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The presentation provides an overview of how a secured party (i) acquires a security interest in collateral, (ii) perfects that security interest, and (iii) determines priority of their security interest. Also reviewed and explained are recent changes to Article 9 regarding updates to filing procedures, search methods and lender due diligence, scheduled to take effect in July 2013.
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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.
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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.
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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))
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
What is the Collateral?
� First, classify collateral to determine how to describe it in security agreement and how to perfect the security interest
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Collateral Classification
1. Identify collateral and describe as precisely as possible
2. Determine how the collateral is categorized by Article 9 for filing purposes
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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))
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Quick Guide to Collateral
Classification
3. If collateral is a right, is it a right to:� Goods
� Payment, or
� Something else?
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Quick Guide to Collateral
Classification
4. If collateral is a right to goods, it is either:
a. Document of title, or
b. General Intangible (catch all)
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Quick Guide to Collateral
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Attachment
1. Agreement to create security reached between parties
2. “Value” must be given (1-204)
3. Debtor has rights in the collateral
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Common Filing Exceptions
� 9-311 – Collateral required filing under separate federal or state notice system (e.g. automobiles and airplanes)
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Common Filing Exceptions
� 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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Common Filing Exceptions
� 9-312(c) – Controls perfection of goods covered by negotiable document
� 9-312(d) – Controls perfection of goods when covered by non-negotiable document
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Common Filing Exceptions
� 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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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)
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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)
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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)
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Priority
� General rule is first to perfect is first in line (9-317(a)(1) and 9-322(a)(1))
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
2013 Amendments
� Most important change is to Debtor name provisions (9-503)- For registered organizations – look to
formation documents
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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)
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
2013 Amendments
� Change of definition of “public records” to “public organic records” (9-102(a)(68))
� Means records available for public inspection
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
2013 Amendments
� Debtors location for entities organized under federal law (e.g. banks) is location of “home office” or “main office”
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
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
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
2013 Amendments
� New UCC-1 and UCC-3 forms
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Article 9
� Questions?
Article 9: A Primer on Attachment, Perfection, and Priority
© 2012 Fox Rothschild
Contact Information
John H. Strock, Esq.
215.299.2922