or
7.6 Debtor shall fail to comply with, or become
subject to any administrative or judicial
proceeding under any federal, state or local
(a) hazardous waste or environmental law, (b)
asset forfeiture or similar law which can result
in the forfeiture of property, or (c) other law,
where noncompliance may have any
significant effect on the Collateral; or
7.7 Secured Party shall receive at any time 50. The filing office may reject a financing statement for a limited number of
following the Closing an SOS Report reasons stated in the statute (e.g. no filing fee; no debtor name). § 9-516(b).
A refusal by a filing office to accept a financing statement for any other
indicating that Secured Party’s security
reason does not prevent the financing statement from being effective to
interest is not prior to all other security perfect the security interest (§ 9-516(d)). Although the first secured party
interests or other interests reflected in the will have a perfected security interest, a subsequent purchaser (including a
13
report.[50] secured party) that gives value in reliance of the absence of the financing
statement will have priority. § 9-516(d). Former law makes a filing effective
if wrongfully refused. However, most decisions under former law protect the
first filer against subsequent searchers, even if the subsequent searcher relies
on the absence of a filing. In addition, a subsequent secured party bears the
full risk of an indexing error by the filing office, even if the subsequent
secured party relied on the absence of a financing statement as reflected in a
search. § 9-517.
8. Default Costs.
8.1 Should an Event of Default occur, Debtor will
pay to Secured Party all costs reasonably
incurred by the Secured Party for the purpose
of enforcing its rights hereunder, including:
(i) costs of foreclosure;[51] 51. If there is sufficient proceeds of a foreclosure sale, recovery of these costs is
provided for by statute. § 9-615.
(ii) costs of obtaining money damages; and
(iii) a reasonable fee for the services of 52. Article 9 provides for the recovery of foreclosure costs, including attorneys
attorneys employed by Secured Party fees (if the parties have so agreed). § 9-615.
for any purpose related to this Security
Agreement or the Obligations, including
consultation, drafting documents,
sending notices or instituting,
prosecuting or defending litigation or
arbitration.[52]
9. Remedies Upon Default.
9.1 General. Upon any Event of Default, Secured 53. The secured party’s enforcement rights continue to be cumulative. § 9-
Party may pursue any remedy available at 601(c).
law (including those available under the
provisions of the UCC), or in equity to collect,
enforce or satisfy any Obligations then owing,
14
whether by acceleration or otherwise.[53]
9.2 Remedies. Upon any Event of Default, Secured
Party shall have the right to pursue any of the
following remedies separately, successively or
simultaneously:
(i) File suit and obtain judgment and, in
conjunction with any action, Secured
Party may seek any ancillary remedies
provided by law, including levy of
attachment and garnishment.
(ii) Take possession of any Collateral if not 54. The secured party remains subject to a nonwaivable obligation not to breach
already in its possession without the peace in the course of attempting to take possession of the collateral. §§
9-602 and 9-609.
demand and without legal process.
Upon Secured Party’s demand, Debtor
will assemble and make the Collateral
available to Secured Party as they direct.
Debtor grants to Secured Party the right,
for this purpose, to enter into or on any
premises where Collateral may be
located.[54]
(iii) Without taking possession, sell, lease or
otherwise dispose of the Collateral at
public or private sale in accordance with
the UCC.
10. Foreclosure Procedures.
10.1 No Waiver. No delay or omission by Secured
Party to exercise any right or remedy accruing
upon any Event of Default shall: (a) impair
any right or remedy, (b) waive any default or
15
operate as an acquiescence to the Event of
Default, or (c) affect any subsequent default of
the same or of a different nature.
10.2 Notices. Secured Party shall give Debtor such 55. Secured party must give notice of sale to other secured parties of record. § 9-
notice of any private or public sale as may be 611(b). The statute provides practical rules indicating which secured parties
of record are entitled to notice. § 9-611(c)(3)(B). The statute provides a
required by the UCC.[55]
“safe harbor” form for giving notice to the debtor of a private or public sale.
§ 9-613(5).
10.3 Condition of Collateral. Secured Party shall 56. Secured party “may” dispose of collateral “in its then condition or following
have has no obligation to give a notice to any any commercially reasonable preparation or processing.” § 9-610(a) and
Comment 4. Although the language of the statute is permissive, the secured
other person. clean-up or otherwise prepare
party should engage in a cost-benefit analysis to determine whether some
the Collateral for sale.[56] preparation is appropriate, taking into account the secured party’s risk of not
being able to collect the preparation costs from the proceeds of the foreclosure
sale or from the debtor.
10.4 No Obligation to Pursue Others. Secured Party 57. Default rules apply to secondary obligors. § 9-601(b). This continues the
has no obligation to attempt to satisfy the majority rule under former law. The debtor, secondary obligor, and other
obligors may not waive most default rights. § 9-602(a). The “debtor” may
Obligations by collecting them from any other
be a “guarantor” to the extent it provides collateral to secure the obligation of
person liable for them and Secured Party may another person. See the definition of “Obligations” in this Security
release, modify or waive any collateral Agreement. § 9-102(a)(59) and (71).
provided by any other person to secure any of
the Obligations, all without affecting Secured
Party's rights against Debtor. Debtor waives
any right it may have to require Secured Party
to pursue any third person for any of the
Obligations.[57]
10.5 Compliance With Other Laws. Secured Party 58. An Comment to § 9-610 directly addresses this issue. It notes that this
may comply with any applicable state or would be an appropriate circumstance for the parties to agree on a
“standard[] measuring the fulfillment of the ... duties of a secured party” if
federal law requirements in connection with a
the standard is “not manifestly unreasonable.” § 9-603.
disposition of the Collateral and compliance
will not be considered adversely to affect the
commercial reasonableness of any sale of the
16
Collateral.[58]
10.6 Warranties. Secured Party may sell the 59. Secured party automatically gives “title” warranties unless disclaimed. The
Collateral without giving any warranties as to statute provides sample disclaimer language. § 9-610(d), (e) and (f). The
reference to other “like” warranties does not mean warranties of quality. A
the Collateral. Secured Party may specifically
secured party gives implied warranties of quality only if they would arise
disclaim any warranties of title or the like.[59] under other law in the circumstances, such as UCC Article 2. See § 9-610,
This procedure will not be considered Comment 11.
adversely to affect the commercial
reasonableness of any sale of the Collateral.
10.6 Sales on Credit. If Secured Party sells any of the 60. A secured party does not have to apply noncash proceeds unless the failure to
Collateral upon credit, Debtor will be credited do so would be commercially unreasonable. The secured party must apply
any noncash proceeds in a commercially reasonable manner. § 9-615(c) and
only with payments actually made by the
Comment 3. This gives the secured party the ability to accept a note from a
purchaser, received by Secured Party and buyer at a foreclosure sale and establish a commercially reasonable discount
applied to the indebtedness of the Purchaser. value or credit the debtor as the secured party receives payments. A secured
In the event the purchaser fails to pay for the party that is in the business of accepting notes in the ordinary course of its
Collateral, Secured Party may resell the business is more likely to have to apply the note at the time of sale. Hence,
Collateral and Debtor shall be credited with depending on the circumstances, the provision to the left may be too
aggressive. This may be an appropriate circumstance for the parties to agree
the proceeds of the sale.[60] on a “standard[] measuring the fulfillment of the ... duties of a secured
party” if the standard is “not manifestly unreasonable.” § 9-603.
10.7 Purchases by Secured Party. In the event 61. The secured party has a right to make a “credit bid” without this provision.
Secured Party purchases any of the Collateral As under former law, a secured party may not purchase the collateral at a
private sale unless the collateral has a readily determinable price. § 9-610(c).
being sold, Secured Party may pay for the
If there is a commercially reasonable sale of collateral to the secured party, a
Collateral by crediting some or all of the person “related” to the secured party, or a guarantor, for an amount that is
Obligations of the Debtor.[61] “significantly below the range” of proceeds that would have been realized
from a complying sale to an independent third person, the calculation of the
deficiency will be based on amount that would have been obtained from that
third person. § 9-615(f).
10.8 Deficiency Judgment. If it is determined by an 62. The statute adopts the rebuttable presumption rule for non-consumer
authority of competent jurisdiction that a transactions. § 9-626(3)(B). This adopts the rule of a majority of the courts
that have determined the issue under former law.
disposition by Secured Party did not occur in
a commercially reasonable manner, Secured
Party may obtain a deficiency from Debtor for
17
the difference between the amount of the
Obligation foreclosed and the amount that a
commercially reasonable sale would have
yielded.[62]
10.8 No Marshaling. Secured Party have no
obligation to marshal any assets in favor of
Debtor, or against or in payment of:
(i) the Note,
(ii) any of the other Obligations, or
(iii) any other obligation owed to Secured
Party by Debtor or any other person.
10.10 Retention of Collateral. Secured Party will not 63. A secured party may accept the collateral in satisfaction of the debt even if
be considered to have to have offered to retain the secured party does not have possession of the collateral. Former law
allows retention only if the secured party has possession of the collateral. A
the Collateral in satisfaction of the Obligations
secured party may accept collateral in partial satisfaction of the debt with the
unless Secured Party has entered into a written consent of the debtor. Under new Article 9, the secured party may
written agreement with Debtor to hat effect.[63] not make a “constructive” acceptance of collateral. This rejects those
decisions under former law that permit an implied acceptance, usually based
on an extended retention of possession by the secured party without taking
any action. Instead, the duration of any delay by the secured party will go to
the question of the commercial reasonableness of the sale. § 9-620.
11. Miscellaneous
11.1 Assignment.
(i) Binds Assignees. This Security 64. A security agreement is operative with respect to a person that “becomes
Agreement shall bind and shall inure to bound” as a “new debtor” to a security agreement entered into by another
person. Under some circumstances, usually in an acquisition context, one
the benefit of the heirs, legatees,
person may “become bound” by a security agreement that an acquired person
executors, administrators, successors has signed. §§ 9-102(a)(56), 9-203(d) and (e).
and assigns of Debtor and Secured Party
and shall bind all persons who become
bound as a debtor to this Security
18
Agreement.[64]
(ii) No Assignments by Debtor. Secured Party
does not consent to any assignment by
Debtor except as expressly provided in
this Security Agreement.
(iii) Secured Party Assignments. Secured 65. Neither the debtor nor a secondary obligor may waive certain foreclosure
Party may assign its rights and interests rights under Article 9. § 9-602. An account debtor may, in specified
circumstances, agree not to assert against an assignee of the secured party
under this Security Agreement. If an
any claims and defenses the account debtor may have against the secured
assignment is made, Debtor shall render party. § 9-403. See also §§ 9-340 and 9-404.
performance under this Security
Agreement to the assignee. Debtor
waives and[65] will not assert against any
assignee any claims, defenses or set-offs
which Debtor could assert against
Secured Party except defenses which
cannot be waived.
11.2 Severability. Should any provision of this
Security Agreement be found to be void,
invalid or unenforceable by a court or panel of
arbitrators of competent jurisdiction, that
finding shall only affect the provisions found
to be void, invalid or unenforceable and shall
not affect the remaining provisions of this
Security Agreement.
11.3 Notices. Any notices required by this Security 66. Article 9 will adopt the use of the term “record” generally to replace the
Agreement shall be deemed to be delivered concept of a “writing.” § 9-102(a)(69).
when a record[66] has been (a) deposited in any
United States postal box if postage is prepaid,
and the notice properly addressed to the
intended recipient, (b) received by telecopy,
(c) received through the Internet, and (d)
19
when personally delivered.
11.4 Headings. Section headings used this Security
Agreement are for convenience only. They
are not a part of this Security Agreement and
shall not be used in construing it.
11.5 Governing Law. This Security Agreement is 67. For purposes of perfection and the effect of perfection, Article 9's mandatory
being executed and delivered and is intended choice-of-law rules generally look to the state of the debtor’s formation. § 9-
301. There may be circumstances where the law of a state where goods are
to be performed in the State of Illinois and
located or the debtor has its chief executive office governs questions of
shall be construed and enforced in accordance perfection and the effect of perfection. §§ 9-301 and 9-705(c).
with the laws of the State of Illinois, except to
the extent that the UCC provides for
perfection under the application of the law of
another state the Debtor States.[67]
11.6 Rules of Construction.
(i) No reference to “proceeds” in this
Security Agreement authorizes any sale,
transfer, or other disposition of the
Collateral by the Debtor.
(ii) “Includes” and “including” are not
limiting.
(iii) “Or” is not exclusive.
(iv) “All” includes “any” and “any”
includes “all.”
11.7 Integration and Modifications.
(i) This Security Agreement is the entire
agreement of the Debtor and Secured
Party concerning its subject matter.
20
(ii) Any modification to this Security
Agreement must be made in writing
and signed by the party adversely
affected.
11.8 Waiver. Any party to this Security Agreement
may waive the enforcement of any provision
to the extent the provision is for its benefit.
11.9 Further Assurances. Debtor agrees to execute 68. This may be especially important in view of the complex transition rules. §§
any further documents, and to take any 9-702 et seq.
further actions, reasonably requested by
Secured Party to evidence or perfect the
security interest granted herein, to maintain
the first priority of the security interests, or to
effectuate the rights granted to Secured Party
herein.[68]
The parties have signed this Security Agreement as
of the day and year first above written at Los Angeles,
California.
“D EBTOR ”
Vending Machine Manufacturing Co.
a California corporation
By: _________________________
Jane Drink-Soft
President
By: _________________________
Bob Soft-Drink
Secretary
21
Revised Article 9: Effect of Post-Closing Events on Security Interests Perfected by Filing
Steve Weise; steve.weise@hellerehrman.com; January 1, 2005
Existing collateral After-acquired collateral
Event Attachment Perfection Priority Attachment Perfection Priority
Notes
Continues? Continues? Continues? Occurs? Occurs? Maintained?
This section does not in-
Changes to the debtor itself volve any transfer of the
collateral by the debtor
Change in Yes Yes Yes Yes Yes, for collat- Yes (for per- Perfection will occur for
debtor’s name 9-507(c)(1) eral acquired fected collat- collateral acquired after 4
during 4 eral) months if amend financ-
months follow- ing statement to correct
ing name debtor’s name; failure to
change only amend financing state-
(unless fix fi- ment does not affect per-
nancing state- fection for collateral ac-
ment) quired before end of 4
9-507(c)(2) month period
Change in ‘loca- Yes Yes, for 4 Yes (for as long Yes No, unless re- n/a (not per- Loss of perfection is retro-
tion’ of debtor months only as perfected) perfect in new fected) (if per- active against purchasers
(unless reper- jurisdiction at fect in new ju- and prospective against
fect in new ju- the time of the risdiction, pri- purchasers and lien credi-
risdiction) change in loca- ority based on tors. 9–316(b), Comment
9-316(a)(2) tion. new filing of 3. No specific rule ad-
financing dresses rights of secured
9-316(b)
statement) party to after-acquired col-
lateral when ‘location’ of
debtor changes.
Existing collateral After-acquired collateral
Event Attachment Perfection Priority Attachment Perfection Priority
Notes
Continues? Continues? Continues? Occurs? Occurs? Maintained?
Change in loca- ‘Reincorporation’ is not a
tion – “reinco r- change in location; treated
poration” as ‘transfer’ of existing as-
sets and as “new debtor”
for after-acquired assets. 9-
316, Ex. 4 + 5 See discus-
sions below. Some state
laws may allow the ‘con-
version’ of an entity
formed under the law of
another state into an en -
tity under a new state and
would treat the entity as
the ‘same’ entity. This
would be treated as a
change in ‘location.’
This section applies only
to existing collateral; after-
Transfers of Collateral acquired collateral can’t be
‘transferred.’ See discus-
sion of ‘new debtor’ be-
low.
BIOCOB No The buyer “takes free”
(buyer in ordi- 9-320 of the security interest
nary course of created by its seller.
business)
Not BIOCOB; Yes Yes Yes, defeat se- A search against the
transferee in 9-315(a)(1) 9-507(a) cured party of transferee will not find
same jurisdiction transferee the financing statement
9-325(a) filed against the trans-
feror. Does not apply to
new collateral acquired
by transferee.
