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1
whole or in part.
Secured Transactions
credit is involved.
Second, students should understand what a security interest is—that it is not a retention of title to goods, but a
lien on them. A secured transaction is a borrowing of money for a security interest in goods (the debtor’s property.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
UCC terminology is used in all documents in secured transactions.
• A secured party is a creditor who has a security interest in a debtor’s collateral.
• A debtor is the party who owes payment or other performance of an obligation.
• A security interest is an interest in a debtor’s collateral that secures payment or performance of an
ENHANCING YOUR LECTURE—
ARTICLE 9 SECURITY INTEREST
The security devices in use prior to the adoption of Article 9 were replete with variations that, according to
many, made no logical sense. These devices included chattel mortgages, trust receipts, conditional sales
contracts, assignments of accounts, and pledges. Additionally, each device had its own jargon. Depending on
the device used, for example, a debtor could be called variously a pledgor, a mortgagor, a conditional vendee,
could not be conveniently moved from the debtor’s property. In such a situation, the creditor would have an
independent warehouser establish a warehouse on the debtor’s premises to obtain possession of the goods.
This was called a field warehouse and dates from about 1900.
ARTICLE 9 STREAMLINED THE LAW GOVERNING SECURED TRANSACTIONS
whole or in part.
other creditors of this prior security interest. With these two elements in mind, the drafters created a new,
simplified security device with a single set of terms to cover all situations. What is this security device called?
It is called, simply, an Article 9 security interest.
APPLICATION TO TODAY’S WORLD
II. Creation of a Security Interest
A. BASIC REQUIREMENTS
• The debtor must have rights in the collateral.
B. WRITTEN OR AUTHENTICATED SECURITY AGREEMENT
A written or authenticated security agreement must describe (reasonably identify) the collateral and be
signed or authenticated by the debtor [UCC 9–102(a)(7), 9–203(1), 9–108(c)].
The debtor’s rights can represent a current or future interest. Title is not a requirement.
III. Perfection of a Security Interest
Perfection protects a security interest against some claims of third parties who may wish to have their debts
satisfied out of the same collateral. Collateral is generally considered either tangible or intangible. The text
whole or in part.
with this requirement discussed in the text include—
a. Corporations
A corporate debtor’s name on the financing statement must match its name in the “public
records” [UCC 9–503(a).
c. Individuals and Organizations
Financing statements for other organizations—unincorporated associations, joint ventures,
churches, clubs, etc.—must be filed under the names of their organizations or the names of
their members.
amendment to the financing statement must be filed.
3. Description of the Collateral
A security agreement’s description may be repeated in a financing statement; a security
agreement may be filed as the financing statement (if it meets the criteria); or, when permitted, a
CASE SYNOPSIS—
Case 21.1: In re Baker
Richard and Amanda Baker operated a dairy farm. They bought fifty-eight cows from Jeanne Angell on
whole or in part.
cows’ descriptions on the financing statement were questioned.
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Notes and Questions
party’s interest in a debtor’s collateral is perfected can have serious consequences for the creditor. A creditor
with a perfected security interest will prevail over any unsecured creditors. If an interest is not perfected and
the debtor defaults, the creditor with the unperfected interest will not have first rights to the collateral.
How do the documents that comprise a security agreement function as a “Statute of Frauds”? A
ered insufficient to create a security interest? It is too general to put third parties on notice of the possible
claim of the creditor.
Under what circumstances might a financing statement not be considered effective even if it does
not identify the debtor correctly? (Hint: When will a computer’s search engine find a debtor’s name
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 21.1
Do the UCC’s rules concerning collateral descriptions encourage parties to enter into security
whole or in part.
agreements in the first place.
