Article 9 basics

Article 9: A Primer on Attachment,
Perfection, and Priority

October 4, 2012

Presented by
John H. Strock, Esq.

Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild

Introduction
Secured transactions are a part of our
professional and personal daily lives. This
program will provide the basics to help you
understand how secured transactions are
created and made enforceable.


Roadmap
1. Article 9 overview
2. What is collateral?
3. How does a security interest attach?
4. How is a security interest perfected?
5. Important changes in 2013


The UCC
The Uniform Commercial Code is the
codification of Karl Llewellyn’s legal
philosophy
The Code is intended to establish
predictable rules that will yield a
predictable outcome
Parties can contract around the Code if
they choose


The UCC
The UCC is comprised of 11 articles that
address different types of commercial
transactions
Most important for today are:
- Article 1
- Article 9


The UCC
Article 1 – General Provisions
- Sets forth general provisions, definitions,
and rules that apply to entire UCC
- Most important section is 1-201, the general
definitions
Article 9 – Secured Transactions
- Governs how a security interest is created in
personal property to secure a debt


Article 9 – Key Parties
Obligor – Party who receives loan/credit (9-102(a)(59))
Debtor – Party who has ownership interest in collateral
(9-102(a)(28))
Creditor – Party giving loan/credit (1-201(b)(13))
Secured Party – Party in whose favor a security
interest is created, whether or not obligation to be
secured is outstanding (9-102(a)(72))


What is the Collateral?
First, classify collateral to determine how
to describe it in security agreement and
how to perfect the security interest


Collateral Classification
1. Identify collateral and describe as
precisely as possible
2. Determine how the collateral is
categorized by Article 9 for filing
purposes


Collateral Classification – Which
Law Controls?
Is collateral real estate?
- If yes, local law governs
Check UCC 9-109 for the scope of an
Article 9 secured transaction
If transaction falls within scope of 9-109,
then Article 9 controls


Quick Guide to Collateral
Classification
1. Is it sui generis (unique)?
If yes, describe as accurately as possible
2. If no, is the collateral a good or a right?
See 9-102(a)(44) for definition of “goods”
If 9-102(a)(44) does not provide
classification for goods, “equipment” is
catch all classification for goods (9-
102(a)(33))


Classification
3. If collateral is a right, is it a right to:
Goods
Payment, or
Something else?


Classification
4. If collateral is a right to goods, it is
either:
a. Document of title, or
b. General Intangible (catch all)


Classification
5. If collateral is a right to payment it is:
a. Chattel Paper (9-102(a)(11));
b. An Instrument (9-102(a)(47));
c. An Account (9-102(a)(2)); or
d. A General Intangible (9-102(a)(42))
General Intangible is catch all collateral
classification


A Security Interest Created
A security interest is an interest in
personal property or fixtures which
secures payment of an obligation . . .
(1-201(35))
Must have an agreement between
obligor/debtor and creditor/secured party
that identifies the collateral


Attachment
Attachment is when a security interest
becomes enforceable between
Obligor/Debtor and Creditor/Secured
Party (9-203)
Knowledge only between these parties
needed for attachment – no third party
notice required


Attachment
1. Agreement to create security reached
between parties
2. “Value” must be given (1-204)
3. Debtor has rights in the collateral


Perfection
Puts third parties on notice that security
interest attached to collateral
Perfection of security interest is only
relevant if there is more than one creditor
- Remember – a trustee in bankruptcy is a
third party


Automatic Perfection
Perfection only occurs when a security
interest attaches to collateral and a
secured party takes the steps necessary
to perfect/protect its interest (9-308(a))
Automatic Perfection (9-309)
- Purchase Money Security Interest in
consumer goods is most common automatic
perfection


Where to File?
If no automatic perfection, secured party
must then look to 9-310(a) and default is
to file a UCC-1 financing statement
Check 9-310(b) for exceptions to filing
requirements


Common Filing Exceptions
9-311 – Collateral required filing under
separate federal or state notice system
(e.g. automobiles and airplanes)


9-312(a) – Permissive filing to perfect
interest in chattel paper, negotiable
documents, instruments, or investment
property
9-312(b) – Control or possession of
certain collateral required


