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Secured Transactions in New York

Michael Decker
Michael Decker

How does Article 9 of the U.C.C. apply to secured transactions?

The subject of secured transactions is governed by Article 9 of the Uniform Commercial Code. As a rule, secured transactions constitute credit transactions, in a scheme in which one party, known as the debtor, will buy something from another, called the creditor or secured party, but without remitting immediate payment. The creditor, therefore, takes out a security interest, which allows him to rely on something other than the debtor’s mere promise. This way he may ensure payment. A security interest is a limited right in the personal property of the debtor, known as collateral, which would allow the creditor to take the personal property should the debtor neglect his credit obligations.

Attaching the interest

For a security interest to be effective between the parties certain steps must be taken to attach it. Upon attachment of the interest, as between the parties, the creditor may take the collateral to satisfy the obligation in the event of the debtor defaulting. Yet, attachment does not accord the creditor rights against third parties who may also have an interest in the collateral.

Secured Transactions

Why should a security interest be perfected?

The creditor would need to take certain steps to perfect the security interest for their rights to beat out those of third parties. Perfection essentially acts as a form of notice that the creditor has a security interest in the collateral, which would make their rights to it superior to those of certain other creditors who may have a similar interest. There are rules governing prioritization of these rights which exceed the scope of this article.

What is covered by Article 9?

Both contractual security interests in personal property and fixtures, meaning personal property which is firmly affixed to real property, are governed by article 9. An interest in personal property or fixtures which serves the purpose of securing payment or performance of an obligation is known as a security interest.

Sales of receivable – Article 9 treats as security interests and governs the outright sale of accounts of the following: chattel papers – as concerns secure transactions, this is a document used for selling property on credit while retaining a certain interest to it; payment intangibles – this is a general intangible which primarily obligates an account debtor to pay money; and promissory notes – this is an unconditional written promise, signed by the maker, to pay absolutely and in any event a certain sum of money either to, or to the order of, the bearer or a designated person.

This can be best illustrated with an example. John does remodeling pursuant to an oral contract consisting of a promise on the behalf of his customer to pay him in the future for his services rather than immediately. Such promises are called accounts. At this point, John is in need of cash and sells his outstanding accounts to Steve, who immediately pays him. While this consists of an outright selling of the accounts, it nevertheless would trigger Article 9, requiring Steve to protect his interests against competing third parties.

Consignment – A typical consignment consists of a consignee and consignor. The latter, who may be a wholesaler or manufacturer, owns the goods and will retain title to them. He will deliver them to the consignee, such as a retailer, so that he may sell them to the public. The consignee may then return goods which are not sold to the consignee. If the creditor of the consignee struggles to distinguish inventory that a consignee is selling on consignment from that which he actually owns, Article 9 will deem the consignment to be a security interest. As such, the consignor would need to comply with its provisions to give notice to the consignee’s creditors.

Compliance with Article 9

For compliance of Article 9 to be incumbent on the creditor to protect their interests in the consigned goods against creditors of the consignee, there are two conditions which must be fulfilled. The consigned goods must be equal to or exceed $1,000 and the consignor must have refrained from making use of the goods for personal, family or household purposes. This means that consignment of one’s old clothes would not fall under Article 9.

So too, the consignee must answer three criteria. They must be one who deals in goods of that kind under a name other than the consignor’s; they cannot be an auctioneer; and they may not be someone who is generally known by their creditors to be substantially engaged in selling the goods of others. As such, the goods cannot be sold at a “consignment store.”

Let us illustrate the above with an example. Todd is a music promoter who delivers compact discs worth $1,000 by a band called “Quiet Noise” to Music, Inc. for selling them on consignment. Todd would have to comply with the provisions of Article 9 to protect his interests against Music, Inc.’s creditors if Music Inc. is not a consignment store.

When does Article 9 not apply?

There are six situations in which Article 9 does not apply. One is for transactions otherwise governed by federal, state and foreign laws. Another, involves most transactions, excepting those of fixtures, pertaining to interests in or liens on land. A third involves assignment of tort claims, excepting that which respects proceeds of the tort claims and priority in those proceeds. Commercial claims, meaning those filed by organizations or arising out of the individual’s business and which do not involve personal injury are exempted from this category.

Assignment of deposit accounts in consumer transactions also do not fall under the rubric of Article 9, although consumer deposit accounts that are proceeds of collateral and priorities in those proceeds do. Deposit accounts in consumer transactions are those in which one creates a security interest in property which is bought or used for personal, family or household purposes.

Moreover, state statutory or common law liens, with the exception of agricultural ones, which are given for services or material, do not fall under Article 9. Mechanics’ liens would be a good example. Consumer deposit accounts that are proceeds of collateral and priorities in those proceeds are covered by Article 9, however.

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