reflecting the greatly increased economic importance of intangibles such as intellectual property rights, and recognizing that transactions were now being achieved without writings, that rights were increasingly being reflected in non-material forms, and that the communications revolution was enabling parties to act in electronic or other forms heretofore unknown. Article 9’s provisions also were modified to make them more responsive to new high-speed and more sophisticated transactions, in direct response to the needs of the economy. The revisions expanded the override of contractual and statutory provisions prohibiting or limiting assignability of rights. Finally, the default provisions were refined to reflect experience and to provide more guidance, making certain provisions more debtor-protective and making some remedies more flexible.

Revised Article 9 is organized in seven parts and comprises 135 sections.

Article 9 in depth

Creation, attachment and enforceability of a security interest

An Article 9 security interest is ‘‘created” by simple contract. Indeed, security agreement means any agreement that ‘‘creates or provides for” a security interest. There are no language requirements, no magic words that must be used. A security agreement need not be denominated as such or found in a separate document or special form. Indeed, a single sentence such as follows will more than suffice: Debtor grants a security interest to Secured Party in all of Debtor’s inventory, wherever located, whenever acquired, to secure all of Debtor’s present and future obligations, of whatever nature, whenever and however arising, in favor of Secured Party. This will create a security interest not only in Debtor’s present and future inventory, but also, automatically (unless excluded), in all proceeds of whatever nature (including checks and rights to payment on open account) or evidenced by an instrument (e.g., a promissory note) or chattel paper (a term coined by Article 9 to denote a lease of goods or the combination of the buyer’s obligation to pay and an interest in the goods securing that promise, such as title retention, which in the US is more commonly called a conditional sale contract). The illustrative language also demonstrates the relaxed collateral description rules of section 9-108. This provision expressly makes sufficient a description using terms defined in the UCC. Vernacular usage is, of course, also

permissible; for example, one might describe the inventory as ‘‘all computers held by Debtor for sale or lease.”

Thus, creation of a security interest is simple and inexpensive. Of course, typical loan documentation will include far more than the simple phrase sufficient to create the security interest, e.g., borrower’s covenants and warranties, but these are not legally essential elements of a security agreement, are not required in order to create a security interest and are not governed by Article 9.

Although a security interest is created by agreement, three elements are required in order for the security interest to ‘‘attach” (section 9-203) to a particular item of collateral -- attachment is the moment when the security interest becomes ‘‘enforceable” against the debtor and third parties with respect to particular collateral.

The three elements of attachment and enforceability are: (1) value has been given (this requires no more than simple consideration; it includes the existence of previously extended credit as well as a promise to extend credit); (2) the debtor has rights in the collateral (the debtor’s interest need not be full ownership, nor need it necessarily have been paid for, and it might even be a voidable title); and (3) either (i) the debtor has authenticated a security agreement that provides a description of the collateral, or (ii) with respect to specified types of collateral, the collateral is, pursuant to a security agreement, in the secured party’s ‘‘possession” (although not a defined term, the concept is given meaning in section 9-313) or control (a term defined, with respect to particular types of property, in sections 9-104--9-107 and 8-106). The third element -- an authenticated agreement -- is evidentiary; it is the only formality requirement, in the nature of a statute of frauds. It is easily satisfied and rarely a hurdle. Authenticate is a defined term reflecting Article 9’s embrace of modern technology -- it includes signing (which, under the definition in section 1-201, has long not been limited to a manually applied name in cursive script) and encompasses any adoption of a symbol or encryption or similar processing of a record with the intent to identify the person and adopt or accept the record. Record means ‘‘information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.” Thus, a security agreement may be in electronic form.

It is useful to examine briefly the element of ‘‘description” of the collateral, as it contrasts with the concept of specificity under, for example, Dutch law. The general meaning is reasonable identification, but this is supplemented by specific provisions that permit description by

category, by type (using any term defined in the UCC), quantity or allocational formula. The statute expressly renders insufficient, however, use of a supergeneric description such as ‘‘all the debtor’s assets” (although section 9-504 provides that use of a supergeneric description is sufficient for purposes of the ‘‘indication” of collateral provided by a financing statement). This rule concerning supergeneric description is not a rule limiting the extent of collateral that may be taken; it relates only to the manner of its description in the security agreement.

The three elements of attachment need not occur in any particular sequence, but a security interest does not attach to a particular item of collateral until all three have occurred.

Attachment of a security interest to collateral not only automatically gives the secured party rights in the proceeds of the collateral but also, under section 9-203, constitutes attachment of a security interest in any supporting obligation (e.g., a letter-of-credit right or a guaranty), and in any security interest or mortgage or other lien on personal or real property which supports or secures collateral that is a right to payment or performance (e.g., an instrument or an account). Also, under section 9-203, attachment of a security interest in a securities account (defined in section 8-501) constitutes attachment of a security interest in all security entitlements (defined in section 8-102) carried in the securities account. This latter provision is an element of the methodology, and illustrates the terminology, used to facilitate financing secured by ‘‘indirectly held” securities (defined in section 8-102). See, generally, part 5 of Article 8.