2
Existing collateral After-acquired collateral
Event Attachment Perfection Priority Attachment Perfection Priority
Notes
Continues? Continues? Continues? Occurs? Occurs? Maintained?
Not BIOCOB; Yes Yes, for 1 year Yes, defeat se- Loss of perfection is retro-
transferee in new 9-315(a)(1) only, unless per- cured party of active against purchasers
jurisdiction fect against transferee and prospective against
transferee in (unless lose per- purchasers and lien credi-
new jurisdiction fection after one tors. 9–316(b), Comment
9-316(a)(3) year, see com- 3.
ment to left)
9-325(a)
‘Reincorpora- ‘Reincorporations’ are a
tions’ and other form of merger. The ‘not
mergers BIOCOB’ transfer rules
(above) apply to existing
collateral. The ‘new
debtor’ rules (see below)
apply to after-acquired col -
lateral. 9-316, Ex. 4 + 5.
See discussion below of
‘new debtor’
3
Existing collateral After-acquired collateral
Event Attachment Perfection Priority Attachment Perfection Priority
Notes
Continues? Continues? Continues? Occurs? Occurs? Maintained?
Mergers of ‘original
debtor’ and ‘new debtor,’
‘reincorporations’ (form
of merger), + transfers of
New debtor substantially all assets of
debtor where buyer sub-
ject to obligations of
debtor. 9-102(a)(56); 9 -
102(a)(60); 9-203(d)
Secured party of See note See note See note Yes, as to exist- Yes, if new No, always lose For existing collateral of
original debtor – ing collateral debtor has to existing per- the original debtor, the
both original and already owned same name as fected secured ‘not BIOCOB, same juris-
new debtor lo- by new debtor original debtor party of new diction’ attachment, per-
cated in same and after- Yes, if new debtor (except fection + priority rules for
jurisdiction acquired collat- debtor’s name for transferred transfers apply (see
eral acquired is different, but collateral, see above). 9-316, Comment
by new debtor only for collat- note) 2, Ex. 4 + 5; 9-508(c),
9-203(e) eral acquired 9-326(a) Comment 5. Any lack of
during 4 perfection as to new col -
9-204
months after lateral does not affect al-
merger ready perfected ‘trans-
ferred’ collateral. Perfec -
9-508
tion will occur for post-4
month collateral if file
new financing statement
against new debtor.
4
Existing collateral After-acquired collateral
Event Attachment Perfection Priority Attachment Perfection Priority
Notes
Continues? Continues? Continues? Occurs? Occurs? Maintained?
Secured party of See note See note See note Yes, as to exist- No, unless new No, if do per- For existing collateral of
original debtor – ing collateral financing fect against the original debtor, the
new debtor lo- already owned statement filed new debtor, ‘not BIOCOB, new juris-
cated in different by new debtor in new debtor’s will be junior diction’ attachment, per-
jurisdiction from and after- jurisdiction 9-322(a)(1) fection + priority rules for
original debtor acquired collat- transfers apply (see
9-508, Com-
eral acquired ment 4 above). 9-316, Comment 2,
by new debtor Ex. 4 + 5; 9-508(c), Com-
9-203(e) ment 5. Any lack of per-
fection as to new collateral
9-204
does not affect already
perfected ‘transferred’
collateral.
Existing per- Yes, security Yes, security No, lose to per- Yes Yes Yes For existing collateral of
fected secured interest attaches interest in col- fected secured 9-204 9-322(a)(1) the original debtor, the
party of new to collateral lateral trans- party of origi- ‘not BIOCOB, same juris-
debtor – both transferred ferred from nal debtor as to diction’ attachment, per-
original and new from original original debtor collateral trans- fection + priority rules
debtor located in debtor under perfected by ferred from (above) for transfers apply
same jurisdiction after-acquired financing original debtor to determine the rights of
property clause statement al- (win as to col - the secured party of the
of new debtor’s ready filed by lateral already original debtor. 9-316,
secured party’s secured party of owned by new Comment 2, Ex. 4 + 5; 9-
security agree- new debtor debtor) 508(c), Comment 5.
ment with new against new 9-325(a)
debtor debtor
9-204 9-308(a)
5
Existing collateral After-acquired collateral
Event Attachment Perfection Priority Attachment Perfection Priority
Notes
Continues? Continues? Continues? Occurs? Occurs? Maintained?
Existing Per- See comment in See comment in See comment in Yes Yes Yes For existing collateral of
fected Secured prior row prior row prior row; see 9-204 9-322(a)(1) the original debtor, the
party of new note for this ‘not BIOCOB, new juris-
debtor – new row diction’ attachment, per-
debtor located in fection + priority rules
different jurisdic- (above) for transfers apply
tion from original to determine the rights of
debtor the secured party of the
original debtor. 9-316,
Comment 2, Ex. 4 + 5; 9-
508(c), Comment 5. Exist-
ing perfected secured
party of new debtor will
also have priority over
secured party of original
debtor as to transferred
collateral if secured party
of original debtor loses
perfection after one year,
as discussed above under
‘not BIOCOB, new juris-
diction.’ 9-316(a)(3)
4/22/05 1:34 PM (18757.0002)
6
A SUMMARY OF THE PROVISIONS OF REVISED UCC ARTICLE 9
Edwin E. Smith
Bingham McCutchen, LLP
(617) 951-8615
edwin.smith@bingham.com
January 1, 2006
By January 1, 2002, the revision to Article 9 of the Uniform
Commercial Code (the “UCC”) became effective in all states and the
District of Columbia, completing a study, drafting and enactment
process that took over a decade. This paper will summarize the
provisions of revised Article 9 as contained in the 2003 Official Text of
the UCC. The 2003 Official Text includes the 2002 revision of Article 1
of the UCC and the 2003 revision of Article 7 of the UCC, with
conforming amendments to Article 9. Unless otherwise indicated,
references in this paper to “Article 9” or to sections of Article 9 are to the
revised Article 9 or to sections of the revised Article 9. References in this
paper to “former Article 9” are to Article 9 as contained in the 1995
Official Text of the UCC, and references to “former Article 1” are to
Article 1 as contained in the 2001 Official Text of the UCC.
This paper will first discuss in Part I the scope of Article 9. It will
then discuss in Part II collateral categories under Article 9, in Part III
the concept of attachment of a security interest, in Part IV methods of
perfection of a security interest, in Part V issues of priority among
competing security interests and other interests in the collateral, in Part
VI the impact of Article 9 on certain third party rights, in Part VII a
description of certain duties imposed by Article 9 on secured parties, in
Part VIII the rules for choice of law, in Part IX actions that may need to
be taken by secured parties in respect of post-closing changes affecting
the debtor, and in Part X the rules for enforcement of security interests.
This paper will conclude in Part XI with a comment on Article 9’s
definition of “good faith”. The last part of this paper, Part XII, discusses
transition issues for transactions completed under former Article 9 or
other law before Article 9’s effective date.
I. SCOPE OF ARTICLE 9
BUSDOCS:1138799.3
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Article 9 is entitled “Secured Transactions.” It generally
applies to any interest (regardless of its form) created by contract in
personal property and fixtures and which secures payment or other
performance of an obligation. §9-109(a)(1). That interest is referred
to as a security interest (see §1-201(35) defining “security interest”),
and the property subject to the security interest is referred to as
collateral (see §9-102(a)(12) defining “collateral”). Article 9 also
generally applies to sales of accounts, chattel paper, promissory
notes and payment intangibles (the definitions for these terms being
discussed below). §9-109(a)(3). Moreover, Article 9 includes
agricultural liens (see §9-102(a)(5) defining “agricultural lien”) and
all consignments (see §9-102(a)(20) defining “consignment”), even
true consignments, within its scope. §§9-109(a)(2) and (4).
Parties.
Debtor and Obligor. Article 9 refers to the debtor as the
person who has a property interest in the collateral other than a
security interest or other lien. §9-102(a)(28)(A). The term "debtor"
also includes a seller of accounts, chattel paper, promissory notes or
payment intangibles (§9-102(a)(28)(B)), a person who has a property
interest in collateral subject to an agricultural lien (§9-102(a)(28)(A);
see §9-102(a)(5) defining “agricultural lien”), and a consignee (§9-
102(a)(28)(C); see §9-102(a)(20) defining “consignment”). Article 9
refers to the person who owes the secured obligation as the obligor.
§9-102(a)(59).
Secured Party. The person in whose favor a security interest
is granted is referred to in Article 9 as the secured party. §9-
102(a)(72)(A). The term "secured party" also includes a buyer of
accounts, chattel paper, promissory notes or payment intangibles
(§9-102(a)(72)(D)), the person who holds an agricultural lien (§9-
102(a)(72)(B)) and a consignor (§9-102(a)(72)(C)). A secured party
may be a “representative” for holders of secured obligations, such as
an indenture trustee or collateral agent, where the security interest
is granted to the secured party as representative. §9-102(a)(72)(E);
see Official Comment 3.b to §9-102.
Form of Transaction is Irrelevant. The form of the transaction or
the label which the parties put on the transaction is irrelevant for
purposes of determining whether Article 9 applies. Rather, the
determination as to whether Article 9 applies is based on the economic
reality of the transaction. For example, a transaction may be
characterized by the parties as a sale or a lease of goods, but, if in economic
BUSDOCS:1138799.3
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reality a security interest is being created, Article 9 will nevertheless
apply. §§1-201(35) and 9-109(a)(1). It is also not required that the parties
refer in their documents to a "security interest" being created under a
"security agreement." Even if the parties use other terms, such as
"assignment," "hypothecation," "conditional sale," "trust deed" or the like,
Article 9 still applies whenever a security interest in personal property is
being created. §9-109(a)(1)(“regardless of its form”). Similarly, it is
generally irrelevant, for purposes of Article 9, whether title to the
collateral is in the name of the debtor or the secured party. §9-202.
Exclusions.
Generally. Although Article 9 covers most security interests
in personal property and fixtures, certain interests in personal
property collateral are outside of the scope of Article 9. These
interests include common law bailments and true leases, the latter
being governed by UCC Article 2A.
Specific Exclusions. In §§9-109(c) and (d), Article 9 expressly
excludes certain transactions and types of personal property
collateral from Article 9's scope. These specific exclusions
encompass transactions preempted by federal law, landlords' liens,
and certain of the following transactions or liens: statutory and
common law liens, wage claims, security interests created by
governments and governmental subdivisions and agencies, sales of
accounts and chattel paper, insurance claims, judgment claims,
rights of set-off, real estate interests, tort claims, and deposit
accounts. The extent of some of these specific exclusions is further
discussed below:
• Non-Possessory Liens other than Agricultural Liens. Article 9
excludes from its scope landlords’ liens and, generally, other
nonpossessory liens arising by statute or common law. But
agricultural liens are included within Article 9’s scope.
“Agricultural liens” are generally nonpossessory statutory liens
on a debtor’s farm products in favor of a landlord or supplier of
goods or services to the debtor in connection with the debtor’s
farming operations. §§9-102(a)(5)(defining “agricultural lien”), 9-
109(a)(2) and 9-109(d)(2).
• Security Interest Granted by a State, Foreign Government or
State or Foreign Governmental Unit under Another Statute. A
security interest created by a state government, foreign
government or state or foreign governmental unit is not included
BUSDOCS:1138799.3
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within Article 9’s scope to the extent that another state or foreign
governmental statute governs security interests created by that
state government, foreign government or state or foreign
governmental unit. §§9-109(c)(2) and (3); see also §§9-
102(a)(45)(defining “governmental unit”) and (76)(defining
“State”).
• Certain Sales of Accounts, Chattel Paper, Promissory Notes and
Payment Intangibles. There are limited exclusions from Article
9’s scope for sales of accounts, chattel paper, promissory notes
and payment intangibles arising out of the sale of the business
out of which they arose. This is also true for assignments of
accounts, chattel paper, promissory notes and payment
intangibles for collection only. Similarly, there are limited
exclusions for an assignment of a right to payment under a
contract to an assignee that is obligated to perform under the
contract, and an assignment of a single account, promissory note
or payment intangible in full or partial satisfaction of pre-
existing indebtedness. §§9-109(d)(4), (5), (6) and (7).
• Insurance Claims other than Health-Care-Insurance Receivables.
While Article 9 generally excludes assignments of insurance
claims as original collateral, Article 9 does include within its
scope assignments of insurance claims, as original collateral,
relating to the provision of health-care goods and services. §§9-
102(a)(46)(defining “health-care-insurance receivable”) and 9-
109(d)(8). Assignments of insurance claims may also be within
Article 9’s scope if they are proceeds of Article 9 collateral. See
§§9-102(a)(64)(E), 9-315 and 9-312 and discussion of “Claimants
as to Proceeds” under “Priority” below.
• Tort Claims other than Commercial Tort Claims. Article 9
includes within its scope commercial tort claims. §§9-
102(a)(13)(defining “commercial tort claim”) and 9-109(d)(12).
Other tort claims, such as tort claims by an individual arising
out of personal injury, are excluded.
• Consumer Deposit Accounts. Assignments of deposit accounts in
commercial transactions are included within the scope of Article
9. Assignments of deposit accounts in consumer transactions are
excluded. §§9-102(a)(26)(defining “consumer transaction”), 9-
102(a)(29)(defining “deposit account”) and 9-109(d)(13).
BUSDOCS:1138799.3
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• Real Estate Interests. Article 9 does not generally apply to
security interests in real estate interests as such, including
rents under real estate leases. §9-109(d)(11). Even so, Article
9 does apply to transactions affected by real estate in a
number of circumstances:
• If the secured party is granted a security interest in a
promissory note (see “Article 9 Collateral Categories”
below) or other right to payment within the scope of
Article 9, secured by a real estate mortgage or other
real estate interest, Article 9 applies to the promissory
note or other right to payment. §9-109(d)(11)(A); see
§§9-203(g) and 9-308(e) and Comment 6 to UCC § 9-308.
• If the debtor has an interest in a contract relating to
real estate, such as a purchase and sale agreement,
option agreement or the like, the debtor’s rights to
payment under the contract are likely to be considered
accounts under Article 9 rather than real estate
interests excluded from the scope of Article 9. See §9-
102(a)(2)(defining “accounts” to include rights to
payment arising from real property sold or otherwise
disposed of).
• If a secured party is taking a security interest in goods
which are or are to become fixtures, both Article 9 and
real estate law may apply to the fixtures. See “Article 9
Collateral Categories” and discussion of “Fixtures”
under “Priority” below.
• Article 9 addresses the priority conflict between a
secured party claiming a security interest in fixtures,
crops or a manufactured home (see §9-102(a)(53)
defining “manufactured home”) and the interest of an
owner or a mortgagee or other encumbrancer claiming
an interest in that collateral under real estate law. See
discussion of “Priority” below.
Effect of Exclusion. Of course, even though a type of assignment or
a type of property may be excluded from Article 9’s scope, it is still often
possible for a secured party to obtain a security interest in that type of
property under other federal or state statutes or under common law.
BUSDOCS:1138799.3
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II. ARTICLE 9 COLLATERAL CATEGORIES
Article 9 categorizes collateral into different types, primarily based
upon the debtor’s use of the collateral. It is important for the secured
party to determine the type of collateral in which the secured party is
taking a security interest, since that determination will in turn guide the
secured party in, among other things, deciding how to perfect the security
interest. Collateral types under Article 9 may be discussed broadly as
comprising personal property consisting of goods, investment property,
semi-intangible property, and other intangible property.
Goods. “Goods” are all things which are movable at the time the
security interest attaches and include fixtures. §9-102(a)(44). But goods
do not include money, documents, instruments, investment property,
accounts, chattel paper, general intangibles or minerals before extraction.
Nor do goods include deposit accounts or letter-of-credit rights (discussed
below). Software embedded in goods is considered as part of the goods if
the software is customarily viewed as a part of the goods (e.g., the
computer chip in the automatic brakes on an automobile) or if, by
becoming the owner of the goods, a person acquires a right to use the
software with the goods. Goods themselves are divided into four
subcategories: consumer goods, inventory, farm products and equipment.
Consumer Goods. “Consumer goods” are goods used or bought
for use primarily for personal, family or household purposes. §9-
102(a)(23).
