ARTICLE 9 APPLICABILITY
Subject Matter Scope
Geographic Scope
/ Scope: §9-109Governs the process of obtaining, perfecting, enforcing and determining priority of a contractual interest in personal property that expressly serves as security interest for an obligation.
1. Any transaction, regardless of form, that creates a security interest in
personal property or fixtures by contract
2. Agricultural lien
3. Sale of accounts, chattel paper, payment intangibles, promissory notes
4. Consignments
Doesn’t apply to items in 109(c) [preemption by other laws] or (d)
Choice of Law: §1-301
Parties can contract their choice-of-law provisions, but if the UCC governs a transaction, the choice of law may be preempted by the UCC’s choice of law. Can specify law to govern creation and validity, but not perfection and priority. Must follow choice of law in §9-301 to §9-307.
CREATION & VALIDITY
Creation
Attachment
3 Requirements for Attachment: Can Occur in any OrderSecurity Agreement can create interest in after-acquired property (§9-204(a)) & future advances (§9-204(c)); can also include proceeds. / 3 Main types of Security Interests: Interest of creditor in personal property that secures payment/performance of obligation, Consignor’s interest, and interest of buyer of payment rights, if sale governed by A9.
§9-201: Except as otherwise provided, a security agreement is effective according to its terms between parties, and against purchasers and creditors.
*Can create security interest in proceeds §9-203/§9-315 (automatic) or in after-acquired property/advances: §9-204*
§9-203: To become valid (enforceable against the debtor), a security interest must first attach. Attach = become subject to a security interest. Agreement may postpone time of attachment. Once meet 203 req’ts, parol evidence OK.
Security interest is enforceable against the debtor and third parties with respect to the collateral ONLY if:
1. Value given by the secured party
2. Debtor has rights in the collateral or the power to transfer rights and
3. ONE of the following evidentiary conditions is met:
a) the debtor has authenticated a security agreement that provides a adequate description of the collateral…; OR
b) Possession along with oral agreement
Related Items
“Security Interest”“Security Agreement”[1]
“Authenticate”
“Value”
“Personal Property”
“Fixtures”
“Collateral” / §1-201(b)(35): Interest in personal property/fixtures that secures payment or performance of obligation.
§9-102(a)(73): Agreement that creates or provides for a security interest. Physical agreement must be authenticated by debtor, and must “reasonably identify” the collateral (§9-108)
§9-102(a)(7): To sign or otherwise execute or adopt a symbol…intent of the authenticating person to identify the person and adopt or accept a record.
§1-204: Consideration
Define as not real property
§9-102(a)(41): Goods that have become so related to real property…
§9-102(a)(12): property subject to S.I.; includes proceeds, accounts and C.P. sold. In security agreements, cannot be supergeneric description. In f.s., okay.
AFTER ATTACHMENT, THEN WHAT?
Continuation of S.I.Proceeds
DISGUISED SECURITY INTERESTS
PERFECTION
“Attachment + Steps”When a security interest attaches, it can be either perfected or unperfected.
General Rule: §9-310
*Need to crudely classify collateral in order to know how to perfect it.Debtor’s use will dictate what item is—goods vs. equipment vs. consumer goods…
PERFECTION, CONTINUED
APPLICABLE LAW
Which state’s law applies?
§9-301General Rule: Situs of Debtor
This applies to perfection (parties can contract for law of creation/validity)
For possessory security interests, situs of the collateral
For priority matters with negotiable documents, goods, instruments, money, or tangible chattel paper:
Debtor’s location?
See also Changes in Law Governing Perfection, below, and §9-316:
Where in state to file?
§9-501
WHAT TO FILE
§9-502: Minimum RequirementsPurpose of system: Notice!
Can file before attachment
Effectiveness of Filing, aka Additional Requirements
Reasons to refuse financing statementIf record accepted, but information in 516(b)(5) is incorrect see §9-520(c)—then §9-338 applies. If information missing, fully effective.
