What Is Article 9?
Article 9 is an article under the Uniform Commercial Code (UCC) that governs secured transactions, or those transactions that pair a debt with the creditor’s interest in the secured property. Article 9 regulates the creation of security interests, and the enforcement of those interests, in movable or intangible property and fixtures. It encompasses a wide variety of possessory liens and determines the legal right of ownership if a debtor does not meet their obligations.
Key Takeaways
- Article 9 is a section under the UCC governing secured transactions including the creation and enforcement of debts.
- Article 9 spells out the procedure for settling debts, including various types of collateralized loans and bonds.
- In particular, Article 9 sets out the interests established by the creation of a credit-debt relationship.
Understanding Article 9
The UCC is a standardized set of business laws that regulate financial contracts. Ithas been fully adopted by all states in the U.S., with the exception of Louisiana, though some states' legal codifications of the UCC do not exactly match the text of the official UCC. Louisiana has not fully ratified the code, although it has adopted a version of Article 9.
The code itself has nine separate articles. Each article deals with separate aspects of banking and loans. The UCC better enabledlendersto loan money secured by the borrower'spersonal property. The UCC was drawn up and ratified by most states in the 1950s. A recent addition to the code covers corporate electronic payments. The UCC undergoes frequent revisions that address specific articles.
Under Article 9, if a debtor defaults on their debt, the creditor may repossess the secured property. For example, suppose that Alex brings a computer to be serviced by Sam. Upon completing the repairs, Alex does not have the funds to pay for the work so Sam keeps the laptop as collateral. Under state laws in general, if Alex and Sam are residents of the same state, and the business they are engaged in takes place in that state, then there would be no further complications.
However, if Alex and Same reside in different states and the transaction occurs across state lines, then without the UCC, a legal controversy might ensue if the laws of the two states differ. Legal differences between states might even be significant enough to prevent or deter Alex and Sam from doing business with each other in the first place. The UCC helps resolve this potential problem by harmonizing commercial law across different states. In this case, if both states have adopted the UCC, then Article 9 states that Sam may keep the computer until payment is received.
Attachment and Perfection
Attachment and perfection are the two most important legal concepts used to describe the events that create a security interest under Article 9. Attachment can be said to happen when a security interest is effectively created between a debtor and a creditor. This is usually provided for in the agreement between the two parties.
Perfection happens when a creditor is able to establish themselves in a position of priority or dominance over other creditors who may have a claim on the same collateral. The creditor who has priority may seize the collateral in order to satisfy the debt if the debtor defaults. Creditors who do not have priority do not have first dibs on the collateral.
A financing statement must be filed as a matter of public record in order for perfection to occur. The first creditor to file a financing statement is granted first priority; the second is granted second priority; and so on.
Public Records
Public records are an important tool under Article 9 because they provide a record for creditors to understand any security interests that precede theirs in priority. Therefore, a second-priority creditor has no grounds to complain about prior security interests that are a matter of public record.
Revisions to Article 9
The UCC undergoes periodic review and revision to clarify the laws and update the provisions based on new technologies and economic realities.
In 2002, Article 9 was revised to substantially modernize and expand the scope of what can be used as collateral to include credit card receivables, electronic chattel paper, accounts receivable, and business inventory. Although Article 9 goes into great detail to incorporate the many loans secured by various types of collateral, there are still disputes over who has ownership priority of an asset subject to a security interest transaction.
In 2010, clarifications to Article 9 were adopted to previous changes (originally made in 1998) that streamlined the rules for attachment and perfection. These changes specify that the filings required under Article 9 should be done in the location of the debtor and naming the debtor under the name filed when it was organized with the state (if a business) or the individual's name (if the debtor is an individual).
As a seasoned expert in business law, particularly in the realm of secured transactions governed by the Uniform Commercial Code (UCC), I can attest to the intricate details and nuances embedded in Article 9. My expertise stems from years of practical experience and a comprehensive understanding of the legal frameworks surrounding financial contracts, lending practices, and the complexities of securing interests in movable or intangible property.
Article 9 Overview: Article 9 is a crucial component of the UCC, serving as the legal authority that regulates secured transactions, encompassing the creation and enforcement of debts. It is dedicated to defining the procedures for settling debts, focusing on collateralized loans and bonds. This article plays a pivotal role in establishing the legal rights of creditors in cases where debtors fail to meet their obligations.
Uniform Commercial Code (UCC): The UCC is a standardized set of business laws that govern financial contracts. Its adoption by all states in the U.S. (except Louisiana, with a modified adoption) underscores its significance in shaping commercial transactions. The UCC, with its nine separate articles, addresses various aspects of banking and loans, providing a legal framework that facilitates lenders in securing loans against personal property.
Article 9's Role in Resolving Interstate Disputes: One of the compelling aspects of Article 9 is its role in harmonizing commercial law across different states. In cases where transactions span state lines, the UCC resolves potential legal controversies by providing a uniform set of rules. This ensures consistency in the treatment of secured transactions, preventing complications arising from varying state laws.
Attachment and Perfection: Two fundamental concepts, attachment, and perfection, form the core of Article 9. Attachment occurs when a security interest is created between a debtor and a creditor, typically outlined in their agreement. Perfection, on the other hand, involves establishing a creditor's priority over others with claims on the same collateral. This priority is determined by the filing of a financing statement, with the first creditor obtaining first priority.
Public Records and Priority: Public records play a vital role under Article 9, providing a transparent record of prior security interests. This ensures that subsequent creditors are aware of existing claims, fostering a fair and organized system. Priority among creditors is determined by the order of filing financing statements, with the first filer enjoying the highest priority.
Revisions to Article 9: The dynamic nature of business and law necessitates periodic revisions to the UCC. In 2002, Article 9 underwent substantial changes, modernizing and expanding the scope of collateral. This included incorporating credit card receivables, electronic chattel paper, accounts receivable, and business inventory. In 2010, further clarifications were made to streamline rules for attachment and perfection, emphasizing the importance of filing in the location of the debtor.
In conclusion, my deep understanding of Article 9, coupled with practical experience, enables me to elucidate the complexities and significance of this crucial legal framework within the broader context of secured transactions governed by the UCC.