Inventory. “Inventory” consists of goods, other than farm
products, held by a person for sale or lease, or consisting of raw
materials, work in process, or materials consumed in business. §9-
102(a)(48).
Farm Products. “Farm products” are crops, livestock or other
supplies produced or used in farming operations. Farm products
include products of crops or livestock in their unmanufactured state.
For the goods to be farm products, the debtor must be engaged in a
farming operation with respect to the goods. §9-102(a)(34). A
farming operation includes aquatic farming operations, and farm
products include aquatic goods produced in acquacultural
operations. §9-102(a)(35); see also §9-102(a)(34).
Equipment. “Equipment” is a residual subcategory of goods.
It consists of goods which are not consumer goods, inventory or farm
products. §9-102(a)(33).
BUSDOCS:1138799.3
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Investment Property. “Investment property” comprises certificated
and uncertificated securities, securities accounts and security
entitlements, all of which are defined in UCC Article 8. §9-102(a)(49); see
§§8-102(a)(15)(defining “security”), 8-501(a)(defining “securities account”)
and 8-102(a)(17)(defining “security entitlement”). Investment property also
includes commodity contracts (§9-102(a)(15)) and commodity accounts (§9-
102(a)(14)). See §9-102(a)(49).
Semi-intangibles. There are certain movables which are
conventional tangible embodiments of intangible rights of the debtor.
These are defined in Article 9 as instruments, chattel paper, documents
and letter-of-credit rights.
Instrument. An “instrument” is a negotiable instrument
governed by UCC Article 3 or another writing evidencing a right to
the payment of money which, in the ordinary course of business, is
transferred by delivery with any necessary indorsement or
assignment. However, a negotiable instrument or other writing will
not qualify as an instrument if it is security agreement or lease or is
included in the definition of investment property. §9-102(a)(47). An
“instrument” does not include a credit card slip. §9-102(a)(47)(iii).
Within the category of instrument, Article 9 provides a subcategory
of promissory note.
Promissory Note. A “promissory note” is an instrument
evidencing a promise to pay (rather than an order to pay,
such as a check). The term “promissory note” does not,
however, include an instrument, such as a certificate of
deposit, containing an acknowledgement of receipt of funds by
a bank. §9-102(a)(65).
Chattel Paper. “Chattel paper” refers to any writing or
writings or other records which evidence both a monetary obligation
and a security interest in or a lease of specific goods. §§9-102(a)(11)
and 9-102(a)(69)(defining “record”). But a charter for the lease or
hire of a vessel is not chattel paper. §9-102(a)(11). If the chattel
paper writings or other records also include a monetary obligation
secured by a security interest in or lease or license of software used
in the chattel paper specific goods, those writings or other records
relating to the software are included in the chattel paper relating to
the goods. Article 9 further divides chattel paper into two
subcategories: tangible chattel paper and electronic chattel paper.
BUSDOCS:1138799.3
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Tangible Chattel Paper. If the chattel paper is
evidenced by a record consisting of information inscribed on a
tangible medium, such as a writing, then the chattel paper is
“tangible chattel paper.” §9-102(a)(78).
Electronic Chattel Paper. If the chattel paper is
evidenced by records stored in an electronic medium, the
chattel paper is “electronic chattel paper.” §9-102(a)(31).
Document. A “document” is a document of title, such as a bill
of lading or warehouse receipt. §§9-102(a)(30) and 1-201(b)(16).
Article 1 provides for two subcategories of documents: tangible
documents and electronic documents. This distinction is relevant
for purposes of Article 9.
Tangible Document. If the document is evidenced by a
record consisting of information inscribed on a tangible
medium, such as a writing, then the document is a “tangible
document.” §1-201(b)(16)(last sentence).
Electronic Document. If the document is evidenced by a
record stored in an electronic medium, the document is an
“electronic document.” §1-201(a)(16)(penultimate sentence).
Letter-of-Credit Right. A “letter-of-credit right” is a right to
payment or performance under a letter of credit, whether the letter
of credit is written or is evidenced electronically. The term does not
include the debtor’s drawing rights as beneficiary under the letter of
credit. §9-102(a)(51).
Other Intangibles. Under Article 9 pure intangibles that are not
investment property are accounts, deposit accounts, commercial tort claims
or general intangibles.
Accounts. An “account” is any right to payment, whether or
not it has been earned by performance, for goods or other property
sold or leased or for services rendered and which is not evidenced by
an instrument or chattel paper. A charter for the lease or hire of a
vessel is an account. The term also includes a right to payment,
whether not earned by performance, for real property sold,
intellectual property licensed, the incurrence of a suretyship
obligation, a policy of insurance, use of a credit card, and
government sponsored or licensed lottery winnings. In addition, a
BUSDOCS:1138799.3
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health-care-insurance receivable is a subcategory of account. §9-
102(a)(2).
Health-Care-Insurance Receivable. A “health-care-
insurance receivable” is an interest in or claim under a policy
of insurance which is a right to payment of a monetary
obligation for health-care goods or services provided. §9-
102(a)(46). See also §9-102(a)(2).
Deposit Account. A “deposit account” is a demand, time
savings, passbook or similar account maintained with a bank (§9-
102(a)(8)(defining “bank”)), but does not include investment
property or an account evidenced by an instrument. §9-102(a)(29).
Accordingly, a deposit account would include an uncertificated
certificate of deposit, where there is no separate writing evidencing
the bank’s obligation to pay, as well as a nonnegotiable certificate of
deposit, if the certificate does not qualify as an instrument. See
Official Comment 12 to §9-102.
Commercial Tort Claim. A “commercial tort claim” is a claim
of an organization (see §1-201(25) defining “organization”) arising in
tort. It is also a claim of an individual arising in tort if the claim
arises out of the individual’s business and does not include damages
for death or personal injury. §9-102(a)(13)(B). However, if a
commercial tort claim is contractually settled, it may cease to be a
claim arising in tort and may become a payment intangible as
described below. See Official Comment 15 to §9-109.
General Intangibles. “General intangibles” is a residual
category for intangible property. The term comprises any personal
property other than goods, accounts, chattel paper, documents,
instruments, investment property, letter-of-credit rights,
commercial tort claims, deposit accounts and money. §9-102(a)(42).
Within the category of general intangibles are two special
subcategories: payment intangibles and software.
Payment Intangible. A “payment intangible” is a
general intangible under which the principal obligation of the
account debtor (see §9-102(a)(3) defining “account debtor”) is
to pay money, such as in the case of a loan not evidenced by
an instrument or chattel paper. §9-102(a)(61).
Software. “Software” is a computer program and
includes related supporting information. However, software
BUSDOCS:1138799.3
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embedded in goods and customarily viewed as a part of the
goods is considered as part of the goods and not as software.
§9-102(a)(75).
Other Terms relating to Article 9 Types of Collateral. Certain other
terms are important to know as they relate to Article 9 types of collateral:
As-extracted Collateral. “As-extracted collateral” are oil, gas
or other minerals that are subject to a security interest that is
created by a debtor having an interest in the minerals before
extraction and that attaches to the minerals as extracted. It also
includes accounts arising out of the sale at the wellhead or
minehead of oil, gas or minerals in which the debtor had an interest
before extraction. §9-102(a)(6).
Fixtures. “Fixtures” are goods that have become so related to
particular property that an interest in them arises under real
property law. §9-102(a)(41).
Supporting Obligation. A “supporting obligation” is a letter-
of-credit right or secondary obligation that supports the payment or
performance of an account, chattel paper, a document, a general
intangible, an instrument or investment property. §9-102(a)(77).
Suretyship law, as explained by the Restatement (3d), Suretyship
and Guaranty § 1 (1996), determines whether an obligation is
secondary. See Official Comment 2.a to §9-102. The most typical
secondary obligation is a guaranty by one party of the obligations to
be performed by another.
III. ATTACHMENT
Article 9 uses the term attachment to describe the moment at which
a security interest becomes enforceable against the debtor. §9-203(a). For
a security interest to attach, a number of events must have occurred: (1)
value must have been given; (2) the debtor must have rights in the
collateral; and (3) either (i) the collateral must be in possession of the
secured party by agreement of the debtor or, if the collateral is investment
property, a deposit account, electronic chattel paper or a letter-of-credit
right, the secured party must have “control” of the collateral; or (ii) the
debtor must have authenticated a security agreement that contains a
description of the collateral. §9-203(b). A security agreement is the
agreement under which a security interest is granted or provided for. §9-
102(a)(73). The following discussion provides a fuller description of these
elements of attachment.
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Value. In general, value is given for any consideration sufficient to
support a simple contract. Some examples of value include a loan of
money, a binding commitment to lend money, the issuance of a guarantee
or acting as an accommodation party. Value also includes whole or partial
satisfaction of a pre-existing claim. §1-204.
Rights in the Collateral. As a general matter, the debtor can only
grant a security interest in whatever ownership or other rights it has.
Similarly, the secured party can generally enjoy no greater rights in the
collateral than the debtor itself holds unless the UCC provides otherwise.
§9-203(b); see Official Comment 6 to §9-203. Note, however, that a mere
power of the debtor to transfer collateral is sufficient to satisfy the “rights
in the collateral” requirement. §9-203(b)(2). Thus, a seller of accounts
may have the power to transfer, yet again, rights in the sold accounts
where the interest of the buyer in the accounts is unperfected, and a
consignee may have the power to transfer rights in consigned goods where
the consignor’s interest in the consigned goods is unperfected. §§9-318 and
9-319.
Possession of or Control by the Secured Party or Security
Agreement. The secured party must either possess the collateral, or, in
case of investment property, a deposit account, electronic chattel paper, an
electronic document or a letter-of-credit right, the secured party must have
“control” of the collateral; or the debtor must have authenticated a security
agreement describing the collateral. §9-203. The description of the
collateral in the security agreement must be sufficient reasonably to
identify the collateral. §9-108. These requirements are further discussed
below.
Possession. A secured party may satisfy the possession
requirement by using a third party who possesses the collateral, if
the collateral is in possession of the third party by agreement of the
debtor and the third party acknowledges in a signed writing or other
authenticated (see §9-102(a)(7) defining “authenticate”) record (see
§9-102(a)(69) defining “record”) that it holds for the secured party’s
benefit. §§9-203(b)(3)(B) and 9-313(c)(1). If the collateral is a
certificated security in registered form, there needs to be delivery to
the secured party under §8-301. §9-203(b)(3)(C).
Control. The concept of “control” applies to investment
property, deposit accounts, electronic chattel paper, electronic
documents and letter-of-credit rights. §9-203(b)(3)(D). The
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requirements for control are further discussed below under
“Perfection.”
Security Agreement. A security agreement must be
“authenticated” by the debtor. §9-203(b)(3)(A). The term
authenticated includes a normal signature on a written document
but it also encompasses an electronic transmission. §9-102(a)(7).
Reasonable Identification of the Collateral. The security
agreement must reasonably identify the collateral. §§9-108(a) and 9-
203(b)(3)(A). The concept of reasonable identification is a flexible
one, permitting identification in a variety of ways: a specific listing,
a reference to a category, collateral type or quantity, or use of a
computational formula. However, an “all asset” description in a
security agreement is insufficient. §9-108(c). And a description by
collateral type alone is insufficient if the collateral is a commercial
tort claim or, in a consumer transaction, if the collateral is consumer
goods, a security entitlement, a securities account or a commodity
account. §9-108(e). If the collateral is timber to be cut, a real estate
description in the security agreement is required. §9-203(b)(3)(A).
After-acquired Property. Article 9 permits a security agreement to
contain an after-acquired property clause. §9-204(a). But the secured
party generally may not obtain a security interest in after-acquired
consumer goods as original collateral unless the debtor acquires rights in
the consumer goods within 10 days after the secured party gives value. §9-
204(b)(1). Moreover, a security interest in a commercial tort claim will
attach only to a tort claim existing at the time that the security agreement
is signed or otherwise authenticated. The security interest will not attach
as original collateral to an after-acquired commercial tort claim. §9-
204(b)(2).
Future Advances and Cross-Collateralization. A security interest
under Article 9 may secure future advances and provide for cross-
collateralization of various obligations. §9-204(c). Official Comment 5 to
§9-204 expressly rejects the holdings of cases under former Article 9 which
require that future advances be of the same type or otherwise related to
the original advance for the future advances to be secured by the collateral
securing the original advance.
Agricultural Liens. The concept of attachment is not applicable to
an agricultural lien. Article 9 merely refers to the agricultural lien
becoming “effective” under the statute giving rise to it. §9-308(b).
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IV. PERFECTION
An attached security interest which will prevail over a creditor
using judicial process to obtain a lien on the collateral, including a trustee
in bankruptcy having the status of a lien creditor under §544(a) of the
Bankruptcy Code on the commencement of the debtor’s bankruptcy, is a
perfected security interest under Article 9. But it should be emphasized
that only an attached security interest can become a perfected security
interest. §9-308(a). There are three primary ways in which an attached
security interest may be perfected. First, the secured party may file a
properly completed financing statement (see §9-102(a)(39) defining
“financing statement”) in the appropriate filing office (see §9-102(a)(37)
defining “filing office”). Second, the secured party may take possession of
the collateral or, in the case of investment property, a deposit account,
electronic chattel paper or a letter-of-credit right, may obtain control of the
collateral. Third, in a few cases, the security interest may be perfected
automatically upon attachment. Depending upon the category of
collateral, there may be only one method of perfection or several.
Perfection by Filing. Generally, most types of security interests
either may or must be perfected by filing a properly completed financing
statement in the appropriate filing office. §9-310(a).
Contents of Financing Statement. A financing statement, to
be sufficient, must provide the debtor’s name (the legal name; see §9-
503) and the name of the secured party or its representative and
indicate the collateral covered by the financing statement. §9-
502(a). Where the collateral is timber to be cut, as-extracted
collateral or fixtures (in the case of a fixture filing), additional
information is required for the financing statement to be sufficient.
§§9-502(b) and (c). Moreover, while an “all-asset” collateral
description is insufficient in a security agreement, it is sufficient in
a financing statement. §9-504(2). A financing statement may still
be effective even though it contains errors, so long as the errors are
minor and are not seriously misleading. §9-506(a). A debtor’s name
on a financing statement that varies from the debtor’s legal name is
not seriously misleading if a search of the records of the filing office
under the debtor’s legal name would disclose the financing
statement. §9-506(c).
Authorization by the Debtor. In order to accommodate
electronic filing, there is no requirement in Article 9 that a financing
statement be signed by the debtor. But the secured party may not
file a financing statement against the debtor unless the filing is
authorized by the debtor. §9-509(a)(1). That authorization is
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automatic in the case of a filing describing the collateral no more
broadly than the collateral description contained in a security
agreement authenticated by the debtor. §9-509(b). However, a
secured party will need an authorization authenticated by the
debtor to pre-file a financing statement in advance of a security
agreement being authenticated by the debtor, or to file a financing
statement with a collateral description broader than that contained
in the debtor’s authenticated security agreement. A secured party
that files a financing statement without the debtor’s authorization
may be liable to the debtor for actual or statutory damages. See §§9-
625(b) and (e)(3).
Office in Which Filing Should be Made. Article 9 contains
choice of law rules to determine in which jurisdiction a filing must
be made. These choice of law rules are discussed in further detail
below. Once the jurisdiction in which the filing must be made is
determined, the financing statement must be filed in the central
filing office in that jurisdiction, typically the Secretary of State’s
office. However, rather than a filing in the central filing office, a
local filing in the applicable real estate recording office is required
for as-extracted collateral, timber to be cut or a fixture filing. §9-
501.
What Constitutes Filing. Communication (see §9-102(a)(18)
defining “communicate”) of the financing statement to the filing
office, together with payment of the correct filing fee, constitutes
filing. §9-516(a). Article 9 sets forth reasons for which a filing office
may refuse to accept a financing statement for filing, thereby
rendering the filing ineffective even if it is otherwise sufficient.
