UCC Introduction and Scope of Article 9

UCC Filings | Secured Transactions Overview

Part 1 | Introduction & Scope of Article 9

The importance of credit decisions and the need to utilize technical skills to protect receivables is receiving a significant increase in visibility and attention. Recognizing an opportunity to generate an increase in sales, while maintaining an acceptable level of risk, is the goal. Perfecting a lien (UCC-1) under Article 9 of the Uniform Commercial Code demonstrates utilization of such technical skills.

By examining specific examples where the use of Article 9 with marginal accounts applies, the opportunities to increase sales and profits can be better recognized.

As an example, an existing customer could be in a position where their account has fallen considerably past due. If the customer does not continue to receive merchandise, the leverage for payment is greatly reduced and a customer may be lost. An alternative might be to secure future transactions, thereby maintaining acceptable risk.

Other examples abound: the new customer who has favorable credit risk factors, but no track record; the very large existing customer who has interim financial statement weakness; the new operator taking over a business; or the growing customer who needs expanded credit lines to support their growth. The key ingredient underlining all opportunities to use security is sound judgment by the credit decision maker.

Introduction – The Security Interest

A security interest protects against the nonpayment of an obligation or nonperformance of a promise. Many creditors require their debtors to enter into a security agreement when credit is extended.

The debtor will provide specific personal property (i.e. collateral) as a security interest to the creditor. Then, in the event of debtor default, the creditor can use the collateral to recover payment. Typically, the collateral can be sold to reduce the debt. Then, any surplus proceeds belong to the debtor and, vice versa, any deficit is still an obligation of the debtor.

Under UCC Article 9, a security interest is an interest in personal property or fixtures which secures payment or performance of an obligation. A Purchase Money Security Interest (PMSI) applies to a seller of the collateral to secure the sales price or a person who gives value to enable the debtor to acquire the collateral.

The Scope of Article 9

Article 9 includes consensual security interests in personal property and fixtures.

What’s Included?

Included under the Article 9 umbrella are all forms of consignment and letter of credit payment rights that support the payment or performance of other collateral.

Software has also been added as a category. Software is a computer program and includes related supporting information. However, software embedded in goods and customarily viewed as part of the goods is treated as part of the goods and not software.

Also included are sales of account and chattel paper, including pledge, chattel mortgage, conditional sales, trust receipts, field warehousing and factor’s liens.

Article 9 applies to leases if the parties intend that the lease provide security.

What’s Not Included?

Article 9 does not apply to income tax liens, landlord’s liens, statutory liens (i.e. mechanic’s liens), wage assignments, interest in or liens on real property, or sales of securities.

What is Collateral?

According to Article 9, collateral is “property subject to a security interest or agricultural lien. The term includes: (A) proceeds to which a security interest attaches; (B) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and (C) goods that are the subject of a consignment.” – § 9-102. DEFINITIONS AND INDEX OF DEFINITIONS

Collateral can be either tangible or intangible. Some forms of tangible collateral are consumer goods, equipment, inventory and farm products. Some forms of intangible collateral are instruments which include any written evidence of the right to receive money, documents of title and receipts, chattel paper, accounts, general intangibles, healthcare receivables and supporting obligations.

In Part 2, we will present an overview of Perfection & Priority under Article 9, and then in Part 3, Defaults & Remedies.

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