Conveying Security Interest via UCCs

UCC Filings Part 2 | Conveying a Security Interest under Article 9

If you missed part 1 of our series, check out the Introduction & Scope of Article 9.  In part 2 of our series on secured transactions, we’ll cover conveying a security interest under Article 9.

Conveying a Security Interest

UCC filings are a form of consensual security. This means your debtor must consent or agree to the filing of the UCC.

“Securing receivables via a UCC filing requires the debtor to sign a security agreement – which makes it consensual – the debtor is agreeing to the filing. This security agreement grants the creditor a security interest in the goods/services (as noted in the collateral description within the agreement) in the event the debtor defaults or files for bankruptcy protection. A properly perfected UCC filing benefits creditors that provide equipment, inventory and consigned goods.”

Attachment

A security interest attaches or forms once the creditor has established a security interest in the collateral. To create the security interest, the following requirements must be met:

  1. Secured Party and the debtor execute a Security Agreement,
  2. Secured Party gives value for the security interest, and
  3. Debtor has rights to the collateral

Security Agreement

Under Article 9-102, a Security Agreement is an authenticated agreement that creates or provides a security interest. The agreement must include the date, debtor’s legal name and address, authentication, granting clause, collateral description and default terms.

There are additional clauses which are commonly incorporated in a Security Agreement.

  • After-Acquired Property Clause: provides for a floating lien which will attach to specified property the debtor may acquire in the future.
  • Future Advance Clause: extends to future liabilities of the debtor to the Secured Party.
  • Acceleration Clause: may provide that the full amount of the debt will mature upon default.
  • Add-On Clause: failure to make payment on the goods purchased permits both current and prior contract items to be repossessed.

Rights & Duties of The Secured Party

The debtor and the Secured Party have an obligation to preserve the pledged collateral, when the collateral is in the possession of the Secured Party

9-207. RIGHTS AND DUTIES OF SECURED PARTY HAVING POSSESSION OR CONTROL OF COLLATERAL.

(a) [Duty of care when Secured Party in possession.]

Except as otherwise provided in subsection (d), a Secured Party shall use reasonable care in the custody and preservation of collateral in the Secured Party’s possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.

The debtor is responsible for the cost of reasonable expenses incurred for the preservation, use or custody of the collateral, as well as the costs of accidental loss or damage when the costs exceed the insurance coverage.

Except for money (which should be used to reduce the amount of the secured obligation or sent directly to the debtor), the Secured Party may keep any increase in collateral, must ensure the collateral remains identifiable and may use or operate the collateral if necessary to preserve the collateral.

Should the Secured Party fail to meet the imposed obligations, the Secured Party is liable for the loss.

In Parts 3, 4 & 5, we will present an overview of Perfection & Priority as well as Defaults & Remedies.

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