These reasons include the communication of the financing statement
by a means not authorized by the filing office and the failure to
tender a payment at least equal to the filing fee. They also include
the failure to provide in the financing statement other information,
such as the debtor’s mailing address, whether the debtor is an
individual or an organization (see §1-201(25) defining
“organization”), and, if the debtor is an organization, the debtor’s
type and jurisdiction of organization and the debtor’s state
organizational identification number or a statement that the debtor
has none. §9-516(b); see especially §9-516(b)(5). The reasons set
forth in §9-516(b) are the only grounds for filing office rejection. §9-
520(a). If there are such grounds for the filing office to reject the
filing but the filing office nevertheless accepts the filing, the filing is
still effective so long as the financing statement meets the
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requirements for sufficiency of the financing statement under §9-
502.
How Filings are Indexed. Filings are to be indexed in the
name of the debtor so as to be capable of being found by subsequent
searchers. §§9-519(c)(1) and (f)(1). Once an initial filing is made,
any amendment, including an assignment, continuation statement
or termination statement, relating to the initial filing must be
placed on the records of the filing office in such a way as to be linked
to the initial filing. §§9-519(c)(1) and (f)(2). Moreover, the filing
office may not delete its records pertaining to any financing
statement until at least one year after the financing statement has
lapsed. §9-522(a).
Lapse; Continuation; Termination. Filings generally expire
after five years and must be continued, within six months prior to
the end of the five-year period, by the filing of a continuation
statement. §9-515. Article 9 does permit an initial financing
statement filed in connection with a public-finance transaction (see
§9-102(a)(67) defining “public-finance transaction”) or a
manufactured-home transaction (see §9-102(a)(54) defining
“manufactured-home transaction”) to have a 30-year duration. §9-
515(b). And a financing statement that indicates that the debtor is
a transmitting utility (see §9-102(a)(80) defining “transmitting
utility”) has a duration that lapses only on the filing of a termination
statement relating to that financing statement. §9-515(f). If a
financing statement lapses, the security interest perfected by the
filing becomes unperfected and is deemed never to have been
perfected as against a purchaser (but not a lien creditor). §9-515(c).
When the secured obligations have been satisfied and the secured
party has no further obligation to extend credit, the secured party is
obligated to file a termination statement or, in a commercial
transaction, to provide to the debtor a termination statement. §9-
513. The debtor is permitted to file a termination statement if the
secured party was required to file or provide the termination
statement and has failed to do so. §9-509(d)(2). The termination
statement filed by the debtor must indicate on it that the debtor
authorized the filing of the termination statement. §9-509(d)(2). In
addition, a secured party that fails to file or provide a termination
statement when required to do so may be liable to the debtor for
actual or statutory damages. §§9-625(b) and (e)(4).
“Bogus” Filings. Article 9 permits a debtor, who believes that
a filing record concerning the debtor is inaccurate or has been
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wrongfully filed, to file a corrective statement setting forth the basis
of the debtor’s belief that the record is inaccurate or has been
wrongfully filed. The corrective statement becomes part of the filing
record but does not impair the effectiveness of an initial financing
statement or other filed record. §9-518. Article 9 leaves to other law
the availability of civil remedies, or the imposition of criminal
penalties, against those who misuse the filing system.
Other Provisions. Additional details concerning financing
statements and the UCC filing system are contained in part 5 of
Article 9.
Perfection by Possession. Certain types of collateral may or must be
perfected by possession.
Money. A secured party's security interest in money (see §1-
201(24) defining “money”) must be perfected by possession by the
secured party. §9-312(b)(3).
Instruments. A secured party may perfect a security interest
in an instrument by either filing or possession. §§9-312(a) and 9-
313(a).
Certificated Securities. A security interest in a certificated
security may be perfected by filing, possession or control. §§9-
312(a), 9-313(a) and 9-314(a). A secured party’s perfection of a
security interest in a certificated security by possession is
accomplished by the secured party taking delivery of the certificated
security under §8-301. §9-313(a). Delivery generally means that
the secured party obtains possession of the security certificate even
if a necessary indorsement is lacking. See §8-301.
Tangible Chattel Paper. As an alternative to perfection by
filing, a security interest in tangible chattel paper may be perfected
by the secured party taking possession of the tangible chattel paper.
§§9-312(a) and 9-313(a).
Tangible Documents. As an alternative to perfection by filing,
a security interest in a tangible negotiable document may be
perfected by the secured party taking possession of the tangible
negotiable document. §§9-312(a) and 9-313(a).
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Goods. A security interest in goods may be perfected by filing
or by the secured party's taking possession of the goods. §§9-310(a),
9-312(a) and 9-313(a).
Possession by Third Parties. Where the secured party wishes
to perfect a security interest in collateral by possession but the
collateral is in the possession of a third party “bailee,” Article 9
requires the third party in possession of collateral, other than goods
covered by a document of title, to authenticate a record
acknowledging that it is holding the collateral for the secured party.
§9-313(c)(1); cf. §§8-106(a) and (b) and §8-301(a)(2) for certificated
securities. For perfection by such possession and authentication to
be effective, the third party may not be the debtor or a lessee in the
ordinary course from the debtor. §9-313(c). A secured party in
possession of collateral does not relinquish possession if the secured
party delivers the collateral to a possible purchaser of the collateral
(other than the debtor or an ordinary course lessee of the collateral)
for inspection and return. §9-313(h).
Perfection by Control. The concept of control applies to perfection of
a security interest in investment property, deposit accounts, electronic
chattel paper, electronic documents and letter-of-credit rights. §§9-106, 9-
104, 9-105, 9-107 and 9-314(a).
Investment Property. A security interest in investment
property may be perfected by control as well as by filing. §§9-312(a)
and 9-314(a). The concept of control is the same under Article 9 as
it is under UCC Article 8 and includes delivery, with indorsements,
of certificated securities to the secured party, an agreement by the
issuer of uncertificated securities that the issuer will honor
instructions from the secured party without further consent of the
debtor, and an agreement by a bank, broker or other securities
intermediary holding a securities account, or by a commodity
intermediary, that it will honor instructions from the secured party
without further consent of the debtor. Control also includes
registering the securities, the securities account or the commodity
account in the name of the secured party. Where the secured party
is the debtor’s securities intermediary or commodity intermediary,
the securities intermediary or commodity intermediary
automatically has control. §§8-106 and 9-106.
Deposit Accounts. A security interest in a deposit account as
original collateral may be perfected only by the secured party
obtaining control over the deposit account. §§9-312(b)(1) and 9-
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314(a). A secured party obtains control over a deposit account if it is
the depositary bank or if the deposit account is in the secured
party’s name. A secured party also has control if the depositary
bank enters into an agreement with the secured party that the
depositary bank will comply with instructions from the secured
party as to the funds in the deposit account, without further consent
from the debtor. §9-104(a).
Electronic Chattel Paper. A security interest in electronic
chattel paper may be perfected by control or by filing. §§9-312(a)
and 9-314(a). A secured party obtains control over electronic chattel
paper if there is only one authoritative or identifiable copy of the
electronic record of the chattel paper, the copy of the record
identifies the secured party and its interest, the copy is
communicated to and maintained by the secured party or its
designated custodian, the copy is readily identifiable as the
authoritative copy and any revision of the authoritative copy is
readily identifiable as authorized or unauthorized. §9-105.
Electronic Documents. A security interest in an electronic
document may be perfected by control or, if the electronic document
is negotiable, by filing. §§9-312(a) and 9-314(a). A secured party
obtains control over electronic document if a system employed for
evidencing the transfer of interests in the electronic document
establishes that person as the person to which the electronic
document was issued or transferred. §§ 9-102(b) and 7-106(a). That
criteria is satisfied if there is only one authoritative or identifiable
copy of the electronic record of the document, the copy of the record
identifies the secured party and its interest, the copy is
communicated to and maintained by the secured party or its
designated custodian, the copy is readily identifiable as the
authoritative copy and any revision of the authoritative copy is
readily identifiable as authorized or unauthorized. §§ 9-102(b) and
7-106(b).
Letter-of-Credit Rights. A security interest in a letter-of-
credit right may be perfected by the secured party obtaining control
over the letter-of-credit right. Control is the sole method of
perfection of a security interest in a letter-of-credit right unless the
security interest in the letter-of-credit right is perfected as a
supporting obligation. §§9-312(b)(2) and 9-314(a). A secured party
has control over a letter-of-credit right if the issuer or nominated
person has consented to an assignment of proceeds of the letter of
credit under §5-114(c) or other applicable law. §9-107.
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Automatic Perfection. In some situations, no additional steps
beyond attachment are necessary to perfect a security interest.
Generally. The following security interests under §9-309 are
automatically perfected upon attachment: a purchase-money
security interest in consumer goods, a sale of promissory notes or
payment intangibles, an assignment of accounts or payment
intangibles which does not alone or in conjunction with other
assignments to the same assignee transfer a significant part of the
outstanding accounts or payment intangibles of the assignor, a
security interest arising under UCC Article 2, 2A or 4 or by delivery
of a financial asset under 9-206(c), a security interest in investment
property created by a securities intermediary or commodity
intermediary, an assignment of a health-care-insurance receivable
to the health-care provider, a security interest in favor of an issuer
or nominated person in documents presented to the issuer or
nominated person for draw under a letter of credit (see §5-118), an
assignment for the benefit of creditors, a security interest created by
an assignment of a beneficial interest in a decedent’s estate and a
sale by an individual of an account that is a right to payment of
lottery winnings.
Supporting Obligations. In addition, Article 9 provides for
automatic attachment of a security interest in a supporting
obligation if the security interest in the supported collateral has
attached and for automatic perfection of a security interest in a
supporting obligation if the security interest in the supported
collateral is perfected. §§9-203(f) and 9-308(d).
Temporary Automatic Perfection. A security interest in
instruments, certificated securities and negotiable documents is
temporarily perfected for a period of 20 days to the extent that it
arises for new value given under an authenticated security
agreement. §9-312(e). A security interest in proceeds is temporarily
perfected for a period of 20 days, §9-315(d); see discussion below of
“Claimants as to Proceeds” under “Priority.”.
Other Methods of Perfection. Federal and state statutes may, of
course, provide for methods of perfection of security interests in vessels,
aircraft, intellectual property and titled goods (such as motor vehicles that
are not inventory of a dealer). Compliance with these methods of
perfection constitutes the equivalent of perfection by filing under Article 9.
§9-311(b). A security interest in titled goods that are inventory held for
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sale or lease by a person in the business of selling goods of that kind is
perfected by filing, rather than by notation of the secured party’s security
interest on the certificates of title. §9-311(d). A security interest in goods
covered by a nonnegotiable document may be perfected by filing as to the
goods, by issuance of the document in the name of the secured party or by
notification to the bailee of the secured party’s interest. §9-312(d).
V. PRIORITY
Even though a security interest has attached and become perfected,
it may not prevail over other creditors and other interested parties. The
ranking of various interests in the same collateral among the secured
party and other claimants raises the question of whether a secured party’s
security interest has priority over the interests of these other parties.
General Creditors. A secured party will prevail over unsecured
creditors with respect to collateral in which the secured party has a
perfected security interest. §§9-201(a) and 9-317(a). Even if the secured
party fails to perfect its security interest, the secured party will still
prevail over unsecured creditors with respect to collateral in which the
secured party has an unperfected security interest, at least outside of the
debtor’s bankruptcy. §9-201(a).
Lien Creditors.
Definition. A lien creditor is a creditor who has acquired a
lien on the debtor's property by judicial process and includes a
trustee in bankruptcy. §9-102(a)(52).
Secured Party vs. Lien Creditor Generally. A perfected
secured party will prevail over a lien creditor holding a lien on the
secured party's collateral so long as the secured party's security
interest in the collateral is perfected at or before the time when the
lien arises. §9-317(a)(2)(A). Even if the security interest is not
perfected, the secured party will prevail over the lien creditor so
long as, before the lien arises, the secured party has filed a financing
statement covering the collateral and, as set forth in §9-203(b)(3),
the debtor has authenticated a security agreement describing the
collateral or the secured party has possession or control of the
collateral. §9-317(a)(2)(B).
Future Advances. Future advances by the secured party on
collateral in which the secured party's security interest is superior
to the lien of the lien creditor on the original advance will likewise
be secured by the collateral in priority to the lien creditor's lien, so
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long as the future advances are made within the later of 45 days
after the lien arose and the time that the secured party obtained
knowledge of the lien, or are made pursuant to a commitment (see
§9-102(a)(68) defining “pursuant to commitment”) incurred without
knowledge of the lien. §9-323(b).
Purchase-money Security Interests. A secured party taking a
purchase-money security interest (see “Purchase-money Secured
Parties” discussed below) will also have priority over a lien creditor
holding a lien on the purchase-money collateral so long as the
secured party perfected its security interest by filing before the
expiration of a period of 20 days after the debtor received possession
of the collateral. §9-317(e).
Other Non-Purchase Secured Parties. Absent another Article 9
priority rule to the contrary, in cases in which there is more than one
secured party claiming a security interest in the same collateral, the first
secured party to file a financing statement or perfect its security interest
has priority. This is the so-called "first-to-file-or-perfect" priority rule. §9-
322(a)(1). It follows that a perfected security interest in collateral prevails
over an unperfected security interest in the collateral. §9-322(a)(2). If
both security interests are unperfected, the first security interest to attach
has priority. §9-322(a)(3).
Purchase-money Secured Parties. A purchase-money security
interest is a security interest in collateral which is either taken by a
supplier of that collateral to finance its purchase price or a security
interest given to a third party lender in the collateral purchased with the
proceeds of the lender's loan. §9-103. The purchase-money collateral must
generally be goods. But it may also be software sold or licensed with goods
which are themselves purchase-money collateral, if the software is
acquired principally for use with the goods. §9-103(b)(3) and (c). A holder
of a perfected purchase-money security interest, who has taken certain
applicable steps, achieves super priority, i.e., its security interest in the
purchase-money collateral will rank ahead of any security interest which
would otherwise be entitled to priority under the first-to-file-or-perfect
priority rule. To achieve super priority, the purchase-money secured party
must take the following steps:
Inventory Collateral. If the collateral is inventory, the
purchase-money secured party must perfect its security interest
before the debtor receives possession of the inventory. In addition,
the purchase-money secured party must notify existing holders of a
security interest of record in the same type of inventory of the
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purchase-money lender's intention to take a purchase-money
interest in the inventory in advance of the debtor receiving
possession of the inventory. The notice is effective for a period of
five years. §9-324(b). Purchase-money inventory advances may be
cross-collateralized so that the total of the purchase-money
inventory advances from the same supplier or lender may be secured
by successive shipments of the purchase-money inventory collateral
from the same supplier or financed by the same lender. §9-
103(b)(2).
Farm Products Livestock Collateral. Article 9 contains
analogous purchase-money priority rules for purchase-money
security interest in farm products livestock. §§9-324(d) and (e). The
purchase-money priority also extends to products of the livestock in
their unmanufactured state.
Other Collateral. If the security interest is in collateral other
than inventory or farm products livestock, the purchase-money
secured party must perfect its security interest before the expiration
of a period of 20 days after the debtor obtains possession of the
collateral. §9-324(a).
If two secured parties, one being a supplier and the other being a lender,
each claim purchase-money priority over the same collateral, the supplier’s
purchase-money security interest prevails over that of the lender. §9-
324(g)(1). In addition, a purchase-money security interest in a commercial
transaction does not lose its status as a purchase-money security interest
merely because it also secures non-purchase-money obligations, the
purchase-money obligations are also secured by non-purchase-money
collateral, or the purchase-money obligations have been renewed or
refinanced. §9-103(f).
Consignors. Article 9 treats all consignments, as defined in §9-
102(a)(20), whether “true” consignments or security consignments, as
purchase-money security interests and requires consignors to comply with
Article 9 rules applicable to purchase-money secured parties in order to
obtain priority. See §§1-201(35)(defining a consignment as a security
interest) and 9-103(d).
Buyers, Lessees and Non-exclusive Licensees in Ordinary Course.
Customers of the debtor who buy the debtor's goods in the debtor’s
ordinary course of business take free of the security interest of the debtor's
secured party even if they know of the security interest. §§1-
201(9)(definition of “buyer in ordinary course of business”) and 9-320(a).
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But only a customer of the debtor that takes possession of the goods or has
a right to recover the goods from the debtor under UCC Article 2 may be
an ordinary course buyer. §1-201(9). A buyer of consumer goods has a
right to recover the goods from the debtor under UCC Article 2 when the
buyer acquires a special property in the goods. §§2-502(2) and 2-716(3).
