Accounting Law - Chapter 29. Security Interests in Personal Property.

What article covers security interests in personal property?

Article 9 of the UCC, titled Secured Transactions.

What must a creditor do to ensure their security interest in a debtor’s personal property is valid and takes priority over other creditors? AKA how to create a security interest (3 steps)

The creditor must comply with Article 9 of the UCC, which governs secured transactions, including properly creating, attaching, and perfecting the security interest to make it enforceable and superior to claims of other creditors.

What is a Security Interest?

An interest in personal property or fixtures a creditor obtains from a debtor to secure payment or performance of an obligation.

Types of Personal Property Collateral under Article 9

Accounts, Chattel Paper, Deposit Accounts, Documents of Title, General Intangibles, Goods (Consumer goods, Equipment, Farm Products, Inventory, Fixtures), Instruments, and Investment Property

What are Accounts under UCC Article 9?

rights to receive payment for goods sold, services performed, or other obligations that are not formal documents like checks or promissory notes. This includes things like open accounts, lottery winnings, and health insurance payments, whether or not the service has already been performed.

What is Chattel paper under UCC Article 9?

Written documents that show both a promise to pay money and a security interest in specific goods, like a conditional sales contract for an appliance bought on a time-payment plan.

What are Deposit Accounts under UCC Article 9?

Bank accounts such as demand, savings, time, or passbook accounts.

What are Documents of Title under UCC Article 9?

Papers showing ownership or right to possession of goods, including bills of lading, dock receipts, dock warrants, and warehouse receipts.

What are general intangibles under UCC Article 9?

A broad category of non-physical assets, including patents, copyrights, software, and franchises.

What are goods under UCC Article 9?

Physical items that can be collateral, divided into types depending on use:

• Consumer goods: For personal, family, or household use (cars, furniture, appliances).

• Equipment: Goods used in business that are not inventory, consumer goods, or farm products.

• Farm products: Crops, livestock, or farming supplies still in possession of a farmer.

• Inventory: Goods held for sale, lease, or use in business, including raw materials and work in process.

• Fixtures: Goods attached to real property so they become part of it.

What are Instruments under UCC Article 9?

Written promises to pay money, like checks, promissory notes, drafts, or certificates of deposit.

What is Investment Property under UCC Article 9?

Securities or financial assets, including stocks, bonds, and commodity contracts.

What is a  PERFECTED and ATTACHED Security Interest good against?

1. The debtor

2. Other creditors of the debtor

3. a person who might purchase the property from the debtor.

What is Attachment (of a security interest)

The process that makes a security interest legally enforceable against the debtor.

3 basic requirements for attachment

1. There must be a security agreement by the debtor granting the creditor a security interest in the collateral. UNLESS!! the secured party must have possession of the property. then they don’t need it.

2. The creditor must give something of value to the debtor. (for example, loan money, advance goods)

3. The debtor must have rights in the collateral or the owner of the collateral must agree to ALLOW its use as collateral. 

Requirements of the Security Agreement between debtor and creditor.

1. Must be authenticated by the debtor (usually by signing). Unless the creditor already has the collateral.

2. Must describe the collateral so it can be specifically identified. Accuracy here is important for enforcing rights and filing UCC-1 statements. for example, a car should have listed the year, make, and serial number.

3. Detail the debtor’s promise to pay, what happens in the event of a default, and the creditors protections.

What is a Purchase Money Security Interest (PMSI)?

A PMSI is a special type of security interest that arises when a creditor finances the purchase of goods and takes a security interest in those same goods.

Creditors of PMSI’s are given special legal priority over other creditors if properly perfected.

What are Future Advances?

A future advance is a loan or credit that a lender agrees to provide in the future, not just at the time the security interest is created.

• Example: A line of credit where the borrower can draw money later.

• The security interest in the collateral covers both current and future loans.

What is a security interest in after-acquired property?

After-acquired property is property that the debtor does not currently own but may acquire in the future.

• A security interest can be drafted to cover after-acquired property, but it only attaches once the debtor actually obtains rights to the new property.

• Example: A restaurant borrows money and grants a security interest in all current and future equipment. If the restaurant buys a new refrigerator later, the security interest attaches when they acquire it.

What are Proceeds?

Proceeds on the sale or other disposition of collateral to which a security interest has been attached are automatically covered as of the time the security interest attaches to the collateral.

What does Perfection give to the Creditor?

They get protection against other creditors or purchasers of the collateral. It protects their security interest against third parties (other creditors or buyers).

What are the 3 main ways of perfecting a security interest?

