Secured Transactions - Applicability and Definitions

Question 1

What body of law are we dealing with here, per examiners?

Answer 1

Official Texts of Articles 1 and 9 of the Uniform Commercial Code have been adopted and are in effect.

Question 2

What does Article 9 apply to?

Answer 2

Article 9 of the UCC applies to ANY transaction intended to create a security interest in personal property or fixtures (not mortgages on real property). A security interest gives a creditor the right to sell a debtor’s property in order to satisfy a debt.

Question 3

Generally, in an Article 9 transaction, personal property or fixtures…

Answer 3

… secure the payment of a debt or insure performance of a contract obligation with the property serving as collateral.

Question 4

There are three main parties to an Article 9 transaction:

Answer 4

Secured Party. The secured party is the creditor who possesses the benefit of the security interest.
Debtor. The debtor is the party who has an ownership interest or other sufficient interest in the personal property securing the obligation.
Obligor. The obligor is the party held responsible for the underlying obligation (usually also the debtor, but could be a type of guarantor).

Question 5

Collateral

Answer 5

refers to the property in which a security interest is created, and it extends to identifiable proceeds from the property that serves as collateral.

Question 6

Article 9 defines different types of collateral as follows:

Answer 6

1. Goods
2. Consumer goods
3. Inventory
4. Accounts

Question 7

How does Article 9 define goods?

Answer 7

Goods. Goods are all things that are movable when a security interest attaches.

Question 8

How does Article 9 define consumer goods?

Answer 8

Consumer Goods. Consumer goods are goods that are used mainly for personal, family, or household purposes.

Question 9

How does Article 9 define inventory?

Answer 9

Inventory. Inventory includes goods that are kept by a person for sale or lease (does not include goods that are only being held for repair).

Question 10

Does inventory include raw material used by the debtor?

Answer 10

YES. “Inventory” includes “raw materials” that are consumed in the business of the debtor.

eg, the rare wood used by the violin shop to restore violins = inventory accessible by secured interest in “inventory” of violin shop.

Question 11

How does Article 9 define accounts?

Answer 11

Accounts. A security interest in a debtor’s “accounts” covers any right to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold (i.e., accounts receivable). A secured party can collect directly from the person who owes the debtor if the debtor defaults.