The acquisition by a buyer of a special property in goods generally occurs
at the time that the goods are identified to the sales contract. See §2-
401(2). In addition, a buyer of goods collateral from a debtor may not take
free of the secured party’s security interest as a buyer in the ordinary
course if the secured party is in possession of the goods. §9-320(e).
Analogous rules for lessees and nonexclusive licensees in the ordinary
course are set forth in §9-321.
Buyers and other Transferees Not in the Ordinary Course.
Generally, if the debtor sells or otherwise disposes of collateral outside of
the ordinary course and the disposition is not authorized by the secured
party holding a perfected security interest in that collateral, the security
interest continues in the collateral and continues perfected
notwithstanding its disposition. §§9-315(a)(1) and 9-507(a). Future
advances by the secured party will likewise be secured in priority to the
interest of the buyer, so long as the future advance is made within the
earlier of 45 days after the sale arose and the secured party's obtaining
knowledge of the sale or the secured party makes the advance pursuant to
a commitment (see §9-102(a)(68) defining “pursuant to commitment”)
entered into without knowledge of the lien and before the expiration of a
period of 45 days after the buyer’s purchase. §§9-323(d) and (e). If the
security interest is unperfected, the buyer gives value and the buyer has
no knowledge of the security interest, the buyer acquires its interest in the
collateral free of the secured party’s security interest. §9-317(b).
Negotiable Documents. During the period that goods are in the
possession of a bailee who has issued a negotiable document covering the
goods, a security interest perfected in the negotiable document has priority
over a security interest perfected in the goods during that period. §9-
312(c)(2). In addition, where goods are evidenced by a negotiable
document, a holder of the negotiable document to whom the negotiable
document has been duly negotiated prevails over an earlier security
interest in the goods to the extent provided in UCC Article 7. §9-331(a).
Instruments. A security interest in an instrument perfected by
filing is generally subordinate to the interest of another secured party or
other purchaser if the other secured party or other purchaser takes
possession of the instrument for value, in good faith and without
knowledge that the purchase violates the rights of the secured party that
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perfected by filing. §9-330(d). A holder in due course of a negotiable
instrument has priority over an earlier secured party to the extent set
forth in UCC Article 3. §9-331(a); see §3-306.
Chattel Paper.
Generally. If a security interest in chattel paper is perfected
only by filing, not by possession of tangible chattel paper or control
of electronic chattel paper, an ordinary course new value purchaser
of the chattel paper who takes possession of the tangible chattel
paper or control of the electronic chattel paper in good faith has
priority over the security interest so long as the purchaser is
without knowledge that the purchase violates the secured party’s
rights. §9-330(b). If the secured party’s interest is legended on the
chattel paper, the purchaser is viewed to have knowledge that the
purchase will violate the secured party’s rights. §9-330(f).
“Merely as Proceeds.” An ordinary course new value
purchaser of chattel paper who takes possession of tangible chattel
paper or control of electronic chattel paper in good faith will have
priority over a security interest in the chattel paper claimed "merely
as proceeds" of inventory by an existing secured party who has
perfected its security interest by filing, even if the purchaser knows
of the security interest, so long as the secured party’s interest is not
legended on the chattel paper. §9-330(a). For what constitutes
“merely as proceeds” chattel paper, see PEB Commentary No. 8.
“New Value.” Article 9 defines “new value,” with one
exception, to require additional monetary or other specific
consideration. §9-102(a)(57). The one exception is where an
inventory secured party, by taking possession of tangible chattel
paper or control of electronic chattel paper that is proceeds of its
inventory collateral, would qualify for priority under §9-330(a) or (b)
but for its failure to provide “new value.” In that situation, the
inventory secured party need not make an additional advance for
value previously given by it to constitute “new value” under §9-
330(a) or (b). §9-330(e).
Investment Property. A security interest in investment property
perfected by control is superior to a security interest in the same
investment property perfected by filing, even if control occurs after the
time of filing. §9-328(1). If competing security interests are each perfected
by control, they rank in priority of the time of obtaining control. §9-328(2).
Even so, a security interest perfected by control in favor of the debtor's
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securities intermediary has priority over a security interest perfected by
filing or other control. §9-328(3). A secured party's possession by
agreement of a security certificate in registered form, without any
necessary indorsements, results in the secured party's security interest in
the certificated security being superior to another secured party's security
interest in the certificated security perfected by filing. §9-328(5). Where
investment property collateral is transferred to a person protected under
UCC Article 8’s adverse claim cutoff rules, the transferee remains
protected under UCC Article 8. §9-331(b).
Deposit Accounts. A security interest in a deposit account perfected
by control is superior to a security interest in the deposit account perfected
by another method (e.g., in the case where a security interest in original
collateral, other than the deposit account, was perfected and the secured
party holding that security interest has an automatically perfected
security interest in the deposit account as proceeds of the original
collateral). §9-327(1). If competing security interests are each perfected by
control, they rank in priority of the time of obtaining control. §9-327(2).
But a security interest perfected by control in favor of the debtor's
depositary bank, and the depositary bank’s right of recoupment or set-off,
are superior to a security interest of a competing secured party perfected
by control or another method unless the competing secured party obtained
perfection by control by becoming the depositary bank’s customer on the
deposit account. §§9-327(3) and (4) and 9-340. A transferee of funds from
a deposit account in which the secured party has a security interest takes
free of the secured party’s security interest unless the transferee acts in
collusion with the debtor in violating the rights of the secured party. §9-
332(b).
Letter-of-Credit Rights. A security interest in a letter-of-credit right
perfected by control is superior to a security interest in a letter-of-credit
right perfected automatically as a supporting obligation. §9-329(1). If
competing security interests in the letter-of-credit right are each perfected
by control, they rank in priority of the time of obtaining control. §9-329(2).
A security interest in a letter-of-credit right is subordinate to the rights of
a transferee beneficiary or nominated person under §5-114. §9-329(1).
Although a secured party may become a transferee of a letter of credit, its
rights as transferee will be derived from UCC Article 5 and letter of credit
practice. See §9-109(c)(4) and Official Comments 3 and 4 to §9-329.
Claimants as to Proceeds.
Definition. Proceeds are whatever is received upon the sale,
exchange or other disposition or collection of collateral. §9-
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102(a)(64). Investment property distributions, partnership and
limited liability company interest distributions, rentals for the lease
of goods, and licensing royalties are all proceeds of the underlying
collateral. Claims arising out of the loss, nonconformity or
interference with the collateral are also proceeds. §9-102(a)(64).
Attachment. Upon the sale, exchange or other disposition or
collection of collateral, a secured party's security interest continues
in any “identifiable” proceeds. §§9-203(f) and 9-315(a)(2). Common
law tracing rules, such as, for example, the “lowest intermediate
balance” test when cash proceeds are commingled with other funds
in a deposit account, may be used to determine what proceeds are
identifiable. §9-315(b)(2); see Official Comment 3 to §9-315.
Perfection. The perfection of the secured party’s security
interest in proceeds continues for a period of 20 days. Unless the
proceeds are identifiable cash proceeds, the secured party may be
required to take additional steps during that 20-day period to
continue the perfection of its security interest beyond the 20-day
period. §§9-315(c) and (d).
Priority Generally. A secured party's priority as to its
security interest in the proceeds will usually date from the time of
the secured party's priority as to its security interest in the original
collateral for the purposes of applying the first-to-file-or-perfect
priority rule. §9-322(b)(1). But an inventory purchase-money
secured party entitled to priority over an earlier filed secured party
has a priority security interest in proceeds of the inventory sold or
otherwise disposed of only in limited circumstances:
• if the proceeds are identifiable cash proceeds received by the
debtor on or before delivery of the inventory to the buyer,
• if the proceeds are instruments, chattel paper or proceeds of the
chattel paper to which the purchase-money secured party,
typically by taking possession of the instrument or chattel paper,
is entitled to priority under §9-330, or
• if the purchase-money security interest is in farm products
livestock.
§§9-324(a), (b) and (d). Moreover, a transferee of money (see §1-
201(24) defining “money”) will take free of the interest of a secured
party claiming the money as proceeds unless the transferee has
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acted in collusion with the debtor in violating the rights of the
secured party. §9-332(a).
Priority Where Certain Original Collateral has Priority under
a Non-temporal Perfection Rule. As discussed above, a perfected
possessory or control security interest in a deposit account,
investment property, a letter-of-credit right, chattel paper, an
instrument or a negotiable document may have priority over a
security interest perfected by an earlier filing. In these cases, the
secured party with priority as to the original collateral and who has
a perfected security interest in the proceeds also has priority in the
proceeds if the proceeds are cash proceeds or are of the same type as
the original collateral, and, in the case of proceeds that are proceeds
of proceeds, any intervening proceeds are cash proceeds, are of the
same type as the original collateral, or are an account relating to the
collateral. §9-322(c). In addition, under certain circumstances,
priority in the proceeds is based upon the first to file rather than
under the “first-to-file-or perfect” priority rule. Those circumstances
arise where:
• each secured party has a perfected security interest in a deposit
account, investment property, a letter-of-credit right, chattel
paper, an instrument or a negotiable document perfected by a
method other than filing, and
• the proceeds are not cash proceeds or a deposit account,
investment property, a letter-of-credit right, chattel paper, an
instrument or a negotiable document. §9-322(d).
Otherwise, the “first-to-file-or-perfect” priority rule applies as to the
proceeds. See Official Comment 9 to §9-322.
Returned or Repossessed Goods. As Official Comments 9 to 11
to §9-330 explain, Article 9 treats returned or repossessed goods as
proceeds of the accounts, chattel paper or other payment rights
created when the goods were sold. Moreover, if a chattel paper
purchaser has priority over a secured party claiming a security
interest in the debtor’s inventory, the chattel paper purchaser has
priority over the inventory secured party on returned or repossessed
goods arising from the chattel paper. §9-330(c)(2).
Agricultural Lien Proceeds. Article 9 does not address
proceeds of an agricultural lien. Article 9 leaves to other law,
presumably the statute under which the agricultural lien is created,
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whether the agricultural lien extends to proceeds and, if so, whether
the agricultural lien in proceeds is perfected and what priority it has
over a competing claimant. See Official Comment 9 to §9-315.
Statutory and Agricultural Liens. A possessory lien on goods for
services and materials furnished in the ordinary course given by statute or
common law has priority over a secured party's security interest in the
goods unless the lien is given by statute and the statute provides
otherwise. §9-333. If the lien is an agricultural lien, the general Article 9
priority rules apply unless the agricultural lien is given by statute and the
statute provides otherwise. §9-322(g); see Official Comment 12 to §9-322.
Unpaid Sellers. An unpaid seller that has not taken a perfected
purchase-money security interest entitled to priority in goods sold to a
debtor will not usually prevail over a secured party of the debtor holding a
perfected security interest in the goods acquired by the debtor. This is the
case even if the unpaid seller has a reclamation claim to the goods under
UCC Article 2. §§2-402(3)(a), 2-403(4), 2-702(3), 1-201(29) and 1-201(30).
But an unpaid seller that retains possession of the goods that it sells to the
debtor will have priority over a secured party of the debtor holding a
perfected security interest in goods acquired by the debtor. §9-110.
Real Estate Claimants as to Fixtures. A security interest in fixtures
may be perfected by a regular Article 9 filing as to the goods or by a fixture
filing (see §9-102(a)(40) defining “fixture filing”) filed at the office in the
jurisdiction where real estate mortgages are recorded, and which provides
that it is being filed in the real estate records. §§9-334(e)(3) and 9-
501(a)(1) and (2). A fixture filing made before the interest of record of a
competing real estate claimant is recorded will generally enable the
secured party claiming a security interest in the fixtures to prevail over
the real estate claimant if the secured party would have prevailed over the
real estate claimant's predecessor in interest. §9-334(e)(1). A purchase-
money security interest in goods which become fixtures will generally
prevail over an existing interest of record of a competing real estate
claimant if a fixture filing is made as to the goods within 20 days after the
goods become fixtures. §9-334(d). A fixture security interest will,
however, often be subordinate to the construction mortgage of a
construction mortgagee where the goods become fixtures before completion
of construction. §9-334(h). Even so, a security interest in certain readily
removable goods perfected before the goods become fixtures has priority
over a competing real estate claimant in the goods, including a
construction mortgagee. §9-334(e)(2); see §9-334(h). In addition, a secured
party with a security interest in a manufactured home has priority over a
competing real estate claimant if the security interest in the manufactured
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home was perfected in a manufactured-home transaction under an
applicable certificate of title statute. §9-334(e)(4); see §§9-102(a)(53) and
(54) defining “manufactured home” and “manufactured-home transaction”
respectively.
Crops. A perfected security interest in crops has priority over the
interest of an owner or mortgagee of the real estate on which the crops are
grown if the debtor is the owner or is in possession of the real estate. §9-
334(i).
Accessions. Article 9 generally leaves to the other priority rules set
forth in part 3 of Article 9 the resolution for determining the priority
between competing secured parties holding security interests in goods
which are accessions (see §9-102(a)(1) defining “accession”), including the
priority dispute between a security party holding a security interest in an
accession and a secured party holding a security interest in the whole of
the goods. See Official Comment 6 to §9-335. However, a security interest
in an accession is junior to a security interest in the whole perfected by
compliance with a certificate of title statute. §9-335(d). For example, in
the event that a debtor grants to a secured party a security interest in a
motor vehicle perfected by notation of the secured party’s interest on the
motor vehicle’s certificate of title and the debtor also grants to a seller of
tires to the debtor a security interest in the tires perfected automatically or
by filing, the motor vehicle secured party will prevail as to the tires if the
tires become accessions to the motor vehicle. See Official Comment 7 to §9-
336.
Commingled Goods. If goods in which one secured party has a
perfected security interest are commingled with other goods in which
another secured party has a perfected security interest, if neither secured
party otherwise has a prior security interest in the other’s goods, and if the
identity of each secured party’s collateral is lost in a product or mass, then
each security party’s security interest attaches to the product or mass. §9-
336(d). Their priority then ranks equally in accordance with a formula by
which each secured party is allocated the proportion of the product or mass
which the value of that secured party’s collateral bore to the sum of the
values of both parties’ collateral at the time that the collateral became
commingled. §9-336(f)(2).
Filing Office Records. Although the filing of a financing statement
that is improperly rejected by the filing office is effective under §9-520(c)’s
“tender rule,” nevertheless the security interest is subordinate to the
interest of a subsequent secured party or other purchaser giving value in
reliance upon the clean record in the filing office. §9-516(d). In addition, a
secured party may, inadvertently or otherwise, file a financing statement
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containing information, required by §9-516(b)(5), that is incorrect. For
example, the secured party may incorrectly state in the financing
statement the type of organization or mailing address of the debtor. In
such a case, although the secured party’s security interest may be
perfected by the filing, the secured party’s security interest is subordinate
to a later perfected secured party, and a purchaser, other than a secured
party, of the collateral takes free of the earlier secured party’s security
interest, if the later secured party or other purchaser gives value in
reliance upon the incorrect information. §9-338.
Creditors Senior by Contractual Subordination. Any secured party
may contractually subordinate its security interest to a secured party or
other person whose interest would not otherwise have priority. §9-339.
Production-Money Secured Parties (Optional). Article 9 contains an
optional set of model provisions for those jurisdictions that wish to provide
a priority security interest, referred to as a production-money security
interest, for extenders of new credit enabling a debtor to produce crops if
the proceeds of the credit are in fact used for the production of the crops.
These provisions, set forth in Appendix II to Article 9, are analogous to the
purchase-money security interest provisions for inventory contained in
§§9-103 and 9-324. In the event that a jurisdiction enacts the production-
money security interest provisions, a holder of a production-money security
interest in crops will prevail over an earlier filed secured party claiming a
non-production-money security interest in the crops. Model §9-324A(a). If
the secured party holds both a production-money security interest and an
agricultural lien on the crops, the priority rules applicable to the
agricultural lien govern. Model §9-324A(e).
VI. CERTAIN THIRD PARTY RIGHTS
Rights of Account Debtors.