1. By filing a public notice of the security interest

2. By the creditor taking possession/control of the collateral

3. In certain transactions, they only need attachment of the security interest. This is known as automatic perfection

Perfection by Public Filing.

the process of filing a financing statement (UCC-1) with the state to perfect a security interest.

• It makes the security interest public and enforceable against third parties, giving the creditor priority over other creditors.

What are the requirements of a public filing (UCC-1 financing statement)?

1. Debtor’s name and address – accurate legal name is critical.

2. Secured party’s (creditor’s) name and address

3. Description of the collateral – must reasonably identify the property.

4. Filing with the correct office – usually the state’s Secretary of State.

• Optional info: additional details about the security interest or debtor.

Effective time period for a financing statement

A financing statement is effective for a period of five years from the date of filing, and it lapses then unless a continuation statement has been filed before that time. An exception is made for real estate mortgages that are effective as fixture filings—they are effective until the mortgage is released or terminates

Continuation Statement (of a financing statement)

may be filed within six months before the five-year expiration date of the financing statement The continuation statement must be signed by the secured party, identify the original statement by file number, and state that the original statement is still effective. Successive continuation statements may be filed

Termination Statement (of a financing statement)

A termination statement is a document filed by a creditor to show that a secured debt has been fully paid and the security interest in the collateral no longer exists.

A consumer debtor is entitled to a termination statement when they fulfill their debts and obligations on the financing statement.

What is the purpose of public filing of a financing statement?

Public filing of a security interest is intended to put any interested members of the public on notice of the security interest. A potential creditor of the debtor, or a potential buyer of the collateral, can check the records to see whether anyone else claims an interest in the debtor’s collateral.

Thus, a security interest is perfected by change of possession of collateral from the debtor to the creditor/secured party or their agent

How can possession of collateral perfect a security interest

• A security interest is perfected when the debtor gives possession of the collateral to the creditor or a third party holding it for the creditor.

• Example: Simpson leaves his guitar with a pawnbroker; the pawnbroker’s interest is perfected by possession.

When is possession a practical way to perfect a security interest?

• Best for commercial collateral, chattel paper, negotiable documents of title, money, and sometimes inventory.

• Example: A finance company controls peanuts in a field warehouse until a loan is repaid.

When is possession not practical for perfection?

• Not practical for equipment or farm products because the debtor needs to use them in business.

• Filing a UCC-1 financing statement is usually the preferred method in these cases.

What duties does a bailee have when holding collateral for a creditor?

A bailee holds collateral on behalf of the creditor and must perform duties owed to parties in interest, such as safeguarding and returning the collateral as required. They are a fiduciary.

What is control in the context of perfecting a security interest

Control is a way for a secured party to perfect a security interest by having direct authority over the collateral, instead of filing or taking possession.

Only method for deposit accounts.

How can a secured party obtain control of a deposit account?

1. The secured party is the bank holding the account.

2. Agreement among debtor, secured party, and bank to follow creditor instructions.

3. The secured party becomes the bank’s customer for that account.

What is Automatic perfection? aka perfection by attachment?

• Automatic perfection happens without filing or taking possession.

• It occurs as soon as the security interest attaches.

• Only applies to consumer goods purchased with a purchase money security interest (PMSI).

Exceptions to Perfection by Attachment: Consumer goods

• Motor vehicles that require a state-issued certificate of title — attachment alone doesn’t perfect the interest.

• Fixtures — automatic perfection is only partially effective

Security Interests in Fixtures - How are they perfected?

• Attachment perfects the interest initially for consumer goods that become fixtures.

• Limitation: Attachment may not be enough against other real estate creditors.

• Solution: File a fixture filing in the real estate records to secure priority.

What are the general priority rules for conflicting security interests?

• First to file or perfect has priority over later perfected interests.

• If none are perfected, first to attach has priority.

• Unperfected interests do not get preferred treatment in bankruptcy, so perfection is very important.

What is the priority rule exception for Purchase Money Security Interests (PMSI’s)? specifically IN INVENTORY

A perfected purchase money security interest (PMSI) in inventory can take priority over a previously perfected conflicting security interest if all four conditions are met:

1. PMSI is perfected when the debtor receives the inventory.

2. PMSI creditor notifies the prior secured creditor in writing before debtor receives the inventory.

3. Prior secured creditor received notification within the last 5 years.

4. Notification states the intention to acquire a PMSI in inventory and describes the inventory.

What is a PMSI in inventory?

A Purchase Money Security Interest (PMSI) in inventory arises when a creditor lends money or sells goods on credit so the debtor can buy inventory, and the security interest is in that inventory.

