Article 9 basics

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

© 2012 Fox Rothschild

Article 9: A Primer on Attachment,

Perfection, and Priority

October 4, 2012

Presented by

John H. Strock, Esq.



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

[email protected]

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Article 9 basics