January 07, 2020
Author: Ben Halverson
Organization: Lorman Education Service
What is UCC Article 9?
When it comes to loans, borrowers have many protections under law. However, creditors also require protection in the event of a loan default. It was for this purpose that the Uniform Commercial Code's Article 9 was first published in 1952, and later revised in 2001.
For well over 60 years, UCC Article 9 has been a guiding standard for borrower-creditor relations. This article will discuss what UCC Article 9 is, what it is used for, and key aspects of its implementation.
What is UCC Article 9?
The Uniform Commercial Code is a standardized set of laws that govern business transactions and financial contracts. This code has 9 separate articles, of which Article 9 deals with secured transactions; in other words, transactions in which a borrower agrees to offer personal property for security against a debt.
The UCC as a whole was ratified by the majority of states in the 1950's. As of this writing, only Louisiana has not fully ratified the code. On July 1st, 2001 a major revision of Article 9 went into effect across most states, and minor amendments were later enacted on July 1st, 2013.
What is UCC Article 9 Used For?
In short, UCC Article 9's main objective is to help lenders become secured creditors.
Article 9 regulates security interests in personal property as collateral for an outstanding debt. This means that even if a debtor defaults on a payment, or the performance of certain duties, the creditor still has the means to receive due compensation from the seizure/sale of the debtor's personal property, as outlined in a previously validated security agreement.
Collateral could include personal property such as:
- Inventory
- Fixtures
- Equipment
- Vehicles
- Stocks
- Bonds
- Personal possessions
In essence, UCC Article 9 serves as an important guideline to ensure that both parties (the debtor and the creditor) are treated fairly.
Key Aspects of UCC Article 9's Implementation
There are 3 fundamental concepts that inform the implementation of Article 9:
- Attachment. An attachment is when a debtor and creditor agree to create a security interest in one of the debtor's pieces of personal property. This should be outlined in the security agreement between the two parties. The security agreement should be signed by both parties, include a description of the property that will serve as collateral, and make it clear that the creditor has a security interest in the property.
- Perfection. The creditor achieves "perfection" when he creates a consensual agreement with the borrower, obtains and files a validated security agreement, and also files a UCC-1 financing form as a matter of public record. In cases where there are multiple creditors seeking compensation from the same piece of property, the creditor that is the first to achieve these conditions may claim priority over other claimants.
- Priority. If for any reason no creditors can claim perfection, then priority is granted in the order that security agreements were attached.
It is important to note that as of this writing, Article 9 does not endorse a specific type of financing statement, meaning that filers have had to cope with a plethora of differing forms adopted by filing officers. Perhaps this will change in the future. For now, UCC Article 9 remains a critical, though imperfect, legal standard with regards to loan transactions and other borrower-lender relations.
If you'd like to learn more about the Uniform Commercial Code and its relevance to your industry, reach out to us today to explore our continuing education courses for legal professionals, real estate agents, banking executives, and all other professionals that work in sectors affected by the UCC and related legislation.