Suppose that Angell had listed only the cows’ names and not their ear-tag designations. Would
the result have been different? Explain. It is not likely that the result would have been different. Providing
only the cows’ names in a financing statement might have been enough for perfection. In this case, of course,
many of the ear tags were lost or destroyed, or replaced, making them almost useless as a method of
identification. The court concluded that the names of the cows was sufficient information to permit any party to
Other cases involving discrepancies in financing statements include the following:
• In re Banke, 275 Bankr. 317 (Bankr.N.D.Iowa 2002) (even if a security interest that a debtor purported to
grant to a bank in a boat that was titled solely in the name of the debtor’s spouse was enforceable, the bank
entity and the creditor filed financing statements that correctly identified the debtor both before and after the
bankruptcy).
• In re Goolsby, 284 Bankr. 638 (M.D.Tenn. 2002) (errors in descriptions, addresses, names, and
signatures on a financing statement do not destroy its effectiveness so long as the discrepancies do not
perfection of the security interest if the names are sufficiently similar).
4. Where to File
Depending on the classification of the collateral, a financing statement is filed in the appropriate
whole or in part.
• For individual debtors, the state of the debtor’s principal residence.
CASE SYNOPSIS—
Case 21.2: In re Camtech Precision Manufacturing, Inc.
bankruptcy court to declare bankruptcy. A committee of unsecured creditors asked the court to rule that
Regions’s statements failed to perfect the bank’s security interest in Camtech and Avstar Fuel’s assets.
The court found that Regions’s financing statements were seriously misleading and ineffective to perfect
security interests in the assets of Camtech and Avstar Fuel. Regions merely listed Camtech and Avstar Fuel
Should the bank have attempted to resolve the consumer problem suffered by the Millers rather
than suing them for full payment on the loan? The bank followed proper procedure in good faith. Lenders
do not provide warranties for all consumer problems, so they owed no obligation to the Millers who decided
for no clear reason that they wanted out of the deal long after all parties had performed. Norwest appeared to
debtor defaults, the creditor with the unperfected interest will not have first rights to the collateral. This would
also be the effect of reducing Regions’s claim in the bankruptcy proceeding to that of an unsecured creditor
with respect to the assets of Camtech and Avstar Fuel.
whole or in part.
Suppose that searches of the Florida and New York records had revealed that Regions was a
revealed the creditor’s interest. This would render the filing effective, and the creditor would retain its secured
status. In the case, searches of the records failed to disclose a financing statement identifying Regions as a
secured creditor of Camtech or Avstar Fuel. This rendered the filing ineffective and resulted in reducing
Regions’s claim to that of an unsecured creditor.
interest in the debtors’ assets was also unsecured? As stated in the text, if a secured party’s interest is
rendered unperfected by an improper filing, the secured party’s claim in bankruptcy is reduced to that of an
unsecured creditor. Camtech and Avstar Fuel’s unsecured creditors sought to reduce Regions’s allegedly
secured interest so that on a distribution of Camtech and Avstar Fuel’s assets in bankruptcy all of the debtors’
creditors might receive something. Otherwise, if Regions’s interest were held to be secured, it would take
1. Perfection by Possession
Perfection by possession may be impractical because it denies a debtor the right to use, sell, or de-
rive income from property to pay off the debt. Security interests in some types of collateral
(negotiable instruments, nonnegotiable transferable instruments, stocks, bonds) can only be per-
fected by possession.
b. Exceptions to Automatic Perfection
Exceptions include—
• Security interests that are subject to other federal or state laws.
whole or in part.
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
ENHANCING YOUR LECTURE—
HOW DO YOU PERFECT A SECURITY INTEREST?
The filing of a financing statement in the appropriate location, as discussed in this chapter, is the most
common method of perfection. Generally, the moment the filing takes place, your priority is established over
the other creditors—as well as over some purchasers of the collateral and a subsequent trustee in
bankruptcy.
Sometimes, credit transactions occur outside normal business relationships. You may be asked, for
example, to aid an associate, a relative, or a friend. At that moment, you should reflect on your need for
security for any debt that will be owed to you.
If there is a need for security, then you should perfect your security interest, even if you believe this action
private but still have security for the loan.
CHECKLIST FOR PERFECTING YOUR SECURITY INTEREST
1. File a financing statement promptly.
C. EFFECTIVE TIME DURATION OF PERFECTION
