Lesson 43: Secured Transactions (Article 9)

Secured Transactions under Article 9 of the Uniform Commercial Code (UCC) are essential in understanding how creditors secure interests in the debtor's property to ensure the performance of an obligation. This lesson will cover key concepts, including the creation, perfection, priority, and enforcement of security interests.

1. Introduction to Secured Transactions

A secured transaction is a transaction intended to create a security interest in personal property or fixtures. The purpose is to provide assurance to creditors that they will receive the owed payment or performance by having an interest in the debtor's property.

1.1 Key Terms

• Debtor: The person who owes payment or performance of the secured obligation.
• Secured Party: The person in whose favor a security interest is created.
• Collateral: The property subject to the security interest.

2. Creation of a Security Interest

For a security interest to be enforceable against the debtor, three requirements must be met:

1. Value has been given by the secured party.
2. The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party.
3. There is a security agreement that describes the collateral.

3. Perfection of a Security Interest

Perfection is the process that makes a security interest enforceable against third parties. Common methods of perfection include:

• Filing a Financing Statement: A public notice filed with a government office.
• Possession: The secured party takes possession of the collateral.
• Control: For certain types of collateral, such as deposit accounts, the secured party exercises control.
• Automatic Perfection: In some cases, perfection occurs automatically, such as in a purchase-money security interest in consumer goods.

3.1 Financing Statement

The financing statement is a simple document that includes the:

• Debtor's name and address
• Secured party's name and address
• Indication of the collateral

4. Priority of Security Interests

The priority of security interests determines the order in which competing claims will be satisfied. Some key rules include:

• First to File or Perfect: Generally, the first secured party to file a financing statement or perfect their interest will have priority.
• Purchase Money Security Interest (PMSI): Special priority rules apply to PMSIs in goods.
• Super-Priority Interests: Certain interests, like those of a buyer in the ordinary course of business, may take precedence over perfected security interests.

Priority Rules

Consider the following priority rules visualized:

Conclusion

Understanding the key aspects of secured transactions under Article 9 of the UCC is crucial for both creditors and debtors. Properly navigating the creation, perfection, and prioritization of security interests can significantly impact the enforceability and satisfaction of secured obligations.

4. Priority of Security Interests (Continued)

Understanding the priority of security interests is crucial for creditors to ensure that their interests are protected. Here are additional rules and examples:

• Conflicting Security Interests in the Same Collateral: When multiple security interests conflict, the general rule is 'first to file or perfect' prevails.
• Future Advances: A secured party can make future advances against the original collateral. These future advances may have priority as of the date of the original filing.

Examples of Priority Rules

Let's consider a few examples to illustrate priority rules:

In this example, Secured Party A, who filed first, has priority over Secured Party B and Secured Party C, even though Secured Party C took possession before Secured Party B filed.

5. Enforcement of Security Interests

When a debtor defaults on the obligation, the secured party has the right to enforce the security interest. The enforcement process includes repossession, disposition, and application of proceeds.

5.1 Repossession

The secured party may take possession of the collateral without judicial process if it can be done without breaching the peace. Otherwise, judicial action is required.

5.2 Disposition

The secured party may sell, lease, license, or otherwise dispose of the collateral. The disposition must be commercially reasonable.

5.3 Application of Proceeds

The proceeds from the disposition of the collateral are applied in the following order:

1. Reasonable expenses of retaking, holding, and preparing for disposition.
2. Satisfaction of the secured obligation.
3. Subordinate security interests.
4. Any surplus is returned to the debtor.

If the proceeds are insufficient to satisfy the secured obligation, the debtor is liable for the deficiency.

Additional Resources

For further reading on secured transactions, you may refer to the following resources:

• Secured Transaction on Wikipedia
• Article 9 of the UCC on Cornell Law School’s Legal Information Institute
• Secured Transactions (Examples & Explanations) by James Brook

Related Lessons

• Sources of Contract Law: Common Law vs. UCC
• Sales of Goods (Article 2)
• Leases (Article 2A)

Conclusion

Understanding the key aspects of secured transactions under Article 9 of the UCC is crucial for both creditors and debtors. Properly navigating the creation, perfection, priority, and enforcement of security interests can significantly impact the enforceability and satisfaction of secured obligations. This knowledge is fundamental for anyone involved in commercial financing and secured lending.