INTRODUCTION TO THE UNIFORM COMMERCIAL CODE

For example: Article 2 deals with sales and Article 3 encompasses commercial paper.  Article 5 addresses letters of credit whereas Article 6 regulates bulk transfers.  Article 8 involves investment securities while Article 9 governs secured transactions.   Although each article is different, one is not mutually exclusive from the others.   In practical application, the lines between the articles sometimes becomes blurred as one article may merge into another.

Article 9 is one of the most important articles in the UCC.  Article 9 applies to any transactions (regardless of its form) which is intended to create a security interest in personal property or fixtures.  Personal property is defined as anything other than real estate (real property).  A security interest is defined as any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability.

Virtually all extensions of credit involve a contingent right, upon default, to take possession of the debtor's property if the debtor should fail to pay.   Additionally, a host of state collection laws are concerned with how a creditor goes about the process of reducing its claim to judgment and then "executing" (or "levying") on property to satisfy the judgment.

Your advantage of having a secured transaction is that the contingent right referred to above is an absolute one under Article 9 of the UCC.  In case of payment default, you have the right to repossess your property.  Additionally, in a bankruptcy, you have first priority to the collateral.  Finally, in the event of liquidation, you have first priority to the proceeds from the sale of the collateral.  Simply stated, - You, as the secured party can greatly enhance your chances of payment or the return of your collateral.

As a secured creditor, you have two additional rights: (1) a right to take specific property of a debtor without needing to go to courts; and (2) a right to enjoy this property interest in the face of competing claims.  Respectively, these are known as property and priority rights.  In bankruptcy, these rights may mean the difference between payment to you as a secured creditor, or taking a loss as an unsecured creditor.

Company Y sells inventory to The ABC Store but does not take a security interest.   Your company sells $10,000 of inventory to The ABC Store and takes a purchase money security interest in the inventory.  The ABC Store files bankruptcy due to poor sales, high debt and bad management.  Your company will get its unsold inventory back as it is secured and enjoys a priority right to payment.  Company Y will only be able to collect after all of the secured creditors are paid off and then, generally, only for a few cents on the dollar or, most likely, not at all.

In business today, secured creditors enjoy a competitive edge over unsecured creditors.   Let O'Cieran & Middlebrook put this competitive edge to work for you.