A Primer for UCC Priorities

• Author: David J. Cook
• Pages: 29-32

A Primer for UCC Priorities

What Is a Security Interest?

Let’s do the ABCs of a security interest. A security interest is a lien on per-

sonal property. This security interest is the legal right of the creditor (the

“secured party”) to take possession (or, better stated, repossession) of the

personal property. Upon recovery of the personal property, the secured

creditor has the legal right to sell, or liquidate, the personal property and

apply the proceeds to the payment of the debt.

The most common form of security is the lien on a car to insure that

the owner makes payment to the finance company. Businesses finance

their equipment purchases through a leasing company, hard money finan-

cier, bank, or long term financing offered by the seller. Long term financ-

ing is commonly called “captive financing,” which is sometimes offered

at attractive rates. Businesses, including attorneys, doctors, dentists, and

manufacturers in the garment and fashion business, among others, finance

their receivables. Despite the machinations of account receivable financing,

which is called factoring, the simple explanation is that the financier lends

money on the receivable, or actually buys the receivable at a steep discount.

The law of secured transaction is found in Article 9 of the Uniform

Commercial Code, which all states have enacted. Generally, and with very

few exceptions, the law of secured transactions is reasonably uniform in all

states. Security interest would reach the property in existence and herein-

after acquire property, proceeds, profits, replacements, and accessories.

The two basic steps of all security are, first, that the debtor signs a

written security agreement that describes the collateral with some reason-

able specificity. This is called the security agreement. “I grant You, Secured

Creditor, security in my ABC machine to secure the debt that I owe You. If I

do not pay You, You can repossess the machine” would be more than legally

sufficient. The next step is to file a financing statement in the offices of the

secretary of state where the debtor “resides,” which is a fancy term for the

place of incorporation. If the security is lease, trade fixture, incorporated

in the real property, agricultural products, minerals in the grounds, fish, or

other like items, the creditor records the financing statement in the county

where the collateral is located. This is called perfecting the security interest.

A financing statement has a five year life and must be renewed.

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