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 his or her obligations.
- Article 9 is a section under the Uniform Commercial Code 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 Uniform Commercial Code (UCC) is a standardized set of business laws that regulate financial contracts. The Uniform Commercial Code has been fully adopted by most states in the U.S.
The code itself has nine separate articles. Each article deals with separate aspects of banking and loans. The UCC better enabled lenders to loan money secured by the borrower's personal property. The UCC was drawn up and ratified by most states in the 1950s. Louisiana is now the only state that has not fully ratified the code, although it has adopted Article 3, relating to checks, drafts and other negotiable instruments. 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 his or her debt, the creditor may repossess the secured property. For example, suppose that George brings his computer to be serviced by Mike. Upon completing the repairs, George does not have the funds to pay Mike. In this case, Article 9 states that Mike may keep the computer until payment is received.
Attachment and perfection are the two most important 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 him or herself in a position of priority or supremacy 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 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.
Revision to Article 9
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.