What a dirt lawyer needs to know about new Article 9 of the UCC

Real Property, Probate and Trust Journal, Summer 2002 by Ebling, Philip H, Weise, Steven O

Editors' Synopsis: This Article was written by two practitioners concentrating on commercial real estate and business transactions, one of whom assisted in the drafting of the new Article 9 of the Uniform Commercial Code. It aims to assist the real estate practitioner in understanding the changes from the former Article 9 to the new Article 9. The Article discusses the fundamental concepts of the new Article 9, and then discusses certain types of collateral and transactions relating to real estate transactions and the special rules that Article 9 applies to them.

I. INTRODUCTION

Discovering that their chosen area of specialty has not immunized them from the subject of personal property secured transactions surprises many neophyte real estate practitioners. Skipping the Uniform Commercial Code ("U.C.C.") Article 9 class in law school may not have been such a good idea. For any transactional real estate practitioner, Article 9 of the U.C.C., in the form promulgated in 1972 (and subsequently amended) [hereinafter Former Article 9] is very much a part of everyday practice. A revised version that became effective in almost all states on July 1, 2001(1) replaced Former Article 9, which replaced the 1962 form that preceded it.

Article 9 was drafted by the Article 9 Drafting Committee, which was sponsored by the American Law Institute and the National Conference of Commissioners on Uniform State Laws.2 The committee contained a mix of scholars and practitioners who sought to resolve many of the issues that have arisen under Former Article 9, to update Former Article 9 to handle modern financing techniques, and to address the advances in e-commerce, and technology generally, since the last major revision in 1972.

and Article 9, especially the changes to the definitions contained in section 9-102 of Article 9 and the changes in scope contained in section 9-109. Familiarity with Former Article 9 will assist in understanding Article 9, but the practitioner must be careful: subtle differences can have significant consequences. It is like a Spanish speaker who tries to speak Italian; the similarities are helpful, but the differences can be problematic. For example, Article 9 expands the definition of "accounts" to include many things that are "general intangibles" under Former Article 9. For a secured party that relies on an old form of security agreement or financing statement, a disastrous omission of collateral could result.

The purpose of this Article is to assist the real estate practitioner in surviving the change from Former Article 9 to Article 9. The intent of this Article is not to summarize all of Article 9 or all of the differences between Former Article 9 and Article 9.3 This Article assumes that the real estate lawyer reading it does not have extensive knowledge about Article 9. The Article attempts to be self-contained for that lawyer. To that end, this Article first discusses the fundamentals of Article 9, as relevant to the real estate practitioner, then discusses particular types of collateral and transactions that often are relevant to real property transactions, and the special rules that apply to them under Article 9. Note that this Article does not address Part 6 of Article 9, which provides a significantly revised regime for enforcement of security interests.4

II. THE FUNDAMENTALS

A. The Parties

There are a number of distinctions drawn in Article 9 that exist only implicitly under Former Article 9. Knowing this in advance aids the student of Article 9 who is familiar with Former Article 9. By way of example:

1. Debtor

things; the additional definitions in Article 9 provide greater precision. A debtor is "a person having an interest, other than a security interest or other lien, in the collateral, whether or not the [debtor] is an obligor."' Put simply, the debtor has a stake in any enforcement of a security interest because the debtor's property is the collateral.

2. Obligor

An obligor is a person who:

1. is obligated under the secured obligation to which the security interest relates,

2. has supplied property other than the collateral to which the security interest relates to secure payment or performance of the secured obligation, or

3. is otherwise wholly or partially accountable for the payment or performance of the secured obligation.'

Put simply, the obligor is obligated to pay the secured debt, but unless the obligor is also the debtor, the obligor has no direct stake in the enforceability of the security interest because the obligor has no rights in the collateral.

3. Secondary Obligor

A secondary obligor is an obligor, to the extent that (i) the obligation is secondary to the debtor's obligation, or (ii) the obligor has recourse against a debtor, another obligor, or the property of either, with respect to an obligation secured by collateral.7 The obvious example is a guarantor. Put simply, secondary obligors may have a stake in any enforcement of a security interest because they are liable for the performance of the obligation that is secured.