If communicate with fee and record refused for reason other than one in 516(b)
PERFECTION, CONTINUED
Indexing Errors
Mistakes on Financing Statement: General Rule §9-506Post-Filing Changes
Impact of changes in the Financing Statement§9-507 (Change in name, structure)
*§9-507(c): If name change makes statement seriously misleading, perfected in goods acquired before change or those acquired w/I 4 months after.
Change of Governing Law and/or Relocation of Debtor: §9-316
Applies to S.I. that have perfected before the change. See example 5.Transfer of Collateral: §9-508
Applies to both original and after-acquired!
Priority Contest
Filing Recap, Generally
PRIORITY, GENERALLY
§9-201: Interest effective against purchasers, creditorsGeneral Rule: §9-322
First to file or perfect
whichever earlier. (a) Pure Race.
Between SP, first in timeB/tw SP and LC, SP if perfected before LC got status.
Effect of Knowledge
Interests that Take Priority Over or Take Free of Security Interest
§9-317, where take free if a good faith purchaser for value, without knowledge, received before interest perfected.
SUPERPRIORITY: EXCEPTIONS TO GEN’L RULE
Buyer in Ordinary Course
§9-320Go to §9-325 if neither apply / After interest has attached, can follow collateral if transferred and/or disposed of.
§9-315(a)(1): Security interest continues in collateral, even if leased, sold, exchanged, or otherwise disposed of, unless the SP consents. (Some transfers may terminate interest—especially those in OCB—see below)
§9-315(a)(2): Security interest also attaches to identifiable proceeds of the transfer. (Collateral definition includes proceeds). No additional action required, but must be identifiable as proceeds. See LIBT, below.
Sales of Intangible Collateral (accounts, chattel paper, promissory notes or payment intangibles) considered to be a security interest. Some may have special perfection rules, though.
§9-308: In order to perfect, security interest must have attached, and secured party must have taken “steps” required by Article 9 in §§310-316. Saves from having to rely totally on word of debtor.
Filing is the general rule: §9-310
Except when accounts are proceeds, there is no other way to perfect an interest in most accounts and general intangibles.
Check exceptions:
§9-308 (d-g—other secured obligations being collateral)
§9-309 (automatic) Very few qualify—law doesn’t like “secret” lien
§9-311 (other statute; e.g. certificate of title)
§9-312 (bailee)
§9-313 (possession) Filing is permissible, but not the only method, for goods, chattel paper, documents, investment property and instruments. Possession is the only way to perfect interest in money, deposit accounts, or letter of credit rights (except when they are proceeds).
Assignment of Accounts (Small #) / Automatic (§9-309) b/c no one would file for insignificant amount
Certificate of Title Statute / Other Law (§9-311)
Chattel Paper / Filing OK (§9-312)
Possession OK (§9-313)
Would turn on which party needs for collection purposes
Deposit Account / Control Only (§9-312/9-313). Meaning of control §9-104
Documents of Title/Bailee Situation / §9-312 (3 methods)
Health Care Insurance Receivable / Automatic (§9-309); may also file (§9-312)
Instruments / Filing OK (§9-312)
Possession OK (§9-313)
Investment Property/Certificated Securities / Automatic (§9-309) or possession
Letter of Credit Right / Control Only (§9-312/9-313)
Money / Control Only (§9-312/9-313)
Negotiable Document / Filing OK (§9-312)
Possession OK (§9-313)
PMSI in Consumer Goods / Automatic (§9-309). Def of PMSI in §9-103
Proceeds / Can be automatic if original collateral perfected §9-315 and then disposed of. Careful under (d) b/c can become unperfected
Goods / Possession (permissive) §9-313 or filing §310
Inventory / Same as goods, but possession not an option. So, filing under §9-310
Sale of P/N and payment intangible / Automatic
§9-301: With some exceptions, the law of the debtor’s location governs perfection. This section (1) is applicable to filing.
Excluded items:
Possessory security interests
Fixture filings
Interests in timber to be cut
§9-301(2) – location of goods if it’s a possessory security interest (n/a if filing- automatic- or control-based perfection)
§9-301(3) – situs of collateral governs priority. Ideally, this won’t matter because all states will have adopted UCC.
