Article 9 UCC Security Interest Explained: Essential Rules for Attachment & Perfection
Security interest. Interest in property pursuant to a security agreement. Any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability (Black’s Law 6th Ed.).
A security interest is a right by a creditor to have a specific item or items of property sold to satisfy the debt owed to the secured party (Green – Seifter Attorneys. PLLC).
Article 9 UCC Security Interest Explained: Creation, Perfection, and Enforceability
The security interest must be properly created and perfected in order that it be enforced against other creditors and in bankruptcy. In order that it be enforceable, the security agreement must be made internationally known, i.e. “notice” of the security interest, thus making the secured parties rights fully enforceable.
This process is known as perfection. Although the rules governing perfection might seem insignificant, failure to comply can result in a fatal flaw in the secured interest.
As of July 1, 2001, Article 9 of the Uniform Commercial Code was revised. Article 9 contains rules for the creation and perfection of security interests.
Requirements for an Enforceable Security Interest
There are three requirements for the creation of an enforceable security interest against the debtor. [These requirements are set forth in UCC § 9-203(b)]:
1. Value has been given; the secured party must give value.
2. The debtor must have rights in the collateral or the power to transfer rights in the collateral to a secured party.
3. The debtor has authenticated (signed) a security agreement that provides a description of the collateral and, if applicable, a description of the land concerned.
Article 9 uses the term “authenticate” to mean “signed.” Authentication may include electronic signatures or any other symbol, encryption, or similar process which identifies the debtor and manifests adoption or acceptance.
[UCC § 9-102(a)(7); Green – Seifter Attorney, PLLC]
Definition of “Authenticate”
“Authenticate” means:
(A) to sign; or
(B) to execute or otherwise adopt a symbol, or encrypt or similarly process a record, in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.
Meeting the requirements entails the creditor obtaining a signed security agreement (authenticated record) that describes and states that the debt is secured by the collateral. Once these requirements are met, the security interest is considered “attached.”
Attachment and Description of Collateral
§ 9-203. Attachment and Enforceability of Security Interest.
A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.
Revised Article 9 clarifies that “supergeneric” descriptions such as “all the debtor’s assets” or “all the debtor’s personal property” are not sufficient to identify collateral in a security agreement.
Such descriptions may be permitted in financing statements, but they will fail to create a valid security interest if used alone in the security agreement.
Sufficiency of Description
§ 9-108. Sufficiency of Description.
A description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” does not reasonably identify the collateral.
Revised Article 9 permits listing defined categories of assets in both security agreements and financing statements. Examples of reasonable identification include:
(1) Specific listing
(2) Category
(3) Type of collateral defined in the UCC
(4) Quantity
(5) Computational or allocational formula
(6) Any other method if the collateral is objectively determinable
Financing Statements
§ 9-504. Indication of Collateral.
A financing statement sufficiently indicates the collateral if it provides a description pursuant to § 9-108 or indicates that it covers all assets or all personal property.
Categories of collateral include tangible property such as goods, inventory, equipment, and fixtures, as well as intangible property such as accounts, chattel paper, general intangibles, instruments, investment property, deposit accounts, money, and mineral rights.
Educational Disclaimer
This content is provided for educational and informational purposes only and does not constitute legal advice.
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