UCC Article 9

A security interest arises when, in exchange for a loan, a borrower agrees in a security agreement that the lender (the secured party) may take specified collateral owned by the borrower if he or she should default on the loan. A security interest also provides the secured party with the assurance that if the debtor should go bankrupt, the secured party may recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrower’s property after it is divided among all creditors.

Security agreements are contracts. Article 9 of the Uniform Commercial Code governs security interests in personal property. It has been adopted, with some modifications, by every state. A security agreement must comply with other state laws governing contracts.

UCC 9 covers most types of security agreements for personal property that is both consensual and commercial. Statutory liens (e.g., a mechanics lien) generally are not governed by Article 9 but by the individual statute that creates them.

Article 9 contains a statute of frauds that requires a security agreement to be in writing unless it is pledged. A pledged security agreement arises when the borrower transfers the collateral to the lender in exchanger for a loan (e.g., a pawnbroker). The "perfection" of a security agreement allows a secured party to gain priority to the collateral over any third party. To perfect a security agreement, the filing of a public notice usually is required.

Article 9 also provides for the resolution of conflicts if there are multiple security interests or liens on specific collateral. Part 5 of Article 9 deals with the procedures to be followed when a borrower defaults.

Last updated: Sept. 29, 2008

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