Definition. An account debtor is someone obligated on an
account, chattel paper or general intangible. But an obligor on a
negotiable instrument is not an account debtor, even though the
negotiable instrument is otherwise part of chattel paper. §9-
102(a)(3).
Account Debtor Discharge. An account debtor is obligated to
pay the assignee of an account, chattel paper or general intangible
when the account debtor is notified of the assignment and that
payments are to be made to the assignee. The account debtor is
permitted to request the assignee to exhibit reasonable evidence
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that the assignment has been made; if the assignee fails to provide
that evidence, the account debtor may continue to pay the assignor.
§9-406(c).
Claims and Set-Offs. Where a secured party has a security
interest in an account, chattel paper or general intangible arising
under a contract between the debtor and the account debtor, the
account debtor may assert a claim or defense against the secured
party arising under that contract. §9-404(a)(1). The account debtor
may also assert a claim or defense arising with respect to any other
obligation of the debtor to the account debtor except for claims or
defenses accruing on such other obligations after the account debtor
has been notified of the security interest. §9-404(a)(2). The secured
party, however, is not generally subject to affirmative contract or
tort liability to the account debtor merely because of the existence of
the security interest. §9-402. Moreover, in a commercial
transaction a claim or defense of an account debtor may be asserted
only to reduce the amount owed; it may not be asserted
affirmatively against the secured party. §9-404(b). Nevertheless,
the rules of §9-404 are subject to any contrary consumer law rule.
§9-404(c). A consumer account debtor has the benefit of the notice
required by Federal Trade Commission Rule 433, 16 C.F.R. Part 433
(the so-called “FTC Holder in Due Course Waiver”) to be stated on
the evidence of an account or general intangible or upon chattel
paper even if the notice is not so stated. §9-404(d). The obligations
of an insurer under a health-care-insurance receivable are governed
by other law. §9-404(e).
Agreements Not to Assert Claims or Defenses. Subject to any
contrary consumer law in a consumer transaction, an account debtor
may agree generally not to assert personal claims or defenses
against an assignee. §9-403. But the rules of §9-403 are subject to
any contrary consumer law rule. §9-403(e). A consumer account
debtor has the benefit of the notice of the FTC Holder in Due Course
Waiver required to be stated on the evidence of an account or
general intangible or upon chattel paper even if the notice is not so
stated. §9-403(d). The provisions of §9-403 are otherwise a “safe
harbor,” i.e., they are without prejudice to other circumstances
where such agreements are effective under other law. §9-403(f).
Anti-assignment Clauses. Article 9 renders ineffective a
clause restricting the creation or enforcement of a security interest
in an account or chattel paper, or, if it secures an obligation, a
promissory note or a payment intangible. §§9-406(d) and 9-407.
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Article 9 also renders ineffective a rule of law that would prevent
the attachment, perfection or enforcement of a security interest in
an account or chattel paper. §9-406(f). Moreover, Article 9 renders
ineffective a clause in any promissory note or payment intangible, in
the case of a sale of the promissory note or payment intangible, or in
any other general intangible, as well as any rule of law, relating to a
promissory note or payment or other general intangible, that
prevents a security interest from attaching and becoming perfected,
so long as the rights of the account debtor or other party favored by
the anti-assignment clause or rule of law are not disturbed. A
security interest in such a promissory note or payment or other
general intangible may attach and be perfected notwithstanding an
anti-assignment clause or rule of law restricting assignment, but the
secured party is not entitled to enforce the security interest without,
if so permitted under other law, the consent of the account debtor or
other party favored by the anti-assignment clause or rule of law. §9-
408. For purposes of §9-408, an assignment of a health-care-
insurance receivable is treated as if it were a general intangible
rather than an account governed by §9-406. §§9-406(i) and 9-408.
Persons Obligated on Instruments. Under UCC Article 3, a person
obligated on a negotiable instrument, such as a maker or indorser, when
notified to pay a transferee of the instrument, may require the transferee
to exhibit the instrument in order to demonstrate that the transferee is the
person entitled to enforce the instrument. §§3-501(b)(2) and 3-602(a).
Article 9 does not change this rule, nor does it address whether a non-
negotiable instrument must be exhibited by the transferee as a condition
to payment by the obligated person.
Securities Intermediaries. Article 9 does not affect the rule in UCC
Article 8 that a securities intermediary has no obligation to enter into a
control agreement with a secured party claiming a security interest in a
securities account, even if the debtor entitlement holder so requests. §8-
106(g).
Depositary Banks. Unless a secured party has control over a deposit
account, the depositary bank has no obligation to deal with the secured
party with respect to the deposit account. §9-341. A depositary bank has
no obligation to enter into a control agreement with the secured party
relating to the deposit account even if the debtor customer so requests. §9-
342.
Letter of Credit Issuers. A clause in a letter of credit restricting its
transfer is ineffective to prevent a security interest in a letter-of-credit
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right from attaching and being perfected as a supporting obligation, so
long as the rights of the issuer or any nominated person are not disturbed.
§9-409.
VII. CERTAIN DUTIES OF SECURED PARTY
Duty of Reasonable Care When Collateral is in Possession or
Control of Secured Party. A secured party generally has an obligation
under Article 9 to use reasonable care to preserve collateral in the secured
party’s possession. Unless otherwise agreed with the debtor, the secured
party must take reasonable steps to preserve rights of the debtor in
instruments and chattel paper in the secured party’s possession against
prior parties. §9-207(a). The secured party is entitled to charge the
collateral in its possession for the secured party’s reasonable expenses in
preserving the collateral. §9-207(b)(1). If the debtor agrees to the secured
party’s repledge of collateral in the secured party’s possession or control,
the debtor’s right of redemption as a claim against the secured party is
preserved even though a third party who took by repledge may have
gained superior rights in the collateral, whether by law or by agreement
with the debtor. §9-207(c)(3).; see Official Comments 5 and 6 to §9-207 and
Official Comment 3 to §9-314. The secured party’s duties under §9-207 do
not apply where the secured party is a buyer of accounts, chattel paper,
promissory notes or payment intangibles or is a consignor unless, in the
case of the duty of reasonable care, the buyer or consignor has recourse
against the debtor or a secondary obligor based upon a credit or other
default of the account debtor or other obligor on the collateral. §9-207(d).
Duty to Account. Article 9 permits a debtor to ask the secured party
to approve or correct the debtor’s statement as to the amount of secured
obligations and the identity of collateral. §§9-210(a)(3) and (4) and (b)(2).
The secured party is required to respond within 14 days or risk liability to
the debtor for any loss to the debtor caused by the secured party’s failure
to respond. §§9-210(b) and 9-625(b) and (f). If the secured party has sold
its interest in the secured obligations and collateral, it must disclose the
name and address of the secured party’s successor, if known to the secured
party. §§9-210(d) and (e). The debtor has an additional right to request an
accounting of the unpaid secured obligations, with analogous provisions for
the timeliness of the secured party’s response, risk of the secured party’s
liability to the debtor for failure to respond, and required disclosure of any
known transferee of the unpaid secured obligations. §§9-210(a)(2), (b), and
(e) and 9-625(b) and (f).
Duty to Terminate or Release. Once the secured obligations have
been paid and the secured party has no further commitment to extend
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credit or otherwise give value, Article 9 requires the secured party to file a
termination statement, if the financing statement covers consumer goods,
and otherwise upon the debtor’s request to send to the debtor to file, or
itself file, a termination statement. If the secured party fails to do so in a
timely manner, it risks liability to the debtor for any loss to the debtor
caused by the secured party’s failure. §§9-513 and 9-625(b) and (e)(4).
Article 9 provides analogous provisions, once the secured obligations have
been paid and the secured party has no further commitment to extend
credit or otherwise give value, for the secured party to release control of
collateral and to release account debtors from any obligations to make
payments to the secured party. §§9-208, 9-209 and 9-625(b) and (e)(1) and
(2).
VIII. CHOICE OF LAW
When it is necessary to determine whether a security interest has
attached, has or has not been perfected, or has priority over another
interest, it is necessary to ask which jurisdiction’s law applies. If a dispute
occurs in a particular forum in a UCC jurisdiction, the first step is to look
to the choice of law rules of the forum jurisdiction's UCC to determine
which jurisdiction’s laws the forum jurisdiction is required to apply.
Several concepts should be kept in mind: (1) the security agreement’s
choice of law provisions which govern the contractual agreement between
the debtor and the secured party, (2) the law which will govern whether
the security interest, even if enforceable by the secured party against the
debtor under the law of the jurisdiction chosen in the security agreement,
is perfected as against third parties, and (3) the law which will govern the
effect of perfection and non-perfection and the priority of the security
interest.
Contract Choice of Law. The governing law provision of the security
agreement will usually be respected by the forum jurisdiction for purposes
of determining the contractual rights and obligations of the debtor and the
secured party to the other as long as the secured transaction bears a
“reasonable relation” to the jurisdiction whose law was chosen. While the
rules in §1-301 found in the 2002 revision of Article 1 actually create, at
least in commercial transactions, a more flexible standard for parties to
chose a governing law provision, nevertheless most states, in enacting the
2002 revision of Article 1, have rejected the rules in §1-301 for the
“reasonable relationship” test found in former §1-105(1). Even so, under
both revised Article 1 and former Article 1, the secured party and the
debtor may not vary by their contract the mandatory choice of law rules in
Article 9, as discussed below, dealing with the perfection and priority of
security interests. §1-301(g); former §1-105(2).
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Perfection.
General Rule: Location of the Debtor. Except as provided
below, the local law of the jurisdiction where the debtor is located
governs whether or not perfection of a security interest has taken
place. §9-301(1). Given Article 9’s general choice of law rule based
upon the location of the debtor, Article 9 provides special rules to
determine that location.
Registered Organizations. A debtor may be a registered
organization, which is defined under Article 9 as an
organization (§1-201(25)) organized in a single State (which is
limited to jurisdictions in the United States and its territories
and possession; see §9-102(a)(76)) and for which the State
must maintain a public record showing the organization to
have been organized. §9-102(a)(70). A debtor which is a
registered organization is located in the jurisdiction of its
organization. §9-307(e). For example, if the debtor is a
corporation, limited liability company or limited partnership
organized under the laws of a particular state, the debtor is
located in that state. See Official Comment 11 to §9-102.
Other Debtors. A debtor which is not a registered
organization is located at his principal residence if the debtor
is an individual, at the debtor’s place of business if the debtor
is an organization that has only one place of business, or at
the debtor’s chief executive office if the debtor is an
organization that has more than one place of business. §9-
307(b).
Foreign Debtors. If the debtor is located in a
jurisdiction, outside of the United States, which does not
provide for a public filing system generally to enable a
secured party to prevail over a subsequent lien creditor, then
the debtor is deemed to be located in the District of Columbia.
§9-307(c).
Special Rules. Special rules apply to determine the
locations of federal registered organizations, certain foreign
air carriers, and bank branches and agencies. See §§9-307(f),
(h), (i) and (j).
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Possessory Security Interests. The local law of the jurisdiction
where the collateral is located governs whether or not perfection of a
security interest by possession has taken place. §9-301(2).
Fixtures. If perfection of a security interest in fixtures is
claimed by a fixture filing, the local law of the jurisdiction where the
fixtures are located governs whether or not perfection has taken
place. §9-301(3)(A).
Timber to be Cut. The local law of the jurisdiction where the
timber is located governs whether or not perfection of a security
interest in timber to be cut has taken place. §9-301(3)(B).
As-extracted Collateral. The local law of the jurisdiction
where the wellhead or minehead is located governs whether or not
perfection of a security interest in as-extracted collateral has taken
place. §9-301(4).
Titled Goods. In general, where ownership of goods is
evidenced by a certificate of title issued by a particular jurisdiction
and, for perfection to take place or as a result of perfection, the
secured party's security interest needs to be noted on the certificate
of title, then the local law of the issuing jurisdiction governs
whether or not perfection has taken place. §9-303(c). However, the
choice-of-law rule for determining whether or not a security interest
in titled goods, which are inventory held for sale or lease by a person
that is in the business of selling goods of that kind, has been
perfected is that of the debtor’s location under §9-301. That is
because under §9-311(d) titled goods which are inventory held for
sale or lease by a person that is in the business of selling goods of
that kind are treated as ordinary goods for purposes of perfection; a
security interest in titled goods, which are inventory held for sale or
lease by a person that is in the business of selling goods of that kind,
need not be noted on the certificate of title for the goods. See
Official Comment 5 to §9-303.
Agricultural Liens. The local law of the jurisdiction where the
relevant farm products are located governs whether perfection of an
agricultural lien on the farm products has taken place. §9-302.
Investment Property. The local law of the jurisdiction in
which the debtor is located governs whether or not a security
interest in investment property has been perfected by filing. §9-
305(c)(1). If perfection is not claimed by filing, :
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• the local law where the security certificate is located governs
whether or not perfection of a security interest in a certificated
security has taken place,
• the local law of the issuer’s jurisdiction (see §8-110(d) for
applicable rules) governs whether or not perfection of a security
interest in an uncertificated security has taken place, and
• the local law of the securities intermediary’s jurisdiction (see §8-
110(e) for applicable rules) or commodity intermediary’s
jurisdiction (see §9-305(b) for applicable rules) governs whether
or not perfection of a security interest in a security entitlement,
securities account or commodity account has taken place.
§9-305(a).
Deposit Accounts. The local law of the jurisdiction of the
depositary bank governs whether or not perfection of a security
interest in a deposit account has taken place. §9-304(a). Article 9
contains rules for determining where the depositary bank is located,
closely following the rules for determining the location of a
securities intermediary. See §9-304(b).
Letter-of-Credit Rights. The law of the jurisdiction of the
issuer or nominated person generally determines whether or not
perfection of a security interest in a letter-of-credit right, other than
a letter-of-credit right which is claimed merely as a supporting
obligation, has taken place. The issuer’s or nominated person’s
jurisdiction is determined under §5-116. §9-306. However, if the
issuer’s or nominated person’s jurisdiction is not a State (see §9-
102(a)(76)), then the law of the debtor’s location determines whether
or not the security interest has been perfected. See Official
Comments 2 and 3 to §9-306.
Effect of Perfection or Non-Perfection and Priority. To determine
the effect of perfection or non-perfection or priority, Article 9 at times
requires the forum jurisdiction to look to the local law of a jurisdiction that
is different from the jurisdiction whose law determines whether or not
perfection has taken place:
Tangible Negotiable Documents, Goods, Instruments, Money
or Tangible Chattel Paper. In the case of tangible negotiable
documents, goods, instruments, money or tangible chattel paper, the
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jurisdiction where the collateral is located is the jurisdiction whose
law governs the effect of perfection or non-perfection and priority.
§9-301(3)(C).
Certificated Securities. In the case of certificated securities,
the jurisdiction whose law governs the effect of perfection or non-
perfection and priority is the jurisdiction where the security
certificate is located. §9-305(a)(1).
Uncertificated Securities. In the case of uncertificated
securities, the jurisdiction whose law governs the effect of perfection
or non-perfection and priority is the jurisdiction of the location of the
issuer. §9-305(a)(2).
Security Entitlements, Commodity Contracts, Securities
Accounts and Commodity Accounts. In the case of security
entitlements, commodity contracts, securities accounts and
commodity accounts, the jurisdiction whose law governs the effect of
perfection or non-perfection and priority is the jurisdiction where
securities intermediary or commodity intermediary is located. §§9-
305(a)(3) and (4).
Other Personal Property. Otherwise, the jurisdiction whose
law governs whether or not perfection has taken place also governs
the effect of perfection or non-perfection and priority.
IX. POST-CLOSING CHANGES
Change of Debtor’s Name. If a debtor changes its name so that an
existing financing statement becomes "seriously misleading," the secured
party must file an amendment to the existing financing statement to
reflect the debtor's new name within four months following the name
change, or the financing statement will not be effective to perfect the
security interest in assets of the debtor acquired after that four-month
period. §9-507(c).
