Question

Laws for Accountants

Article 9 of the UCC describes different types of property that may be used for collateral. What are the various categories of property under Art. 9-excluding securities since different rules apply to how security interests are created, attach and are perfected in securities.  What are these other types of property and why is that important? Note-remember that the UCC does NOT cover real estate

What are the steps to perfect a security interest under Art. 9 of the UCC? For each classification of property, what is necessary to perfect the Art. 9 security interest in this property? Specifically what is a purchase money security interest in consumer goods and why does that matter?

Answer 1

The first is "tangibles," including especially goods. The second category consists of "pure intangibles," including choses in action, ranging from rights to payment or performance to claims to special protection or privilege. The third category is "quasi goods," made up of intangibles that have taken on a certain tangible or goods-like quality because of the merger of some right or claim into a document or record, with the paradigm being a negotiable instrument.

Quasi Goods

The description quasi goods is intended to capture the idea that an intangible can be merged into a document or record so that parties who deal with the right or claim do so by dealing with the document or record. In the case of a simple contract, there may or may not be a paper in which the rights under the contract are embodied. Any writing that does exist is only evidence that a contract was entered into. The rights under the contract can be transferred by an assignment that does not require transfer of any writing evidencing the contract.

1. Instrument

New section 9-102(a)(47) defines "instrument" to mean "a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment." Thus, as was true under former section 9-105(1)(i), instruments are quasi goods.

2. Investment Property

As seen above, investment property is excluded from the definition of "instrument." Security interests in investment property pose complicated questions, many of which are attributable to how such property is held and traded today.

3. Tangible Chattel Paper

Historically, goods have sometimes been referred to as chattels. Under former Article 9 "chattel paper" was paper that was goods-like and under former section 9-105(1)(b) meant essentially a writing or writings that evidenced both a monetary obligation and a security interest. The classic example of chattel paper historically has been a conditional sales contract, for example, a contract under which a vehicle is sold on installment credit that is secured by an interest in the vehicle.

4. Documents of Title

Security interests often are taken in warehouse receipts and bills of lading. A warehouse receipt is a document of title issued by a warehouse that is both a receipt evidencing a bailment of goods and a contract in which the terms of the bailment are spelled out. A bill of lading is a document of title issued by a carrier and it also is both a receipt and a contract. Documents of title are referred to in both former and new Article 9 simply as "documents."

Pure Intangibles

1. Generally

Pure intangibles are neither goods nor goods-like. Stated differently, the defining characteristic of a pure intangible is that in law it cannot be possessed or pledged. This means that a security interest in such property cannot be perfected by possession.

2. Accounts

"Account " is defined in new section 9-102(a)(2). A significant change from former section 9-106 is that the new definition expands the meaning of account to include a right to payment of a monetary obligation resulting other than from a sale of goods or services. Consequently, many things that likely were general intangibles under former Article 9 -- including especially license fees, credit card charges and lottery winnings -- are accounts under new Article 9.

3. General intangibles

"General intangible" is defined in new section 9-102(a)(42). Under the definition, "general intangible" includes things (choses) in action other than accounts. As was true under former section 9-106, what is an account cannot be a general intangible, but because the definition of account in new section 9-102(a)(2) has been expanded beyond rights to payment for sales of goods or services greater care must be used in deciding whether or not a particular pure intangible is a general intangible

Software" is a general intangible

Methods of Perfecting Security Interest

Second, Article 9 expanded and created more flexible methods of perfecting security interests. Specifically, the statute provides for perfection by "control" and for automatic perfection of security interests in certain types of collateral. Security interests in deposit accounts, letter-of-credit rights and electronic chattel paper are subject to perfection by control. The steps required to obtain control under Revised Article 9, however, vary depending on the type of property involved. Security interests perfected by control under Revised Article 9 generally have priority over security interests perfected under other means.

