Brief description of key features of Article 9

Article 9 provides for a unitary security device applicable to virtually all forms of personal property, tangible and intangible (including intellectual property and rights to payment or other claims against third parties), applicable to the use of future as well as present property as collateral, applicable without regard to the nature of the obligation secured, applicable to all types of creditors (i.e., not limited to banks or specific types of lenders and including sellers on secured credit, such as title-retaining vendors), and applicable to all types of debtors (i.e., not limited to commercial enterprise debtors and including individuals whether they be professionals, sole traders or consumers).

Rather than total categorical exclusion, when appropriate, distinctions with respect to types of debtors, secured parties and collateral are made, and special, precisely drawn, rules are provided; these are based not on abstract concepts but rather on the basis of policy in the context of the realities of the marketplace. Thus, for example, rather than complete exclusion of consumer transactions, which would have the effect of depriving consumers of the benefit of efficient less costly financing, specific protective rules applicable to consumer debtors or to consumer transactions or to consumer-goods transactions are provided within the framework of Article 9.

Further, the comprehensive scope of Article 9 brings together in a single regime coverage with respect to both tangibles and rights to payment, which are frequently encumbered together. This differs from the structure typically found in Europe, where separate regimes cover these two types of assets.

The unitary device, denominated a security interest, is an interest in property -- a real rather than a personal right. Indeed, guaranties embodied in the promises of third parties, which are personal rights rather than real rights, are not, as such, directly viewed as collateral under Article 9, are distinct from security interests and are governed by a separate, largely non-statutory, body of law (very usefully systematized recently by the Restatement of the Law of Suretyship and Guaranty). Thus, B’s obligation to L to repay a loan, accompanied only by G’s guaranty, would not be a secured obligation and Article 9 would not be applicable to the transaction. In a transaction otherwise subject to Article 9 (e.g., because the obligation is secured by personal property collateral), however, where the collateral is a right to payment (e.g., B’s obligation to L to repay a loan is secured by B’s right to payment of a

debt owed to B by X), if B’s right to payment from X is accompanied by a guaranty given by G, that guaranty relating to the collateral would be treated as additional collateral for the benefit of L, as a supporting obligation (discussed below).

Coverage of both present and future collateral (facilitated by the acceptability of general collateral ‘‘descriptions”) and permitting the collateral to secure both present and future obligations, without limitation as to nature or amount, together may be referred to as the ‘‘floating lien” concept. The floating lien facilitates modern financing transactions such as revolving credit and bulk assignments of receivables. Some or all of the elements of the floating lien are found in some of the European systems, although they often (i) are limited to a particular class of debtor (for example, in England, the ‘‘floating charge,” although not necessarily conceptually limited to corporate debtors, has been embodied in the Companies Act and has been developed judicially in the context of corporate debtors and is not used with respect to other debtors such as sole traders and partnerships); (ii) are limited to a particular class of secured party (for example, the Belgian gage sur fonds de commerce/pand op de handelszaak and the advantaged mode of assignment of receivables under the French Loi Dailly (2 Jan. 1981) may be made only in favor of a bank or other financial institution); and/or (iii) cover much but not all of the debtor’s assets (for example, the French nantissement sur fonds de commerce does not cover inventory and the Belgian analog covers inventory only up to 50 percent of its value). See also the special laws on enterprise mortgages enacted in Sweden and Finland in 1984, and compare the EBRD Model Law provisions on an ‘‘enterprise charge.”

The Article 9 security interest is based on a functional approach, rather than on theoretical distinctions, and the location of title to the property that serves as collateral is, for this purpose, irrelevant. This contrasts with those European systems where ownership (even, in some cases, an ownership created for security purposes) is outcome-determinative. Article 9 is applicable to all transactions in movables which serve the purpose or have the effect of providing security for an obligation. Thus, there is not a body of specialized nantissements or warrants having different rules and producing different consequences than the general principle, and there is not a general distinction made between the seller of goods who retains title to secure deferred payment of the purchase price and the third-party lender who (by paying the seller or lending money to the buyer who uses that money to pay the seller) has performed the

identical economic function of providing the purchase-money credit to the debtor-buyer.