Change of Debtor's Location. If a debtor which is not a registered
organization changes its location to another jurisdiction, the secured party
must file a new financing statement in the new jurisdiction within four
months following the change (or before the financing statement in the
original jurisdiction lapses, if earlier) in order to maintain the perfection of
its security interest by filing in collateral which must be perfected by filing
where the debtor is located. §9-316(a). A debtor which is a registered
organization will not typically be able to change its location. For example,
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a dissolved corporation will be considered as located in the jurisdiction in
which it was organized prior to the dissolution See §9-307(g). Moreover,
the attachment, perfection and priority of a security interest in the assets
of a corporate debtor which reincorporates will likely be analyzed as if the
new corporation were a new debtor under the “double debtor” provisions
discussed below.
Double Debtor Issues. Article 9 addresses a number of “double
debtor” issues.
Transfer of Collateral to a Person who Becomes a Debtor. If
collateral in which a secured party has a security interest perfected
by filing under the law of the jurisdiction of the location of the
debtor is transferred to a person who thereby becomes a debtor (see
§9-102(28)(A) defining “debtor”), the filing remains effective to
continue the perfection of the security interest. §9-507(a). But, if
the transferee debtor is located in a jurisdiction different from that
of the transferor debtor, the secured party has a period of one year
(or until the expiration of any earlier period in which the perfection
of the security interest would lapse under the law of the transferor
debtor’s jurisdiction) to perfect the security interest under the law of
the jurisdiction of the location of the transferee debtor in order to
maintain the perfection of its security interest beyond that period.
§9-316(a)(3); see §9-509(c) for the secured party’s authority to file a
financing statement in the new jurisdiction. If the security interest
is not perfected in that jurisdiction during that period, it is deemed
never to have been perfected against a purchaser for value. §9-
316(b).
Priority Dispute Between Secured Party of Transferor and
Secured Party of Transferee as to Transferred Collateral. A debtor
may transfer collateral subject to a perfected security interest to a
transferee who creates a security interest in favor of the transferee’s
secured party. In that case, the “first-to-file-or-perfect” priority rule
is called off, and the transferor debtor’s secured party will prevail as
to the transferred collateral so long as its security interest in the
transferred collateral remains perfected. §9-325.
Priority Dispute Between Secured Party of Transferor and
Secured Party of Transferee When Transferee Becomes Bound by
Transferor’s Security Agreement.
New Debtor. A debtor, whose assets are subject to a
security interest under a security agreement in favor of its
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secured party, may merge with another organization, or
the debtor may otherwise transfer its assets or business to
another person. In such a case, the survivor of the merger
or other transferee may become bound by the original
debtor’s security agreement, both for collateral existing at
the time when the transferee becomes bound and, if
applicable under the security agreement, after-acquired
collateral in either of two cases:
(1) By operation of law other than Article 9
or by contract, the security agreement of the
transferor becomes effective to create a security
interest in property of the transferee, or
(2) By operation of law other than Article 9
or by contract, the transferee becomes generally
obligated for the obligations of the transferor,
including the secured obligations of the transferor,
and acquires all or substantially all of the assets of
the transferor.
§9-203(d). Article 9 refers to the transferee in either of
such cases as a new debtor. §9-102(a)(56).
Attachment. A new debtor, by definition, becomes
bound by the original debtor’s security agreement. §§9-
102(a)(56) and 9-203(d). Accordingly, the security interest of
the original debtor’s secured party in the collateral existing at
the time of the transaction and, if applicable under the
security agreement, after-acquired collateral attaches in the
hands of the new debtor. §9-203(e).
Perfection. A filing that would have been effective to
perfect a security interest in the collateral of original debtor’s
secured party under the security agreement had the original
debtor not effected the transaction with the new debtor is
generally effective to perfect the secured party’s security
interest in that collateral, both existing and after-acquired, in
the hands of the new debtor. §9-508(a). But there are three
important exceptions.
Continuation of Perfection as to Transferred
Assets if the New Debtor is Located in a New
Jurisdiction. If collateral in which the original debtor’s
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secured party has a security interest that is perfected
under the law of the jurisdiction of the location of the
original debtor but the new debtor is located in another
jurisdiction, the secured party has a period of one year
(or the expiration of any earlier period in which the
perfection of the security interest would lapse under
the law of the original debtor’s jurisdiction) to perfect
the security interest under the law of the jurisdiction of
the location of the new debtor in order to maintain the
perfection of its security interest. §9-316(a)(3); see §9-
509(c) for the secured party’s authority to file a
financing statement in the new debtor’s jurisdiction. If
the security interest is not perfected in that jurisdiction
during that period, it is deemed never to have been
perfected against a purchaser for value. §9-316(b).
Perfection as to After-acquired Assets if the New
Debtor is Located in a New Jurisdiction. If the new
debtor is located in a jurisdiction different from that of
the original debtor, the original debtor’s secured party
must perfect its security interest under the law of the
new debtor’s jurisdiction in order for the original
secured party’s security interest to be perfected in the
new debtor’s collateral acquired after the new debtor
became bound by the original debtor’s security
agreement. See §9-316(a)(3) which provides a one-year
grace period to continue perfection in a new debtor’s
location only for collateral existing at the time that the
new debtor becomes bound under §9-203(d); for
authorization for the original debtor’s secured party to
file a financing statement against the new debtor, see
§9-509(b). The secured party of the original debtor has
no grace period to perfect its security interest in
collateral acquired after the new debtor became bound
by the original debtor’s security agreement, if the
location of the new debtor is in a jurisdiction different
from that of the original debtor.
Perfection as to After-acquired Assets if the New
Debtor is Located in Same Jurisdiction but its Name is
Seriously Misleading. If the original debtor’s secured
party has perfected its security interest in the
collateral of the original debtor by filing in the
jurisdiction of the location of the original debtor and
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the new debtor is located in the same jurisdiction, but
the name of the new debtor is seriously misleading
when compared to the name of the original debtor, the
original debtor’s secured party has a period of four
months from the time that the new debtor became
bound by the original debtor’s security agreement to
file a financing statement against the new debtor. If
the original debtor’s secured party fails to file a
financing statement against the new debtor within that
four month period, its security interest in collateral
acquired by the new debtor after that four-month
period is unperfected by filing. §9-508; see §9-509(b) for
the secured party’s authorization to file the financing
statement.
Priority as to Existing Collateral. If the original
debtor’s secured party has a perfected security interest in the
transferred collateral, the “first-to-file-or-perfect” priority rule
is called off, and the original debtor’s secured party will
prevail over the secured party of the new debtor as to the
transferred collateral so long as the original debtor’s secured
party’s security interest in the transferred collateral remains
perfected. §9-325.
Priority as to After-Acquired Collateral. If the original
debtor’s secured party needs to rely upon perfection by filing
against the original debtor to claim perfection of its security
interest in collateral acquired by the new debtor after the new
debtor became bound by the original debtor’s security
agreement, the original debtor’s secured party’s security
interest in the after-acquired collateral is junior to a security
interest created by the new debtor in favor of the new debtor’s
secured party. §9-326.
Titled Goods. A secured party may have perfected its security
interest in titled goods by having its security interest noted as lienholder
on the certificate of title for the goods. If the debtor obtains a certificate of
title for the goods in a new jurisdiction, and the secured party’s security
interest is not noted on the new certificate of title, the secured party’s
security interest continues perfected, despite the coverage under the new
certificate of title, so long as the security interest would have remained
perfected if the goods had not been covered by the new certificate of title.
§9-316(d). However, that security interest becomes “unperfected” as
against a purchaser of the goods for value unless, during the four-month
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period commencing from the time of coverage under the new certificate of
title, the secured party’s security interest is noted on the new certificate of
title or the secured party has repossessed the goods. §9-316(e). Absent
perfection by either method within that four-month period, a buyer may
take free of the security interest under §9-317(b). See Official Comment 5
to §9-316. Even inside of the four-month period, an innocent buyer, other
than a dealer, that buys in reliance upon a new “clean” certificate of title
will take free of the security interest. §9-337(1). Likewise, even inside of
the four-month period, an innocent secured party that extends credit in
reliance upon a new “clean” certificate of title, takes a security interest in
the titled goods and perfects the security interest under the issuing state’s
certificate of title statute, has priority over the earlier security interest.
§9-337(2).
Proceeds. Steps may be required to be taken by a secured party to
maintain the perfection of its security interest in proceeds. §9-315(d).
X. ENFORCEMENT
Article 9 sets forth various rights and remedies of a secured party
with respect to the collateral upon the debtor’s default. Article 9 also
requires that the secured party proceed to enforce its security interest in
ways which give minimum protections to the debtor and certain other
interested parties.
Default. A secured party has rights and remedies under part 6 of
Article 9 upon default by a debtor. The remedies of a secured party are not
exclusive, and the secured party may resort to any one remedy without
losing rights under the others. §9-601(c). What constitutes a "default" is
not defined in Article 9 and is determined by the terms of the security
agreement or other agreements between the debtor and the secured party.
Events of default contained in loan agreements, promissory notes and
security agreements typically include the debtor's nonpayment,
misrepresentations, failure to comply with covenants, cross-defaults and
the debtor's bankruptcy. A default occurs under an agricultural lien when
the secured party has the right to enforce the lien. §9-606.
Secured Party's Options after Default. Upon the debtor's default,
the secured party may take possession of collateral, but only if doing so
will not result in a breach of the peace. §§9-609(a) and (b). The secured
party may collect the collateral from account debtors and other persons
obligated on collateral. §9-607. Also, the secured party may, subject to
certain debtor and third party protections, either sell or otherwise dispose
of the collateral and apply the proceeds to the satisfaction of the secured
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debt or retain the collateral in satisfaction of the secured debt. §§9-610
and 9-620. In addition, the secured party may judicially foreclose on the
collateral under local judicial foreclosure procedures. §9-601(f). Below is a
fuller discussion of the secured party’s options of collection, disposition and
retention relating to the collateral.
Collection. When agreed between the debtor and the secured
party but in any event upon the debtor’s default, the secured party
may collect payments directly from account debtors and other
persons obligated on collateral by notifying the account debtors and
obligated persons to pay the secured party directly. §9-607(a). If
there is credit recourse to the debtor (as in the case of a full or
partial recourse loan to the debtor), the collection must be made in a
commercially reasonable manner. §9-607(c). Article 9 provides a
mechanism by which a secured party that is an assignee of an
obligation secured by a real estate mortgage may become the
mortgagee of record upon the debtor’s default in order to foreclose
nonjudicially on the mortgage. See §9-607(b). The secured party
may receive and apply against the secured debt funds in a deposit
account over which the secured party has control. §§9-607(a)(4) and
(5). Furthermore, the secured party may deduct the secured party’s
collection expenses from collections made by it in a commercially
reasonable manner. §9-607(d).
Disposition. The secured party may sell or otherwise dispose
of the collateral by public or private sale and apply the proceeds of
the disposition towards the satisfaction of the secured debt. The
following discussion highlights the requirement of the commercial
reasonableness of the disposition, the requirement of notification of
the disposition, provisions of Article 9 relating to the disposition
itself, and a special provision that adjusts a secured party’s
deficiency claim in the event of a disposition to an insider for low
value.
Requirement of Commercial Reasonableness. Every
aspect of the disposition must be commercially reasonable.
§§9-610 and 9-615. The obligation of the secured party to
exercise commercial reasonableness may not be waived by the
debtor or an obligor. §9-602(7).
Requirement of Notification of Disposition. Unless the
collateral is perishable or threatens to decline speedily in
value or is of a type customarily sold on a recognized market,
the secured party must send the debtor and certain other
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persons reasonable authenticated notification of the time and
place of any public disposition or reasonable authenticated
notification of the time after which any private disposition is
to take place. §§9-611, 9-612 and 9-613. The notification
must be given not only to the debtor and any secondary
obligor, but also to all persons who have given to the secured
party an authenticated notification of an interest in the
collateral and to all secured parties and other lienholders of
the collateral disclosed on a search of the proper filing office
within certain time parameters §§9-611(b), (c) and (e)). In a
commercial transaction, 10 days prior notification of
disposition is per se reasonable. §9-612(b). Article 9 also sets
forth “safe harbor” disposition notification forms in
commercial and consumer transactions. §§9-613 and 614.
The debtor or any secondary obligor may waive its right to
receive the disposition notice but only in an authenticated
agreement made after default. §9-624(a).
The Disposition Itself. The secured party may disclaim
or modify disposition warranties otherwise given to a
foreclosure transferee. §9-610(e). The secured party may
purchase the collateral at a public disposition. The secured
party may not purchase collateral at a private disposition
unless the collateral is of a kind customarily sold on a
recognized market or is the subject of standard price
quotations. §9-610(c). A secured party disposition generally
discharges all subordinate interests in the collateral. §9-
617(a). Furthermore, Article 9 provides for a title clearing
mechanism for the secured party to effect a transfer of record
title to titled collateral to the foreclosure purchaser of that
collateral. §9-619.
Insider Dispositions for Low Value. If a secured party,
a person related to a secured party (see §§9-102(a)(62) and
(63) defining "person related to" for individuals and
organizations, respectively) or a secondary obligor acquires
collateral at a foreclosure disposition and the amount of the
foreclosure proceeds so paid is significantly below the range of
proceeds that a complying disposition to an unrelated
purchaser would have brought, any deficiency calculation is
required to be readjusted to reflect a credit to the debtor for
the higher amount of any such disposition proceeds that
would have been paid to the secured party by such a
hypothetical unrelated purchaser. §9-615(f).
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Retention of Collateral in Satisfaction of the Secured Debt.
The secured party may under some circumstances retain the
collateral in total satisfaction or, in the case of a commercial
transaction, partial satisfaction of the secured debt. The following
discussion highlights certain limitations of the retention remedy,
the requirement that the secured party send to the debtor and
others an advance notice of the secured party’s proposal to retain
collateral, the effect of a person entitled to receive the proposal
objecting to the proposal, and the effect of acceptance of retention.
Limitations on Retention Remedy. If the collateral is
consumer goods, the secured party may not propose to retain
collateral which is not in the possession of the secured party.
Otherwise, a secured party may propose to retain any
collateral, whether tangible or intangible and even tangible
collateral that is at the time in the debtor’s possession. See
§9-620(a)(3). A secured party in a commercial transaction
may propose to retain collateral in partial satisfaction, rather
than total satisfaction, of the secured debt. In that case, the
debtor must, after default, affirmatively consent to the
retention. §9-620(c)(1). But in a consumer transaction, the
secured party may only propose to retain collateral in total
satisfaction of the secured debt. §9-620(g). Moreover, the
remedy of retaining the collateral in satisfaction of the
secured debt is not available for certain consumer goods
where a significant portion of the purchase price of the goods
or of the secured debt has already been paid. §9-620(e).
Requirement to Send a Proposal of Retention. The
secured party must send a proposal to retain the collateral
not only to the debtor but also to all persons who have given
to the secured party an authenticated notification of an
interest in the collateral and to all secured parties and other
lienholders of the collateral disclosed on a search of the proper
filing office. §9-621(a). If the secured party proposes to retain
the collateral in partial satisfaction of the secured debt, the
secured party must send the proposal to any secondary
obligor as well. §9-621(b). The debtor or a secondary obligor
may waive its right to receive a retention notice, or agree to
the secured party’s retention, but only after default. §§9-
602(10) and 9-620(c)(1).
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Effect of Objection to Retention. If the secured party
receives an objection from the debtor, a secondary obligor or
another secured party or lienholder entitled to notice and the
objection is received within 20 days after the notice was sent,
the secured party may not retain the collateral in satisfaction
of the secured debt. §§9-620(a) and (d).
Effect of Acceptance of Retention. Acceptance of
retention of the collateral generally discharges all subordinate
interests in the collateral. §9-622.
Application of Noncash Proceeds. In the event of the secured party’s
receipt of noncash proceeds (see §9-102(a)(58) defining "non-cash proceeds")
by collection or disposition of the collateral, the secured party may value
the noncash proceeds and apply them to the secured debt, but the secured
party must do so in a commercially reasonable manner. Alternatively,
unless the secured party’s failure so to value and apply the noncash
proceeds to the secured debt is commercially unreasonable, the secured
party may reduce and collect or dispose of the noncash proceeds, as
collateral, until the noncash proceeds have been converted to cash for
application of the secured debt. §§9-608(a)(3) and 9-615(c); see also Official
Comment 4 to §9-608 and Official Comment 3 to §9-615.