• Example: A supplier sells 1,000 widgets to a retailer on credit and keeps a security interest in those widgets until they are paid for.

What is a PMSI in noninventory collateral and how does it get priority?

• A PMSI in noninventory collateral is a security interest in goods other than inventory (e.g., equipment, machinery, consumer goods) that a creditor finances.

• Priority rule: Takes priority over conflicting interests if perfected when the debtor receives the collateral or within 20 days after.

• Example: A bank loans money for a delivery truck; files a financing statement within 20 days → bank’s PMSI has priority over earlier creditors.

Why does the UCC give special protection to PMSIs?

• Prevents one creditor from blocking other credit → debtor can continue buying inventory/equipment.

• Gives PMSI holder first claim on financed goods until paid.

• Requires notice to prior creditors → alerts them that some collateral is subject to a PMSI.

What is the buyer in the ordinary course of business (BIOCB) exception to secured creditor priority?

• A BIOCB takes goods free of the seller’s security interest, even if perfected and known.

• Example: Customer buys a car from a dealership; the bank’s lien on inventory does not follow the car.

• Purpose: Ensures smooth commerce and clear title for ordinary buyers.

What is an Artisan’s or Mechanic’s Lien and how does it interact with a perfected security interest? (or, take priority over it?)

• A lien by law that allows someone who repairs or improves property to retain it until paid.

• Can have priority over a perfected security interest.

• Example: A garage repairs a car with a bank lien; the garage gets paid first if the car is sold.

How does automatic perfection by attachment work for consumer goods, and what is the exception?

• Automatic perfection gives the seller/creditor priority over other creditors of the debtor.

• Exception: A bona fide purchaser of the collateral from the debtor (unaware, gives value, buys for personal/family/household use) takes free of the security interest.

• Protection: To avoid losing to a buyer, the seller must file a financing statement.

How are security interests in fixtures prioritized, and what must a creditor do to protect their interest?

• Default: Owner/mortgagee usually has priority over security interests in fixtures.

• PMSI exception: Secured party can have priority if:

  1. Debtor has interest/possession of property,

  2. PMSI arose before fixture,

  3. Secured party perfects by fixture filing before or within 20 days.

• Consumer goods that are removable: Attachment may suffice.

• Non-removable fixtures: Filing is required to protect against other real property interests.

• On default: Secured party can remove the fixture but must reimburse for damage.

What is default under the UCC, and what can a secured creditor do if a debtor defaults?

• Definition: Usually defined in the security agreement; must be declared in good faith.

• Creditor’s options on default:

  1. Sue on the debt.

  2. Repossess and use strict foreclosure.

  3. Repossess and sell the collateral, then collect any deficiency or return surplus.

What is a creditor’s right to possession under the UCC, and what rules apply to repossession?

• Repossession allowed if the agreement permits and the debtor defaults.

• Self-help repossession: When a secured creditor takes back collateral on their own after the debtor defaults. Only if it can be done peaceably; otherwise, court action is required.

• Intangible collateral: Secured party can give notice and receive payments or performance directly.

What are the requirements of Sale of Collateral by a secured party?

• Sale/lease must be commercially reasonable.

• Debtor must get notice of public or private sale.

• Gives debtor a chance to object if the sale is unfair.

What is the right of redemption after default?

• Debtor can recover collateral before it’s sold.

• Must pay:

  1. All obligations secured by the collateral.

  2. Reasonable expenses of retaking, holding, and preparing the collateral.

What happens when a consumer debtor has paid 60% or more of the purchase price or debt on repossessed goods?

• The creditor must sell the collateral.

• Strict foreclosure (just keeping it) is not allowed unless the debtor agreed in writing.

What happens when a consumer debtor has paid less than 60% of the purchase price or debt on repossessed goods?

• Creditor may propose to keep the collateral to satisfy the debt.

• Debtor has 20 days to object in writing.

  • If they object: creditor must sell.

  • If no objection: creditor may keep the collateral.

What is the order of distribution for proceeds from the sale of repossessed collateral, and what happens if proceeds don’t cover the debt?

• Expenses first: Repossession, storage, sale costs, attorney fees.

• Debt second: Remaining proceeds pay the creditor who sold the collateral.

• Junior liens third: Other lower-priority creditors are paid.

• Surplus last: Any leftover money goes to the debtor.

• Deficiency: If proceeds don’t cover the debt, the debtor still owes the balance (deficiency judgment).

When can a creditor be held liable in connection with collateral?

A creditor can be liable to the debtor or others if they act improperly when repossessing, foreclosing, or selling collateral. Acting in breach of the peace or violating Article 9 rules can create liability.