§9-307 – Location of debtor
Individual: her principal residence (not defined in the code—use KL, CL)
Organization w/ one location: PB
Organization w/ multiple locations: exec hq
Registered Organization (see §9-102(a)(70): state of incorporation §9-307(e)
Person that ceases to exist or to have a residence or PPB, location continues in place specified above. §9-307(d). For registered organization, continue to be in place of incorporation, even if lose status or dissolve. §9-307(g)
Each state determines where, but usually a central filing system with the Secretary of State
Financing Statement is the “bikini” of Article 9. Don’t need to file agreement.
§9-502 lists the minimum data to be included on a financing statement.
1. Name of debtor
Need Debtor authorization under §9-509
Debtor Name Sufficiency: §9-503
Registered Org: Name indicated on public record
If organization has a name, use it. If no, individual §9-503(a)(4)
*Can also include trade name w/o problem as long as have official
or individual §9-503(b); trade name alone insufficient §9-503(c). If it isn’t clear which name is last (e.g. Joe Joseph), office must reject: Cmt 2.
2. Name of secured party: Also §9-503. Can have multiple SPs
3. Description of collateral: §9-504. Refers back to §9-108
Must reasonably ID; Can indicate that it covers “all my property” 504
Financing statement can be supergeneric; security agreement cannot.
Can file before agreement made and/or before interest attaches!
§9-516 states that communication of record + tender of fee constitutes filing. Filing doesn’t occur if the record isn’t accepted. 516(b) lists reasons why a record may be rejected.
Office must refuse statement (§9-516b):
Not in correct format
Filer doesn’t have filing fee
Office unable to index record:
Doesn’t identify debtor’s last name
Insufficient description of collateral
Doesn’t have name/add of secured party
Doesn’t indicate type of debtor
If statement is refused, there has never been a filing.
If office does accept and it turns out that additional requirements haven’t been met, the filing will likely be held to be effective for most purposes [§9-516(b)]. See §9-520(c) [if accept statement even though the office should have rejected, the filing is effective, unless the problem is one listed under §9-516(b)(5). Go to 9-338. [Cmt 3 to 520 says that if information not included, fully effective, if it’s incorrect, then go to §9-338.]
1. Will be subordinate to holder of perfected S.I. to the extent that S.I.
taken in reasonable reliance on incorrect information and in exchange for value; and
2. Purchaser (see §1-201(30)—key is voluntary transaction) other than SP
takes free of S.I. to the extent that, in reasonable reliance on wrong information, gave value (and in the case of C.P., documents, goods, instruments, or certificated security, takes delivery of item)
If communicate with fee and record refused for reason other than one in 516(b):
If office refuses statement for reason not included in §9-516(b), then the attempted filing is effective under 9-516(d) [provided that 502(a) and 502(b) are met] “except as against a purchaser of the collateral which gives value in reasonable reliance upon the absence of record from the files.” This would likely only occur if the office never communicated the refusal of the statement to the secured party.
If office indexes wrong, doesn’t change effectiveness: §9-517
A financing statement that substantially satisfies the requirements is effective unless the errors or omissions make the financing statement seriously misleading. Generally, failure to sufficiently identify the debtor as required in §9-503 is seriously misleading. An exception, though: if a standard search in the filing office would find the record, the error doesn’t make the statement seriously misleading. [A seriously misleading statement is ineffective, even if found by search logic other than that of the office, or using the standard logic to search a different database.]
§9-506 tries to soften rules in 502/503—courts don’t want trustee in bankruptcy displacing secured parties because of nitpicky issues, especially because they aren’t reliance creditors.
General Rule: In terms of sufficiency of information, financing statement remains effective even if collateral is sold or otherwise disposed of. (See also §9-315(a)). [Still need to watch changes in law/jurisdiction].
Generally, post-filing changes don’t impact effectiveness, with the exceptions of §9-508 and §9-507(c). In 507(c), if a name change makes the statement seriously misleading, and isn’t amended, is effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change. If amend more than four months after change, may have gap creditor to watch out for. Should put requirement in security agreement that if debtor changes their name, they have to notify, or else they’re in default.
