Article 9 basics

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The presentation provides an overview of how a secured party (i) acquires a security interest in collateral, (ii) perfects that security interest, and (iii) determines priority of their security interest. Also reviewed and explained are recent changes to Article 9 regarding updates to filing procedures, search methods and lender due diligence, scheduled to take effect in July 2013.

Text of Article 9 basics

  • 1. Article 9: A Primer on Attachment, Perfection, and PriorityOctober 4, 2012Presented by John H. Strock, Esq.Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild

2. IntroductionSecured transactions are a part of ourprofessional and personal daily lives. Thisprogram will provide the basics to help youunderstand how secured transactions arecreated and made enforceable.Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 3. Roadmap1. Article 9 overview2. What is collateral?3. How does a security interest attach?4. How is a security interest perfected?5. Important changes in 2013Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 4. The UCCThe Uniform Commercial Code is thecodification of Karl Llewellyns legalphilosophyThe Code is intended to establishpredictable rules that will yield apredictable outcomeParties can contract around the Code ifthey chooseArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 5. The UCCThe UCC is comprised of 11 articles thataddress different types of commercialtransactionsMost important for today are: -Article 1 -Article 9Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 6. The UCCArticle 1 General Provisions -Sets forth general provisions, definitions,and rules that apply to entire UCC -Most important section is 1-201, the generaldefinitionsArticle 9 Secured Transactions -Governs how a security interest is created inpersonal property to secure a debtArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 7. Article 9 Key PartiesObligor 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 securityinterest is created, whether or not obligation to besecured is outstanding (9-102(a)(72))Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 8. What is the Collateral?First, classify collateral to determine howto describe it in security agreement andhow to perfect the security interestArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 9. Collateral Classification1. Identify collateral and describe as precisely as possible2. Determine how the collateral is categorized by Article 9 for filing purposesArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 10. Collateral Classification Which Law Controls?Is collateral real estate? -If yes, local law governsCheck UCC 9-109 for the scope of anArticle 9 secured transactionIf transaction falls within scope of 9-109,then Article 9 controlsArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 11. Quick Guide to Collateral Classification1. Is it sui generis (unique)?If yes, describe as accurately as possible2. If no, is the collateral a good or a right?See 9-102(a)(44) for definition of goodsIf 9-102(a)(44) does not provideclassification for goods, equipment iscatch all classification for goods (9-102(a)(33))Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 12. Quick Guide to Collateral Classification3. If collateral is a right, is it a right to:GoodsPayment, orSomething else?Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 13. Quick Guide to Collateral Classification4. If collateral is a right to goods, it is either: a. Document of title, or b. General Intangible (catch all)Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 14. Quick Guide to Collateral Classification5. 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 collateralclassificationArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 15. A Security Interest CreatedA security interest is an interest inpersonal property or fixtures whichsecures payment of an obligation . . .(1-201(35))Must have an agreement betweenobligor/debtor and creditor/secured partythat identifies the collateralArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 16. AttachmentAttachment is when a security interestbecomes enforceable betweenObligor/Debtor and Creditor/SecuredParty (9-203)Knowledge only between these partiesneeded for attachment no third partynotice requiredArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 17. Attachment1. Agreement to create security reached between parties2. Value must be given (1-204)3. Debtor has rights in the collateralArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 18. PerfectionPuts third parties on notice that securityinterest attached to collateralPerfection of security interest is onlyrelevant if there is more than one creditor -Remember a trustee in bankruptcy is athird partyArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 19. Automatic PerfectionPerfection only occurs when a securityinterest attaches to collateral and asecured party takes the steps necessaryto perfect/protect its interest (9-308(a))Automatic Perfection (9-309) -Purchase Money Security Interest inconsumer goods is most common automaticperfectionArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 20. Where to File?If no automatic perfection, secured partymust then look to 9-310(a) and default isto file a UCC-1 financing statementCheck 9-310(b) for exceptions to filingrequirementsArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 21. Common Filing Exceptions9-311 Collateral required filing underseparate federal or state notice system(e.g. automobiles and airplanes)Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 22. Common Filing Exceptions9-312(a) Permissive filing to perfectinterest in chattel paper, negotiabledocuments, instruments, or investmentproperty9-312(b) Control or possession ofcertain collateral requiredArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 23. Common Filing Exceptions9-312(c) Controls perfection of goodscovered by negotiable document9-312(d) Controls perfection of goodswhen covered by non-negotiabledocumentArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 24. Common Filing Exceptions9-313 When possession or delivery tosecured party perfects without filing -Must be tangible collateral9-314 Perfection by control -Investment property is most commonArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 25. Perfection Choice of LawNeed to know which state governs: -Perfection -Effects of perfection/non-perfection -PrioritySections 9-301 through 9-307 show ushow to select to correct jurisdictionArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 26. Perfection Choice of Law9-301 is catch all, but look to 9-302through 9-306 first to determine choice oflaw 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 RightsArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 27. Choice of Law General Rule9-301 Default rules for choice of law -9-301(1) Debtors location controlsperfection (default rule) -9-301(2) If creditor has possession ofcollateral then location of collateral controlsperfection, must be tangible or semi-tangiblecollateral -9-301(3) Limited to fixtures, timber to becut, location of collateral governs (real estatefiling)Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 28. Debtors Location9-307 Debtors locationGeneral rules for organizations (9-307(b)(2)) -Registered organization state oforganization -Unregistered organization (generalpartnership) place of business or chiefexecutive officeArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 29. Debtors Name Most important information on financing statement is getting the Debtors name right! If the name is not correct, it could be seriously misleading and subordinate security interest (9-506)Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 30. PriorityExcept as otherwise provided in [theUCC], a security agreement is effectiveaccording to its terms between theparties, against purchasers, and againstcreditors 9-201(a)Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 31. PriorityGeneral rule is first to perfect is first inline (9-317(a)(1) and 9-322(a)(1))Article 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 32. PriorityBuyer in ordinary course take free ofsecurity interest, but security interestattaches to proceeds (See, e.g., 9-320(a)and 9-315(a))Proceeds must be segregated, or sweptinto an account subject to a securityinterestArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 33. PriorityPurchase Money SecurityInterest (PMSI)PMSI lender gets automatic firstpriority lien in consumer goodsPMSI lender gets first prioritylien in goods commercialborrower if perfected within 20daysArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 34. 2013 AmendmentsMost important change is to Debtor nameprovisions (9-503) -For registered organizations look toformation documentsArticle 9: A Primer on Attachment, Perfection, and Priority 2012 Fox Rothschild 35. 2013 Amendments -Debtor name chance provisions cont -For individuals states have two choicesOnly if Use name on state issued ID, if andonly if no ID, may use deb