Surplus or Deficiency. If the collateral secures an obligation, unless
otherwise agreed, the secured party is to account to the debtor for any
surplus in the collection or disposition of collateral, and the debtor is liable
for a deficiency. In a secured transaction which is a sale of accounts,
chattel paper, promissory notes or payment intangibles, unless otherwise
agreed, the debtor is not entitled to a surplus, and the debtor is not liable
for a deficiency. §§9-608(b) and 9-615(e).
Redemption. The debtor may redeem the collateral by paying off the
secured debt any time before the secured party has disposed or is
contractually committed to dispose of the collateral or has retained the
collateral in satisfaction of the secured debt. §9-623. The debtor may
waive its right of redemption in a commercial transaction, but only after
default. §9-624(c).
Non-compliance. Article 9 provides that the secured party is
generally liable to the debtor for any loss caused by the secured party’s
failure to comply with the enforcement provisions of part 6 of Article 9. §9-
625(b). Article 9 adopts a rebuttable presumption rule for commercial
transactions where an improper foreclosure or other enforcement results in
a deficiency claim: in a commercial transaction, the value of the collateral
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is presumed to have equaled the entire secured debt (thus eliminating the
deficiency claim) unless the secured party is able to show otherwise. §9-
626(a)(3). Article 9 does not address which measure of damages should be
applied in a consumer transaction. A specific penalty, however, may be
imposed, regardless of any damages being shown, on a non-complying
secured party where the collateral is consumer goods. §9-625(c)(2). In
some circumstances, a secured party who does not comply with the
enforcement provisions of part 6 of Article 9, whether in a commercial or
consumer transaction, may be liable for statutory damages as well. §§9-
625(e)(5) and (6).
Status of Guarantors. A guarantor or other secondary obligor (see
§9-102(a)(71) defining "secondary obligor") of the secured obligations is
entitled to many of the same rights and protections as is the underlying
debtor. Article 9 requires disposition notifications to be given to
guarantors and other secondary obligors, and it provides that a guarantor
or other secondary obligor may not waive such notification unless the
waiver is given after default. §§9-611(c)(2) and 624(a). A secured party is
not, however, liable for failure to provide a disposition notification to a
guarantor or other secondary obligor unknown to the secured party. §§9-
628(a) and (b).
Certain Consumer Provisions. Notice given to a consumer debtor
ten days in advance of the secured party’s disposition of the collateral is
not per se a reasonable notice. §9-612(b). A secured party must, following
disposition of collateral, provide a consumer debtor with an explanation of
the calculation of any deficiency claim before making demand upon the
debtor for payment of that deficiency. §9-616. In a consumer transaction,
a secured party may not retain collateral that is in the possession of the
debtor and may not retain collateral in only partial satisfaction of the
secured debt. §§9-620(a)(3) and (g). A consumer debtor may not waive his
right of redemption, even after default. §9-624(c). Article 9 leaves the
courts to fashion an appropriate damage rule (e.g. rebuttable presumption,
absolute bar or offset) in the case of a secured party’s non-compliance with
part 6 of Article 9. §9-626(b).
Certain Exclusions. The enforcement provisions contained in part 6
of Article 9 do not apply to true consignors. Nor do these provisions apply
to buyers of accounts, chattel paper, promissory notes or payment
intangibles except for the buyer’s obligation to use commercial
reasonableness in the collection of collateral where the buyer has a right of
chargeback on uncollected collateral or full or limited credit recourse to the
debtor. §§9-601(g) and 9-607(c).
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XI. DEFINITION OF “GOOD FAITH”
Consistent with revisions to other UCC Articles, Article 9 has its
own definition of “good faith” as “honesty in fact and the observance of
reasonable commercial standards of fair dealing.” §9-102(a)(43)(italics
added).
XII. TRANSITION PROVISIONS
Part 7 of Article 9 contains provisions to assist in the transition from
former Article 9 to Article 9. These transition provisions are summarized
below.
Effective Date. In order to minimize choice of law issues arising on
the effective date of Article 9 in a particular jurisdiction, Article 9
established a uniform effective date of July 1, 2001. §9-701. Unless
otherwise provided in part 7 of Article 9, Article 9 applies, as of its effective
date, to all transactions within its scope, even if the transaction was
entered into prior to that date at a time when former Article 9 or other law
was applicable. §9-702(a).
Pre-Effective-Date Causes of Action. Article 9 does not affect causes
of action in litigation that was pending on Article 9’s effective date. §9-
702(c).
Pre-Effective-Date Collateral Description in Security Agreement.
Official Comment 3 to the §9-703 makes clear that, as a matter of
customary contract interpretation, former Article 9 terms used in a
collateral description in a security agreement executed prior to Article 9’s
effective date should not normally be interpreted as requiring, after Article
9’s effective date, that the terms be interpreted as if defined in Article 9.
Instead, the terms would normally be interpreted as they were defined in
former Article 9 when the security agreement was executed.
Pre-Effective-Date Security Interests Created Outside of Former
Article 9 but within Article 9. Unless otherwise provided in part 7 of
Article 9, a security interest in collateral outside of the scope of former
Article 9 but included within the scope of Article 9 remains valid under
Article 9 and may be enforced after Article 9’s effective date under Article
9 or under the law governing the transaction prior to Article 9’s effective
date. §9-702(b).
Pre-Effective-Date Security Interests Perfected under Former
Article 9. A security interest that was enforceable and perfected under
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former Article 9 or other law may or may not meet the requirements for
enforceability and perfection under Article 9.
Requirements Met under Article 9. A security interest that
was enforceable and perfected under former Article 9 or other law,
and for which the requirements for enforceability and perfection
were met under Article 9 on Article 9’s effective date, remains
enforceable and perfected under Article 9. §9-703(a).
Requirements not Met under Article 9: Generally. If the
security interest was enforceable and perfected under former Article
9 or other law, but the requirements for enforceability or perfection
are not met under Article 9 on Article 9’s effective date, the security
interest remains enforceable and, with one exception described
below for a security interest perfected by filing under former Article
9, remains perfected for a period of one year following Article 9’s
effective date. The security interest will no longer be enforceable,
and its perfection will lapse, if the requirements for enforceability
and perfection under Article 9 have not been satisfied by the end of
that one-year period. §9-703(b).
Requirements not Met under Article 9: Perfection by Filing
under Former Article 9. The one exception from the general rules
for the continuation, on and after Article 9’s effective date, of
perfection of a security interest perfected under former Article 9, but
not under Article 9, relates to a security interest perfected under
former Article 9 by filing. In the case of a security interest perfected
by filing under former Article 9, the one-year post-effective date
grace period in §9-703(b) for maintaining perfection under Article 9
does not apply. §9-703(b) (“Except as otherwise provided in Section
9-705”); see Official Comment 4 to §9-705. The maintenance of
perfection, on and after Article 9’s effective date, of a security
interest perfected by filing under former Article 9 is addressed
separately in §§9-705 and 9-706 as discussed below.
Pre-Effective-Date Unperfected Security Interests. A security
interest that is enforceable but is unperfected under former Article 9 or
other law may or may not meet the requirements for enforceability and
perfection under Article 9.
Enforceability of Unperfected Security Interest. An
unperfected security interest which was enforceable under former
Article 9 or other law, but for which the requirements for
enforceability are not met under Article 9 on Article 9’s effective
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date, remains enforceable for a period of one year following Article
9’s effective date. The security interest will no longer be enforceable
if the requirements for enforceability under Article 9 have not been
satisfied by the end of that one-year period. §§9-704(1) and (2).
Perfection of Unperfected Security Interest. A security interest
which was enforceable but unperfected under former Article 9 or
other law, and for which the requirements for perfection are not met
under Article 9 on Article 9’s effective date, does not achieve
perfection under Article 9 until Article 9’s perfection requirements
are satisfied. §9-704(3)(B).
Perfection by Pre-Effective-Date Actions other than Filing for After-
Acquired Collateral. If an action (exclusive of the filing of financing
statements) under former Article 9 or other law was taken before Article
9’s effective date to perfect a security interest that attaches in collateral
after Article 9’s effective date, and that action would have been sufficient
to perfect the security interest under former Article 9 or other law, the
security interest in that collateral becomes and remains perfected under
Article 9 for a period of one year following Article 9’s effective date. The
perfection will lapse if the requirements for perfection under Article 9 have
not been satisfied by the end of that one-year period. §9-705(a).
Perfection by Pre-Effective-Date Filing. The filing of a financing
statement that was effective to perfect a security interest in collateral
under former Article 9 may or may not be effective to perfect a security
interest in that collateral under Article 9.
Pre-Effective-Date Filing Effective under Article 9. If a
financing statement filed in a jurisdiction and office before Article
9’s effective date, whether or not effective under former Article 9,
would, if filed in that jurisdiction and office on Article 9’s effective
date, be effective to perfect a security interest under Article 9, the
filing is given effect under Article 9. §9-705(b). Such a filing may be
continued, after Article 9’s effective date, by the filing of a
continuation statement in that jurisdiction and office only if the
continuation statement, together with other filing office records
relating to the financing statement, satisfies the requirements of
part 5 of Article 9 for an initial financing statement. §§9-705(d) and
(f). The continuation statement, to be effective, must be filed within
the six-month period prior to the lapse of the financing statement.
§9-515(d).
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Pre-Effective-Date Filing Not Effective under Article 9. If a
financing statement filed in a jurisdiction and office before Article
9’s effective date that was effective to perfect a security interest
under former Article 9 would, if filed on Article 9’s effective date, be
ineffective to perfect that security interest under Article 9, the filing
is nevertheless given effect under Article 9 until the earlier to occur
of the financing statement’s normal lapse (without regard to any
continuation statement filed after Article 9’s effective date) and
June 30, 2006. §9-705(c). To avoid lapse and in order to continue
the original financing statement, an initial financing statement
(often called an “in lieu” initial financing statement), referring to the
original financing statement to be continued, must be filed under §9-
706 in the jurisdiction and office required by Article 9.
Continuation Where Article 9 Changes the Meaning of a
Collateral Description. If a financing statement filed before Article
9’s effective date was filed in the correct jurisdiction and office under
Article 9 but the meaning of the collateral description on the
financing statement has changed under Article 9 (e.g., a general
intangible under former Article 9 is an account under Article 9), any
continuation statement filed on or after Article 9’s effective date
must contain an amendment to the collateral description to comply
with the meaning of the collateral description in Article 9;
otherwise, the continuation statement is not effective for the
collateral for which the description should have been amended. §9-
705(f); see, e.g., §9-504 (cross-referencing §9-108). Similarly, any “in
lieu” initial financing statement that is filed to continue under §9-
706 an original financing statement filed before Article 9’s effective
date must contain a collateral description that complies with the
meaning of the collateral description in Article 9. §9-706(c)(1).
Upon Article 9’s effective date, the secured party is authorized by
the debtor to make any such amendment necessary to continue the
perfection of the secured party’s security interest. §9-708(2).
Continuation: Other Requirements. In addition to collateral
description requirements, a continuation statement filed on or after
Article 9’s effective date, together with any other records already on
file in the filing office pertaining to the related financing statement,
as well as an “in lieu” initial financing statement filed as a
continuation under §9-706, must generally satisfy the other
requirements for an initial financing statement under part 5 of
Article 9. The continuation statement, or “in lieu” initial financing
statement, may need to contain the requisite information set forth
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in §9-516(b) to avoid filing office rejection. See §§9-516(b), 9-705(f)
and 9-706(c)(1).
Initial Financing Statement as a Continuation: the “In Lieu” Initial
Financing Statement. If a financing statement filed before Article 9’s
effective date remains effective on Article 9’s effective date although filed
in a jurisdiction and office which would not otherwise be effective to perfect
the security interest under Article 9, that financing statement, to avoid
lapse, must be continued as an “in lieu” initial financing statement in the
jurisdiction and office required by Article 9.
Requirements. An “in lieu” initial financing statement must
satisfy the filing requirements of part 5 of Article 9. In addition, in
order to put subsequent searchers on notice that the “in lieu” initial
financing statement is intended to continue the original financing
statement filed in a different jurisdiction and office, the “in lieu”
initial financing statement must identify the original filing by filing
office, dates of filing and filing numbers (both for original filing and
the most recent continuation statement, if any, of the original filing)
and must indicate that the original filing remains effective. §9-
706(c). Upon the effective date of Article 9, the secured party is
authorized by the debtor to file any “in lieu” initial financing
statement necessary to continue the perfection of the secured party’s
security interest created under former Article 9. §9-708(2).
Pre-Effective-Date Filings Covered. The “in lieu” initial
financing statement may continue more than one original financing
statement filed before Article 9’s effective date. See Official
Comment 2 to §9-706.
Timing of Filing. The “in lieu” initial financing statement
may be filed at any time before lapse of the original filing, even
before the normal six-month period prior to lapse. See Official
Comment 1 to §9-706. The secured party may have made an “in
lieu” initial financing statement filing even before the effective date
of Article 9 assuming that the filing office accepted the filing and
that the debtor had signed the financing statement, as required
under §9-402(1) of former Article 9, or had otherwise authorized the
filing. See Official Comment 1 to §9-706.
Period of Effectiveness. An “in lieu” initial financing
statement filed on or after Article 9’s effective date lapses upon the
expiration of the period for the effectiveness of the financing
statement set forth in §9-515. §9-706(b)(2). An “in lieu” initial
BUSDOCS:1138799.3
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financing statement filed before Article 9’s effective date lapses upon
the expiration of the period for the effectiveness of a financing
statement set forth in §9-403 of former Article 9. §9-706(b)(1).
Amendments to Pre-Effective-Date Financing Statements.
Generally. An amendment (other than a continuation as
discussed above) made on or after Article 9’s effective date to a
financing statement filed before Article 9’s effective date, must
generally be filed in the jurisdiction and office required by Article 9.
§9-707(b)(first sentence). If the financing statement was filed in the
jurisdiction and office required under Article 9, then the financing
statement may be amended by the filing of an amendment in that
office. §9-707(c)(1). If, however, the financing statement was not
filed in the jurisdiction and office required by Article 9, the financing
statement must be amended by means of the filing of an “in lieu”
initial financing statement filed in the jurisdiction and office
required by Article 9. The amendment may be made by filing the
“in lieu” initial financing statement with the modified information,
or the “in lieu” initial financing statement may filed first and then
amended to reflect the modified information. §§9-707(c)(2) and (3).
Alternative Technique for Termination. As an alternative, it
may be possible to file a termination statement in the office in which
the related financing statement filed before Article 9’s effective date
was filed. §9-707(e). However, if the financing statement was not
filed in the jurisdiction and office required by Article 9, the
termination statement may be filed only if the financing statement
has not already been continued by an “in lieu” initial financing
statement filed in the jurisdiction and office required by Article 9.
§9-707(e)(“unless…”). Moreover, the termination statement must be
one that is effective under the law of the jurisdiction in which the
financing statement filed before Article 9’s effective date was filed.
§9-707(b)(second sentence). That requirement will usually mean
that the financing statement may be terminated in this manner only
if it is filed in an office of that jurisdiction referred to in the
jurisdiction’s §9-501, i.e., the statewide central filing office in the
jurisdiction or a local filed office in the jurisdiction in which a
financing statement was filed as fixture filing or covering timber to
be cut or as-extracted collateral is filed. See §§9-513(d)(termination
statement effective when filed in the filing office) and 9-
102(a)(37)(defining “filing office” as the place designated in §9-501 as
the place to file a financing statement).
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Priority. Article 9 determines priorities that were not established
under former Article 9 before Article 9’s effective date. Accordingly, an
attached security interest that was not perfected under former Article 9
may not, merely by Article 9 becoming effective and causing that security
interest to become perfected, obtain priority over a competing perfected
security interest to which it was junior under former Article 9. §9-709(a).
Moreover, the priority of a security interest that attaches after the
effective date of Article 9 and which is perfected by a financing statement
filed before Article 9’s effective date dates from Article 9’s effective date,
not from the date of the earlier filing, if the earlier filing would have been
ineffective to perfect the security interest under former Article 9. §9-
709(b).
BUSDOCS:1138799.3
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