SECURED TRANSACTIONS
1) Scope of Article 9
A secured transaction involves a lender providing a pecuniary loan to a debtor. In exchange, the
debtor may provide property or some other form of collateral as security to the lender in case the
debtor defaults. The governance of a secured transaction is dealt with by Article 9 of the UCC, but
only if the collateral falls within its categories. There are three main types of categories in Article 9.
Tangible goods may fall under Article 9. The nature of the goods will depend on the debtor’s
primary use of these goods. Consumer goods are products used for personal, family or domestic
use. Inventory is used for sale or lease. Farm products are used for agricultural purposes. Equipment
is used for business operations. Fixtures are chattel items attached to property whereby either their
identity is lost or their removal would cause substantial damage to the property.
Intangible goods may also fall under Article 9. These include copyrights, insurance and commercial
tort claims (not personal injury claims), non-consumer deposit accounts, and account receivables
from third parties. Leases may also fall under this category if they were intended as security
arrangements. Otherwise leases are dealt with under real property law.
Proceeds from the exchange, lease or sale of goods may fall under Article 9. These proceeds may be
in the form of tangible products or cash.
2) Attachment
If a lender enters a secured transaction with a debtor, the lender must ensure he can enforce his
rights against the debtor over the collateral. This is known as attachment, which requires three
elements.
First, the debtor must have authenticated a security agreement granting the lender secured interest
over the collateral. The agreement may include a broad description of the collateral, such as its type,
category or even a serial number. However, it cannot be super generic such as ‘all of my assets’,
unlike the requirement in a financing statement for perfection. It must be sufficient enough to put
other creditors on notice. However, an agreement is not always required if the lender obtained
possession or control of the collateral. In particular, a lender may have attached his interest over a
non-consumer deposit account if he has control of the account. If the deposit account is held by a
separate bank rather than by the lender, the lender can still obtain control only if there was money
deposited in the lender’s name and the lender entered an authenticated agreement between himself,
the debtor and the bank, in which the bank agrees to comply with the lender’s instructions and the
debtor’s consent is not required.
Secondly, the lender must provide value to the debtor. This is an issue often seen in secured
transactions, in which the lender will not have secured rights over the collateral until he gives the
loan to the debtor. The lender may provide future advance loans, which do not have to be made
immediately. The issue with such loans is when they will be dated. This depends on the type of
future loan made. For obligated future advance loans, the future loan will ‘relate back’ to the date
the former loan was perfected. However, for optional future advance loans, the future loan will be
dated when it was made rather than ‘relate back’, in which other creditors must have had notice of
the loan to gain priority over the loan.
1) Scope of Article 9
A secured transaction involves a lender providing a pecuniary loan to a debtor. In exchange, the
debtor may provide property or some other form of collateral as security to the lender in case the
debtor defaults. The governance of a secured transaction is dealt with by Article 9 of the UCC, but
only if the collateral falls within its categories. There are three main types of categories in Article 9.
Tangible goods may fall under Article 9. The nature of the goods will depend on the debtor’s
primary use of these goods. Consumer goods are products used for personal, family or domestic
use. Inventory is used for sale or lease. Farm products are used for agricultural purposes. Equipment
is used for business operations. Fixtures are chattel items attached to property whereby either their
identity is lost or their removal would cause substantial damage to the property.
Intangible goods may also fall under Article 9. These include copyrights, insurance and commercial
tort claims (not personal injury claims), non-consumer deposit accounts, and account receivables
from third parties. Leases may also fall under this category if they were intended as security
arrangements. Otherwise leases are dealt with under real property law.
Proceeds from the exchange, lease or sale of goods may fall under Article 9. These proceeds may be
in the form of tangible products or cash.
2) Attachment
If a lender enters a secured transaction with a debtor, the lender must ensure he can enforce his
rights against the debtor over the collateral. This is known as attachment, which requires three
elements.
First, the debtor must have authenticated a security agreement granting the lender secured interest
over the collateral. The agreement may include a broad description of the collateral, such as its type,
category or even a serial number. However, it cannot be super generic such as ‘all of my assets’,
unlike the requirement in a financing statement for perfection. It must be sufficient enough to put
other creditors on notice. However, an agreement is not always required if the lender obtained
possession or control of the collateral. In particular, a lender may have attached his interest over a
non-consumer deposit account if he has control of the account. If the deposit account is held by a
separate bank rather than by the lender, the lender can still obtain control only if there was money
deposited in the lender’s name and the lender entered an authenticated agreement between himself,
the debtor and the bank, in which the bank agrees to comply with the lender’s instructions and the
debtor’s consent is not required.
Secondly, the lender must provide value to the debtor. This is an issue often seen in secured
transactions, in which the lender will not have secured rights over the collateral until he gives the
loan to the debtor. The lender may provide future advance loans, which do not have to be made
immediately. The issue with such loans is when they will be dated. This depends on the type of
future loan made. For obligated future advance loans, the future loan will ‘relate back’ to the date
the former loan was perfected. However, for optional future advance loans, the future loan will be
dated when it was made rather than ‘relate back’, in which other creditors must have had notice of
the loan to gain priority over the loan.