Origin of the 4-month requirement is concern about the liquidity of inventory.
General Rule: S.I. perfected pursuant to law of jurisdiction remains perfected until the EARLIEST of:
[1] Time perfection would have lapsed (§9-515: five years)
[2] Expiration of four months after debtor relocates to another jurisdiction; or
[3] 1 year after a transfer to person in diff jurisdiction who becomes a debtor
If transferee takes collateral subject to security interest, no new filing is necessary (unless in different jurisdiction). §9-507(a)
If new debtor agrees to be bound by security agreement (or made to be bound under successor liability), transferee is “new debtor.” If new debtor is in same state, treat like name change. If name so differs that becomes seriously misleading, secured party has four months to refile.
For information on person becoming bound, see §9-203(d). When undertake obligations and acquires all or substantially all of assets. §9-203(e) says that a person who didn’t originally sign security agreement can nevertheless be bound by it.
§9-326 applies to priority contest between SP of original debtor and SP of new debtor.
FILING RECAP:
Everyone must meet requirements of §9-502. If missing 502 requirements, not effective regardless of what happens at the filing office. If one meets §9-502, but not §9-516 and is rejected at the filing office because of 516 failure, filing not effective. If it meets 502 but not 516, and is accepted, considered to be effective for most purposes. If statement meets 502 and office rejects it for a reason other than those listed under 516, considered to be effective for most purposes. If competing—one submits statement that meets 516 but not 502 and the other meets §9-502 but not 516, one meeting 502 will be considered perfected.
§9-521 has a uniform financing statement.
Filing isn’t itself a factor in determining whether the collateral secures an obligation. §9-505 But can file if determination of interest is unclear, as precaution.
Unperfected secured creditor will lose to any other secured creditor who perfects (even if perfecting party knows about other unperfected interest) and will also lose to bankruptcy trustee. See SP’s powers under §9-601
§9-322(a): General Rules for Determining Priority for Conflicting Security Interests/Ag Liens on Same Collateral
1. Conflicting perfected interests determined by time of filing.
2. Perfected security interest has priority over unperfected.
3. First security interest to attach has priority if conflicting security interests are
unperfected.
Generally, actual knowledge irrelevant; only constructive.
§9-317
Security interest subordinated to:
Perfected secured party entitled to priority under §9-322
Lien creditor who got status before perfection (see details in 317(a)(2)(B))
Buyers (not SP) that receive delivery of thing (see items) take free of S.I. if
[1] give value,
[2] receive delivery of collateral,
[3] without knowledge (actual knowledge, see §__) of security interest,
[4] before interest perfected.
Holder of PMSI has 20 days to file, except as otherwise provided in 320, 321
[Unsecured above lienless b/c “gap” creditors may legitimately be hurt.]
BOC takes free of interest even if interest is perfected and buyer knows of its existence. Mostly applies to inventory collateral. Distinction between knowing of interest’s existence and knowing that the interest is violative. If know that sale violates a term in agreement with secured party, take subject (Cmt 3)
BOC (§1-201(b)(9)): Person who buys in g.f. w/o knowledge that the sale
violates the rights of another person, and in the ordinary course, from a person, other than a pawnbroker, in the business of selling goods of that kind.
True with consumer goods, in the “garage sale exception,” where buyer takes free if buy [1] w/o knowledge, [2] for value, [3] primarily for buyer’s own personal or household purposes, and [4] before a financing statement is filed.
The two sections above apply only to unauthorized dispositions by the
debtor. If the sale is authorized, the buyer takes free under §9-315(a).
**As to PMSIs—if the SP files, all take subject to interest; if no filing, above exception applies (Cmt. 6); **If perfection step required but not taken, buyers in subsection (b) and purchasers in §9-317 will take free of S.I.
Purchase Money Priority
PMSI in Inventory
In priority contests with LC or with buyers NOCB, a SP with PMSI given a 20-day grace period to perfect (§9-317(e))
OTHER PRIORITY RULES