If They Won't Pay, Can I Get That Asset?
Brief Summary Of Article 9 Of The Uniform Commercial Code Security Interests

I. Introduction.

Obtaining a security interest under Article 9 of the Uniform Commercial Code is extremely important for business transactions in many cases. The process leaves little or no room for creativity or changes, especially in Minnesota. This summary is intended to give a practical and basic explanation of the process. An attorney with expertise in this area should be consulted with detailed questions.

II. Why Is a Security Interest Important?

1. What if I Don't Have a Security Interest in an Asset?
   Security Interests are significant because if a creditor does not have a security interest (i.e., is unsecured), then a less than reputable debtor may try to sell the asset to someone else and the creditor may not be able to do anything about it or recover their debt. The first step in recovery of debt from a debtor that cannot or will not pay is to obtain a judgment against that debtor. After the judgment is obtained, the creditor cannot simply take the debtor's property. To collect on such judgment, the creditor must often employ the sheriff to levy on that judgment. To avoid immediately turning over the asset to the Sheriff or the Creditor, the Debtor may file for bankruptcy, in which event, except in rare cases, the unsecured creditors receive little, if any, recovery.
2. Effect of Security Interests.
   Basic Definitions. 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. Perfection is the concept of being able to enforce a security interest against and take a priority over other creditors in a bankruptcy proceeding.
   Additionally, "perfection" is the idea of "putting the world on notice" of the security interest in order to make the secured parties' rights fully enforceable against others. The most common example of a security interest is a mortgage on real property. In order to be enforceable against other creditors or the bankruptcy trustee, a mortgage must be duly recorded in the county property records so that others who may try to obtain title to the home to collect on a debt are put on notice that the bank that gave the loan has a security interest in the home and is "first in line" to take the home.
3. Creation of Security Interests in Assets
   In order to create a security interest enforceable against the debtor, and separate from putting the world on notice, there are three requirements set forth in UCC 9-203(b):
   
   1. The secured party must give value;
   2. The debtor must have rights in the collateral; and
   3. The debtor has authenticated (e.g., signed) a security agreement.

Practice Note: The UCC uses the term "authenticate" to mean "signed," but 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).

Furthermore, there are other ways to create an enforceable security interest. It can also be created by pledge (i.e., by possession of the collateral) or in certain circumstances control of the assets. UCC 9-203(b)(3).

Practice Note: The Uniform Commercial Code permits financing statements to contain the words "all assets" or "all personal property." UCC 9- 504(2). Although this may be true in the terms of the asset description in certain financing statements, it is not true with respect to the security agreement.

"SUPERGENERIC" DESCRIPTIONS THAT ARE ROUTINELY USED IN SECURITY AGREEMENTS, SUCH AS "ALL DEBTORS ASSETS" OR "ALL PERSONAL PROPERTY" WILL FAIL TO CREATE A SECURITY INTEREST DESIRED UNDER THE UCC.
UCC 9-108(c).

Article 9 of the UCC permits listing of defined categories of assets in both the security agreement and the financing statements. UCC 9-108(b)(3); UCC 9- 504(1).

Examples of Categories of Collateral that have been found to be detailed enough to create a security interest include:

"Goods." Goods means all things movable including fixtures, crops, and manufactured homes. UCC 9-102 (44).

"Inventory." Inventory is generally goods sold or leased whether under a sale or service contract or that are consumed in business. UCC 9-102 (48).

"Equipment." Equipment is defined as goods other than inventory, farm products, or consumer goods. UCC 9-102 (33).

"Fixtures." Fixtures means goods that have become fixtures under real property law. UCC 9-102(41).

"Account." The term "account" can include a wide range of various assets common to business such as credit card payables from a third party processor, lottery winnings, and it might even include health care receivables if properly defined. "Account" also includes a right to payment for goods or services. UCC 9-102(2).

"Chattel Paper." Chattel Paper means an obligation evidenced by monetary obligation and a security interest in specific goods. UCC 9-102(11).

"General Intangibles" is the catch-all category that covers all intangible assets that are not included in other categories. UCC 9- 102(42).

Other categories. There are several other categories of collateral and if your collateral is not listed you should consult competent counsel on whether particular collateral is secured.

After- Acquired Property Clauses. Article 9 permits a description which grants to the secured party rights in all collateral "in which debtor now has or hereafter acquires an interest." This is known as an "after-acquired property clause." UCC 9-204.

Practice Note: There are limitations on After-Acquired Property Clause security interests including purchase money security interests and being a buyer in the ordinary course of business.

The Perfection of Security Interests in Personal Property.

There are generally four methods of perfecting security interests in assets under the UCC. These include:

1. The most common method of filing financing statements with the appropriate regulatory body, generally the Secretary of State;
2. By acquiring physical possession of the property;
3. Somewhat complicated idea, but by acquiring control of the asset; and
4. Finally, there are other ways to perfect a security interest that are dependent on various state and federal laws for assets such as cars, other motor vehicles, boats and air planes and involve different types of registrations and proper certificates of title.

Filing Financing Statements. The most common method of perfecting a security interest in a transaction is the filing of a financing statement (known as a UCC-1 form). The UCC-1 must be filed in the appropriate governmental office and is very specific as to the form, information required and method of perfection. In Minnesota, these forms can be filed with the Minnesota Secretary of State's office on-line. The current system is somewhat confusing and if the proper information and procedures is not completed correctly, the security interest may not be perfected and the asset in question may not properly secure the debt.

Practice Note: As a rule of thumb, if the creditor uses the description of the collateral set forth in the security agreement for collateral ordinarily taken for a commercial debtor (e.g., equipment, goods, inventory, fixtures, accounts, general intangibles, payment intangibles, instruments and goods, etc.), the description will suffice. In addition, the financing statement can recite that it covers "all assets."

Location of Filing.

In most states, in order to perfect a security interest in that state for most property (other than farm related assets, other special items and fixtures) the proper filing is required. There are some various rules for farm related products such as crops and live stock.

In Minnesota for farm related products and crops, there are two important provisions for farm products. If the debtor is a resident of the State of Minnesota, then the statement must be filed in the office of the county recorder for the county of debtor's residence. If the debtor is not a resident of Minnesota, then the financing statement must be filed in the Office of the Secretary of State.

For business entities that are registered with the Secretary of State, including LLC's, corporations and limited partnerships, the state where the organization is registered is the proper state to file a financing statement. For unregistered business entities, the proper place for filing the financing statement is the State where the business is located or, if a business has more than one place of business, then the State in which the primary executive office is located.

Name of Debtor. The UCC requires creditor's to verify the exact name of the debtor in the public records and, therefore, perform a search of the records from the state where the debtor is located. UCC 9-503 (a)(1). Any discrepancies in the name might be deemed fatal. For an entity name, the exact name is required. UCC 9-502(a)(1); 9-503(a).

For individuals, this can create complex issues, because many people use more than one name or may use a nickname (e.g. Bill v. William or Tom v. Thomas). The rule of construction is whether the standard search logic used by the Secretary of State will uncover the name. UCC 9-506(c). The signature of the debtor on the financing statement is not required.

Conclusion

Article 9 of the Uniform Commercial Code does not promote creativity. It is concise, succinct and very technical. Not following the requirements leaves a creditor with little more that a pretty piece of paper and has significant pitfalls for the unwary or inexperienced practitioner. In this era of difficult business and economic conditions proper filing, perfection and enforcement of security interests makes proper enforcement of security interests even more important. This article gives a very brief and superficial review of the requirements of the UCC. As always, for a particular transaction please consult competent counsel.