учебный год 2023 / Helsen, Security in Movables Revisited. Belgium’s Rethinking of the Article 9 UCC System

the collateral being consumer goods. A consumer debtor is defined as a debtor in a consumer transaction.181 Consumer goods are those which are used or bought primarily for personal, family, or household purposes.182 Consumer goods transactions, finally, are consumer transactions in which an individual incurs an obligation primarily for personal, family, or household purposes which is secured by a security interest in consumer goods.183

As stated above, US law allows the parties rather broad freedom to define the events that will give rise to a default under the agreement, a freedom that might, to a limited extent, be both useful and valid under Belgian law. When dealing with consumers, however, many states have adopted consumer protection laws that disallow a secured party from acting on certain types of events of default, even if the consumer has agreed to the terms, unless that event puts the secured creditor’s chances of repayment at a defined state of heightened jeopardy.184 Similarly, Belgian law has adopted specific limitations on the execution rights of creditors against consumers.185

In both jurisdictions, the process for repossession against consumers is functionally similar to that against non-consumers. In Belgium, repossession must be performed by the sheriff (gerechtsdeurwaarder/huissier de justice), whereas US creditors can obtain a writ of replevin or resort to self-help repossession.186

From then on, however, the Pledge law imposes judicial review of the entire execution process against consumers. Any form of disposition of the collateral requires the intervention of a judge. Regardless of whether a sale or lease of the collateral will be held publicly or privately, a court ruling is required, and as with non-consumers, the creditor is not allowed to purchase the collateral at a private sale. In the UCC system, the creditor still has relatively broad freedom to organize the disposition but will have to comply with stricter procedural requirements and enjoys more limited possibilities for appropriation of the collateral. While under Belgian law, the rules for notification before disposition of consumer collateral are identical to those for non-consumers, the UCC imposes some additional requirements. Notification before disposition of collateral given by a consumer must contain, in addition to the information that has to be given to non-consumers, a description of any liability for a deficiency of the person to which the notification is sent, a telephone number from which the amount

181§9-102(a)(22) UCC.

182§9-102(a)(23) UCC.

183§9-102(a)(24) UCC.

184Henderson, Bankruptcy Court District of Nevada 22 May 2013, 2013 Bankr. LEXIS 2136, www.lexisnexis.com; J. BROOK, Secured Transactions (Frederick, MD: Wolters Kluwer 2014), p 407.

185See i.a. Arts VII.105 and VII.111 Code of Economic Law.

186§9-609 UCC; C. CARTER, et al., Repossessions (Boston, MA: National Consumer Law Center 2013), p 43.

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necessary to redeem the collateral can be obtained, and a telephone number or mailing address from which additional information concerning the disposition and the secured obligation is available. Otherwise, similar general principles apply: no particular phrasing is required,187 and a model form containing sufficient information is provided, which remains sufficient even if the notification contains additional information or minor errors188 which are not misleading. However, the standard for insufficiency of a consumer notification, which contains errors, is that they are ‘misleading’ with respect to the consumer’s rights under Article 9, while in the case of non-consumers, that standard is ‘seriously misleading’.189 In addition, when dealing with consumers, there is no flexibility as to the kinds of information that must be supplied. The categories of information laid down in §9-614 are necessary conditions, not merely sufficient ones.190

While the creditor under US law remains rather free in designing the disposition, as long as the method is commercially reasonable,191 the choice of whether to dispose of the collateral or accept it in satisfaction of the debt is less free when the collateral is consumer goods. If 60% of the cash price or the principal amount of the secured obligation has been paid, then the creditor must dispose of the collateral and is not allowed to accept it in satisfaction of the

The debtor can, however, waive the right to require mandatory disposition, but only by way of an agreement authenticated after default.193

Moreover, the creditor must in this case dispose of the collateral within ninety days after taking possession, unless the debtor and all secondary obligors agree to a longer period in an agreement entered into and authenticated after default.194

Appropriation of the collateral given by a consumer is, as a principle, possible in both jurisdictions, albeit under more stringent conditions. As mentioned above, the Pledge law requires judicial overview for the entire execution process against consumers, and that includes appropriation of the collateral. For purposes of applying the putative proceeds of the collateral to the outstanding debt, the appropriated collateral must be valued by a court-appointed expert.195 The objectivity of such valuation is highly important, as it will determine whether the debtor will be liable for any balance or, on the contrary, will receive a surplus. The UCC, on the other hand, does not allow acceptance of collateral in partial satisfaction of the obligation in consumer transactions,

187Compare §9-614(2) to §9-613(4) UCC.

188Compare §9-614(3), (4) and (5) to §9-613(3) and (5) UCC.

189Compare §9-614(5) to §9-613(3)(B) UCC.

190§9-614(1)UCC.

191§9-610(b) UCC.

192§9-620(e) UCC.

193§9-624(b) UCC.

194§9-620(f) UCC.

195Article 46 Pledge law.

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rendering any attempted acceptance in partial satisfaction void.196 This provision is linked to the mandatory disposition of consumer good collateral of which 60% has already been paid off, which has been discussed above.

