New rules for secured transactions

January 1, 2003 By    

An important portion of the uniform commercial code (the “UCC”) has undergone sweeping revisions and has been adopted with some variations as law in virtually all states.

This section of law governs how valid security interests are created and where you need to file notice of the lien you have on another’s personal property in order to validate the lien. You should be aware that the place you file may be different than where you used to record these “financing statements.”

Consult your lawyer if you are going to engage in what is called a secured transaction ­ that is, where you have or want to have a valid lien on personal property as security for sums owed to you by the property’s owner. If the new UCC filing and other provisions are not followed, you may end up as a general creditor without any lien or security interest, rather than being a secured creditor.

Revised article 9 expands the scope of property and the transactions it covers. It simplifies and clarifies the rules for creating, filing, prioritizing and enforcement of a security interest. It also contains many special rules for consumer transactions.

Rather than referencing the state variations, here are some of the provisions as they appear in the uniform act itself.

Generally, the old law provided for the filing of a financing statement covering goods in the state where the goods are located. For intangible collateral ­ such as accounts and general intangibles ­ the filing was in the state of the debtor’s chief executive office.

Revised article 9 provides for only one place to file for all kinds of collateral: at the place of the debtor’s “location.” The legal definition of location varies, however.

For an entity created by a filing with a state ­ such as incorporation the entity’s location is that state. For a debtor that incorporated in Kansas but has its primary office in Missouri, for example, the financing statement for all types of collateral would be filed in Kansas, the state of the debtor’s formation.

For an entity not created by a filing with a state ­ such as a general partnership ­ the entity’s “location” is the place of its primary office. For an individual, the “location” is his or her principal residence.

The revision does away with the requirement that the debtor sign the financing statement. This change will facilitate electronic filing of financing statements and electronic searches.

A secured party can file a financing statement without the debtor’s signature only if authorized by the debtor to make the filing. The revision provides for automatic authorization to file a financing statement consistent with the security interest granted by the debtor in the security agreement.

Generally, article 9 continues the long-standing rule that the first secured party to file a financing statement, or to otherwise perfect its security interest, has priority. There are a number of exceptions, generally based on the method of perfection, which you should discuss with your lawyer.

One crucial issue is whether a propane tank is a fixture (attached to and part of real estate) or personal property. If you are selling a propane tank to your customer, the answer to this question will determine whether you file with the state or county.

Your lawyer may advise you to file both places if this issue is not clearly resolved in your jurisdiction.

As I mentioned at the outset, my purpose this month is only to give you an awareness of the uniform changes. As for the individual changes that apply in your state, ask your lawyer for advice in your jurisdiction.

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