Section 9-204 confirms the effectiveness of provisions in a security agreement which provide for a security interest in after-acquired collateral (except for consumer goods) and which provide that collateral may secure future advances or other value, whether or not the same are given pursuant to commitment. Section 9-205 validates (declares not fraudulent against creditors) secured transactions despite freedom given to the debtor to use, commingle or dispose of the collateral without accounting for the proceeds or replacing the collateral. These provisions, in the context of the permissiveness as to form and language, serve to validate and facilitate the floating lien.

The provisions discussed above reflect the basic Article 9 structure concerning the creation and attachment of a security interest that is a property right enforceable against the debtor and third parties. This structure is accompanied by a detailed priority scheme, discussed below, that specifies when, and the extent to which, the security interest will

have priority over the claims, rights and interests of particular third parties under particular circumstances.

Scope of Article 9’s coverage

Article 9 applies to ‘‘a transaction, regardless of its form, that creates [(1)] a security interest in personal property or fixtures by contract; . . . [(2)] a sale of accounts, chattel paper, payment intangibles, or promissory notes; [(3)] a consignment; . . .” (section 9-109). The first of these three categories is extremely broad, and its articulation implements the functional approach described above. This category encompasses, for example, transactions that are denominated as leases but which, when their terms are examined (under a set of carefully articulated statutory provisions found in section 1-201(37), the definition of security interest), are economically indistinguishable from conditional sales. The second category encompasses transfers of rights to payment which are not made for security purposes. For essentially practical reasons, these transfers are treated in some respects, by making Article 9 applicable to them, as if they were made for security purposes. In some instances, these transactions are very difficult to distinguish from transfers made for security purposes; inclusion under Article 9 renders them subject to filing requirements and obviates the need to make such a distinction until after default. In other instances, they were included in Article 9 (at the request of the industry) to give such transactions, often the subject of securitizations, the benefit of the clear rules, certainty and uniformity provided by Article 9. Likewise, consignments are included so as to provide creditors of consignees with the benefit of the publicity requirements of Article 9, again obviating the need to inquire into the true nature of transactions labeled as consignments (i.e., whether made for security purposes or not) until after default.

This broad scope is narrowed slightly by a list, in section 9-109, of exclusions -- particular transactions to which it was deemed inadvisable to apply Article 9. Also, while not an exclusion from scope, section 9-201 subordinates Article 9 to any rule of law that establishes a different rule for consumers.

Other provisions spell out the rights and duties of the parties when the secured party is in possession or control of the collateral (e.g., the power of a secured party who is a pledgee of securities to re-pledge those securities) and the obligation of the secured party to respond to a debtor who requests an accounting or a list of collateral.

While virtually all of the foregoing provisions may be modified by agreement between the parties, the careful articulation in the statute does away with the need to elaborate them in the agreement when no modification is desired.

Choice of Law (including, importantly, where to file)

Because of the federal nature of the United States, rules concerning determination of the applicable law in the context of transactions having contacts with more than one state are provided, although not discussed here. Of course, to the extent that the substantive laws of the implicated states are identical, there is no conflict. Nevertheless, even in that situation, there is a need for a pointer as to where to file, i.e., rules that determine which state’s filing system governs.

For this purpose, the primary rule, found in section 9-301, is the ‘‘location” of the debtor (whether the collateral is tangible or intangible), which is specified as the ‘‘principal residence” when the debtor is an ‘‘individual” (even with respect to business-related debts), and the ‘‘place of business” (or the ‘‘chief executive office”, if the debtor has more than one place of business), if the debtor is an organization. The concept of location is developed in section 9-307.

Importantly, the meaning of the general debtor location rule is modified in the case of a debtor that is a registered organization (most commonly typified by a domestic corporation), in which case the debtor’s location is the jurisdiction of the organization rather than the place of the chief executive office. This pointer provides an objectively determinable location that is verifiable from the public records. Section 9-307 also provides special location rules for registered organizations organized under federal law, foreign bank branches and agencies and selected other classes of debtors.

The general debtor location rule, however, is not applicable in the case of a debtor whose location is not in a jurisdiction ‘‘whose law generally requires information concerning the existence of a nonpossessory security interest to be made generally available in a filing, recording, or registration system as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral.” In that case, the debtor is deemed located in the District of Columbia. This rule will not come into play if the debtor is located in the US, but may well become applicable if the debtor is located elsewhere.