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.
- 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. It has 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 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. 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 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).