SECTION 9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT.
The following security interests are perfected when they attach:

(1) a purchase-money security interest in consumer goods, except as otherwise
provided in Section 9-311

(b) with respect to consumer goods that are subject to a statute or treaty
described in Section 9-311(a);
(2) an assignment of accounts or payment intangibles which does not by itself or
in conjunction with other assignments to the same assignee transfer a significant part of the
assignor’s outstanding accounts or payment intangibles;
(3) a sale of a payment intangible;
(4) a sale of a promissory note;
(5) a security interest created by the assignment of a health-care-insurance
receivable to the provider of the health-care goods or services;
(6) a security interest arising under Section 2-401, 2-505, 2-711(3), or 2A-508(5), until the debtor obtains possession of the collateral;
(7) a security interest of a collecting bank arising under Section 4-210;
(8) a security interest of an issuer or nominated person arising under Section 5-118;
(9) a security interest arising in the delivery of a financial asset under Section9-206(c);
(10) a security interest in investment property created by a broker or securities intermediary;
(11) a security interest in a commodity contract or a commodity account created by a commodity intermediary;
(12) an assignment for the benefit of all creditors of the transferor and subsequent transfers by the assignee thereunder; and
(13) a security interest created by an assignment of a beneficial interest in a decedent’s estate.
SECTION

SECTION 9-312. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER, DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS, INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT
RIGHTS, AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY PERFECTION WITHOUT FILING OR TRANSFER OF POSSESSION.

(a) Perfection by filing permitted. A security interest in chattel paper,
negotiable documents, instruments, or investment property may be perfected by filing.
(b) Control or possession of certain collateral. Except as otherwise provided in Section 9-315(c) and (d) for proceeds:
(1) a security interest in a deposit account may be perfected only by control under Section 9-314;
(2) and except as otherwise provided in Section 9-308(d), a security interest in a letter-of-credit right may be perfected only by control under Section 9-314; and
(3) a security interest in money may be perfected only by the secured party’s taking possession under Section 9-313.
(c) Goods covered by negotiable document. While goods are in the possession of a bailee that has issued a negotiable document covering the goods:
(1) a security interest in the goods may be perfected by perfecting a security interest in the document; and
(2) a security interest perfected in the document has priority over any security interest that becomes perfected in the goods by another method during that time.
(d) Goods covered by nonnegotiable document. While goods are in the possession of a bailee that has issued a nonnegotiable document covering the goods, a security
interest in the goods may be perfected by:
(1) issuance of a document in the name of the secured party;
(2) the bailee’s receipt of notification of the secured party’s interest; or
(3) filing as to the goods.
(e) Temporary perfection: new value. A security interest in certificated securities, negotiable documents, or instruments is perfected without filing or the taking of
possession for a period of 20 days from the time it attaches to the extent that it arises for new
value given under an authenticated security agreement.
(f) Temporary perfection: goods or documents made available to debtor. A perfected security interest in a negotiable document or goods in possession of a bailee, other than one that has issued a negotiable document for the goods, remains perfected for 20 days withoutfiling if the secured party makes available to the debtor the goods or documents representing the goods for the purpose of:
(1) ultimate sale or exchange; or
(2) loading, unloading, storing, shipping, transshipping, manufacturing,processing, or otherwise dealing with them in a manner preliminary to their sale or exchange.
(g) Temporary perfection: delivery of security certificate or instrument to debtor. A perfected security interest in a certificated security or instrument remains perfected
for 20 days without filing if the secured party delivers the security certificate or instrument to thedebtor for the purpose of:
(1) ultimate sale or exchange; or
(2) presentation, collection, enforcement, renewal, or registration oftransfer.
(h) Expiration of temporary perfection. After the 20-day period specified in subsection (e), (f), or (g) expires, perfection depends upon compliance with this article.

Purchase Money Security Interests in Consumer Goods

A purchase money security interest (PMSI) arises in certain situations where the secured party provides the funds necessary to purchase the subject collateral. § 9-103. This can arise through a loan for identified collateral or when the secured party sells and then finances the collateral for the purchaser. A PMSI is automatically perfected when the security agreement establishes a security interest and the collateral is consumer goods (other than vehicles subject to certificate of title or fixtures). § 9-309(1). Consumer goods means that the goods are for personal use by the purchaser (rather than for business use or resale).

A PMSI in consumer goods provides the secured party priority in interest above other secured parties and lien creditors. The only limitation to an automatically perfected security interest under § 9-309(1) is that certain types of purchasers of the collateral from the secured party may take the collateral free of the security interest. § 9-320(b). The purchaser of the consumer goods from the seller:

• Cannot know about the security interest in the collateral;
• Must provide value for the goods (it cannot be a gift);
• Must primarily use the goods for personal, family, household purposes.

The purchaser of the consumer goods will not take the goods free of the security interest if the secured party has filed a financing statement to perfect its security interest.