The apparent form of the transaction and the language of the documentation are, for this purpose, disregarded; it is the economic substance that governs. Form and language may, of course, continue to have impact for other purposes, e.g., tax consequences, balance sheet presentation, etc. The debtor receives the same protection of his equity in the goods regardless of the nature of the credit or the creditor, and all types of creditors that have ‘‘purchase-money security interests” (this term is not, strictly speaking, defined but is given substantive meaning by the very extensive provisions of section 9-103) in those goods are provided with the same priority rules and remedies. Denomination of a transaction as a ‘‘lease” does not control; for Article 9 purposes, the transaction is treated as a secured transaction if its actual economic effects are identical to a secured deferred payment sale of the equipment. While the concept of ignoring the nomenclature used by the parties to a transaction is not unknown in Europe (see, e.g., the Dutch provision on sale with payment by installments: ‘‘All contracts, that have the same tenor, entered into in whichever form or under whichever name, are treated as purchase and sale on installments.” 7A:1576 lid 3 BW, and the analogous provision in the hire-purchase law, 7A:1576h lid 3 BW, both dating back to 1936), judicial re-characterization of a transaction appears to be rare. The German system recognizes a category of ownership for security purposes; this category has been explicitly rejected in the Netherlands (3:84 lid 3 BW) and Belgium (assignment of claim rejected in insolvency because made with an obligation to re-assign upon payment of debt, Cass. 17 Oct. 1996).

Under Article 9, the functional approach is explicit and is a key element of the law. Moreover, as there is but a single device, Article 9 presents no issue of distinctions between simultaneously co-existing types of security rights and no issue of the inability of parties to create new types of property rights not specified in the Civil Code (numerus clausus). Further, Article 9 avoids dependence on judicial ingenuity to fashion arrangements that modernize the law or are otherwise responsive to business needs (consider, for example, the recent German case law on ‘‘over-security”).

To maximize certainty and to allow secured parties effectively to assess their exposure to claims of others against the collateral, Article 9 provides a detailed, carefully nuanced priority scheme, specifying outcomes in the statute (rather than leaving them to be developed over time and

unpredictably by the courts). These rules are carefully drawn to support the UCC’s overall policy goals in the context of the marketplace. See, for example, the discussions below of the distinctions made by the special purchase-money super-priority rules or the buyer in ordinary course of business rules.

A crucial part of the priority scheme is the ‘‘filing” system. The filing of a financing statement establishes an objective marker, a date certainly not subject to private manipulation, which can be, and in most cases is, used as a priority determinant. These important functions are served without the need for public disclosure of private financial details, and without the need for imposition of requirements, such as notarization, that entail significant costs and/or delays. As discussed in detail below, the filing system provides a database of information that suffices to warn that a creditor may, presently or thereafter, claim a security interest in property in which the identified debtor may, presently or thereafter, have rights, with the collateral being indicated in either specific or general terms, while at the same time the information provided in the financing statement is not so extensive as to either disclose confidential data or overburden the filing office. The financing statement provides only minimal identifying data sufficient to enable a searcher to protect its interests. Original security agreements or other documents need not be filed. Indeed, a financing statement is not limited to a particular transaction (it may serve with respect to post-filing transactions as well, whether or not foreseen at the time of filing or of the initial transaction) and may be filed before a security agreement exists. The database is publicly and inexpensively accessible.

The existence of this filing system makes possible efficient financing secured by nonpossessory interests in tangibles and by assignments of intangibles, present and future, and individually or in bulk. The notion of publicity with respect to security rights in movables has had varying acceptance in Europe, being generally rejected in Germany and playing a limited but significant role in Belgium and France and a substantial role in Norway (Hungary, Poland, Bulgaria and Albania also have created registries for nonpossessory rights in movables). The Cape Town Convention contemplates an international registry. That, however, will be an asset-based registry, as contrasted with the debtor-based Article 9 filing system; asset-based registries with respect to aircraft already exist in many countries.

Finally, Article 9 introduced an efficient market-based remedial scheme, permitting the parties to go to court to obtain such assistance