9-312(c) – Controls perfection of goods
covered by negotiable document
9-312(d) – Controls perfection of goods
when covered by non-negotiable
document


9-313 – When possession or delivery to
secured party perfects without filing
- Must be tangible collateral
9-314 – Perfection by control
- Investment property is most common


Perfection – Choice of Law
Need to know which state governs:
- Perfection
- Effects of perfection/non-perfection
- Priority
Sections 9-301 through 9-307 show us
how to select to correct jurisdiction


Perfection – Choice of Law
9-301 is catch all, but look to 9-302
through 9-306 first to determine choice of
law for specific collateral
- 9-302 – Agricultural Liens
- 9-303 – Certificate of Title
- 9-304 – Deposit Accounts
- 9-305 – Investment Property
- 9-306 – Letter of Credit Rights


Choice of Law – General Rule
9-301 – Default rules for choice of law
- 9-301(1) – Debtor’s location controls
perfection (default rule)
- 9-301(2) – If creditor has possession of
collateral then location of collateral controls
perfection, must be tangible or semi-tangible
collateral
- 9-301(3) – Limited to fixtures, timber to be
cut, location of collateral governs (real estate
filing)


Debtor’s Location
9-307 – Debtor’s location
General rules for organizations (9-
307(b)(2))
- Registered organization – state of
organization
- Unregistered organization (general
partnership) – place of business or chief
executive office


Debtor’s Name
Most important information
on financing statement is
getting the Debtor’s name
right!
If the name is not correct, it
could be seriously
misleading and subordinate
security interest (9-506)


Priority
“Except as otherwise provided in [the
UCC], a security agreement is effective
according to its terms between the
parties, against purchasers, and against
creditors” 9-201(a)


Priority
General rule is first to perfect is first in
line (9-317(a)(1) and 9-322(a)(1))


Priority
Buyer in ordinary course take free of
security interest, but security interest
attaches to proceeds (See, e.g., 9-320(a)
and 9-315(a))
Proceeds must be segregated, or swept
into an account subject to a security
interest


Priority
Purchase Money Security
Interest (“PMSI”)
PMSI lender gets automatic first
priority lien in consumer goods
PMSI lender gets first priority
lien in goods commercial
borrower if perfected within 20
days


2013 Amendments
Most important change is to Debtor name
provisions (9-503)
- For registered organizations – look to
formation documents


2013 Amendments
- Debtor name chance provisions – con’t
- For individuals states have two choices
“Only if” – Use name on state issued ID, if and
only if no ID, may use debtor’s first personal
name and surname
“Safe Harbor” – financing statement is sufficiently
names debtor by providing:
– Debtor’s individual name determined by state law;
– Debtor’s surname and first personal name; or
– Name on unexpired state issued ID


2013 Amendments
Continued Perfection after Change of
Law (9-316)
- Current code provides secured party four
months to refile in new jurisdiction to
preserve priority


2013 Amendments
9-316 Changes con’t
- New 9-316(h) provides for continued
perfection of newly acquired security
interests that attach within four months of
move
- New 9-316(i) provides for automatic
perfection within four months after new
debtor in new state becomes bound by
existing security agreement (e.g. merger)


2013 Amendments
Changes to Information on Financing
Statement (9-516)
Financing statement can be rejected if it
fails to state:
- Type of organization;
- Jurisdiction of organization; and
- Organization's identification number


2013 Amendments
Change of definition of “public records” to
“public organic records” (9-102(a)(68))
Means records available for public
inspection


2013 Amendments
“Control” of electronic chattel paper is
amended to evidence that “reliably
establish the secured party as the person
to which chattel paper was assigned” (9-
105)
- Old six factor test is now safe harbor


2013 Amendments
Debtors location for entities organized
under federal law (e.g. banks) is location
of “home office” or “main office”


2013 Amendments
UCC-5 “Correction Statement” now
“Information Statement”
- Under amendments, debtor or secured party
may file an Information Statement to clarify
previous filing
- No legal effect


2013 Amendments
New UCC-1 and UCC-3 forms


Article 9
Questions?


Contact Information

John H. Strock, Esq.
215.299.2922
jstrock@foxrothschild.com


Article 9 basics

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