Often times a written agreement (contract) will contain language which states the debtor agrees to give the secured party a secured interest in specific collateral. This is often mistaken as a security agreement, it isn't. It is nothing more then agreeing to provide a security agreement.

The security agreement must contain the debtors name and address and the secured partys name and address. It must contain language that states value or consideration has been recieved. "For value received......", "In consideration of.........". It must describe the collateral sufficiently so that the reader understands what collateral is being taken as security. "All inventory now in debtors possession or hereafter acquired of every kind, nature and description".

The security agreement must be signed by the debtor and dated.

The security agreement can be no more than one page or it can contain numerous pages. The largest security agreement we have been witness to was 40 pages. The one we presently use for our clients is 4 pages for proprietorships and partnerships and 5 pages for corporations.

The number of pages is dependent on the language your attorney wants included in the document. It is not necessary for an attorney be the one to draft the security agreement but it is always recommended that an attorney review the document before using to insure that you are adequately protected. Often our clients will choose to use our security agreement because they do not have one of their own. We always insist that their legal counsel review our document first to insure it is acceptable for their purposes. Remember, it is your advocate who may have to argue the validity of the document, therefore they should be well aware of the language contained in the document before using.

Once signed and dated it should be recorded. This is done by filing the document in the appropriate jurisdiction.

The UCC-1 Financing Statement (In some states it may be another numer such as UCC-2) is the document most commonly used to record the security agreement. The UCC-1 contains names and addresses of the debtor and secured party, a description of the collateral, signatures of debtor and secured party.

The function of the UCC-1 is to reduce the amount of paper processed in the filing of the security agreement. Therefore, it is nothing more than a filing document.

Some creditors mistakenly think if they have a UCC-1 signed and it is recorded then they are secured creditors. The key to being a secured creditor is to have a signed security agreement. A security agreement can be filed in lieu of a UCC-1 financing statement. Often our clients customers will return the signed security agreement but the UCC-1 is not signed. We assume they think the document cannot be recorded. We simply record the UCC-1 with the signature page of the security agreement attached. It becomes properly recorded.

In our next column we will discuss when it is not necessary to record the document and the reasons why the documents should always be recorded, regardless of what the Code says.

I wish you well.