The above considerations are further complicated by the existing limitations on the recovery of deficiency balances against consumers. The determination of the applicable rule for such collection is left to the courts by §9-626(b) UCC. For instance, some courts have adopted the rebuttable presumption rule, which allows a secured party to recover the difference between the fair market value of the collateral and the amount of the obligation. Under this rule, a secured party must prove it sold the collateral in a commercially reasonable manner, even if the debtor did not claim otherwise. If the secured party fails to meet this burden of proof, then the value of the repossessed collateral is presumed equal to the outstanding debt, and no deficiency can be recovered. If, however, the secured party proves that the fair market value was lower than the outstanding obligation, he will be entitled to a deficiency equal to the difference.197

Whether the pledger is a consumer or not, both jurisdictions allow the debtor and certain third parties a right to redeem the collateral. By paying the secured debt and the costs of execution, these parties can liberate the collateral of the security interest or pledge. In addition to the debtor, the Pledge law accords this right to redeem to any third party in interest.198 If a third party fulfils the secured obligation, however, this third party can in certain cases be subrogated in the rights of the secured creditor, so that the pledge remains in existence, be it to the benefit of a different creditor.199 The UCC defines this category slightly more specifically, as consisting of secondary obligors and any other secured parties and lienholders. To obtain such redemption, the secured obligation must be fulfilled, as well as those costs of execution which are deemed part of the secured claim. These are the same costs against which the proceeds of any disposition of the collateral must be applied. Such fulfilment and payment are to be tendered before foreclosure has run its course. Again, the UCC gives a more specific definition of this deadline: the moment when the secured party has disposed of the collateral or contracted for its disposition, or has accepted the collateral in full or partial satisfaction of the obligation.200 The UCC allows the debtor or secondary obligor

196§9-620(g) and comment 12 UCC.

197W. GIBSON, A Comprehensive Review of Revised Article 9 (Durham, NC: Carolina Academic Press 2007), pp 154–155.

198Article 50 Pledge law.

199Articles 1236 and 1251 CC; R. JANSEN, ‘Subrogatie’, in X., Bijzondere overeenkomsten. Artikelsgewijze commentaar met overzicht van rechtspraak en rechtsleer (Mechelen: Kluwer) (loosel.), 158.

200Compare Art. 50 Pledge law to §9-623 UCC.

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to waive this redemption right, but only in non-consumer goods transactions and only by agreement entered into and authenticated after default.201

6.3.3.Debt Claims: Accounts

As explained above, collateral can also take the form of receivables. Because of their special nature, the execution process is slightly different than in the case of collateral consisting of corporeal assets. The value of receivables as assets derives from the income stream they give a right to, and therefore, they are the most liquid assets, aside from simple cash, of a typical debtor’s business. In addition, receivables are, for the vast majority of businesses, a kind of asset that can be collected without any interruption of the business activity. This is a stark contrast to inventory or equipment, the removal of which usually shuts down the business, at least partially.202 Hence, both the Pledge law and the UCC allow the secured creditor to demand payment of the receivable directly from its debtor, through judicial process (enforcement) as well as extrajudicially (collection after notification). While pursuing payment, the secured creditor can exercise all rights accessory to the receivable.203 Such pursuit of payment from the debtor of the receivable serving as collateral can be seen as the equivalent of repossession.

Usually, after applying varying degrees of pressure, the debtor of the collateral receivable will comply with the requests of the secured creditor and pay him directly. Once the creditor has gained access to the payment stream, thereby turning the collateral into cash in much the same way as a disposition of tangible collateral would, these proceeds must be applied to the secured debt. As far as the timing of this application is concerned, the Pledge law distinguishes this process based on whether the secured debt is due and payable. If it is, then the secured creditor simply sets off the collected amount against the secured debt, turning over any balance to the debtor.204

If the secured debt has not yet become due and payable, the secured creditor must deposit the collected sums into a separate bank account, opened specifically for this purpose, and accept an obligation to turn over any balance to the debtor once the secured obligation has been fulfilled.205

As far as secured debts that have become due and payable are concerned, the UCC provides a functionally equivalent system. After default and, therefore, when the debt has become due and payable under the Belgian understanding of

201§9-624 UCC.

202Comment 2 to §9-607 UCC.

203Belgian law: Art. 67 Pledge law; US law: §9-607 UCC; P. COOGAN, et al., Secured Transactions under the Uniform Commercial Code (Albany, NY: Matthew Bender & Company 2014), §2.02 (3), www.lexisnexis.com

204Article 67, 2nd al. Pledge law.

205Article 67, 5th al. Pledge law.

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that concept, the secured party has the right to collect the collateral receivable.206

This collection then triggers the provision on application of proceeds from collection or enforcement.207 If, however, no default has occurred yet, the secured party may do the same, as long as the debtor has so agreed. Such agreement is not unusual.208

As with corporeal collateral, the purpose of pursuing the rights granted by the security interest is to turn the collateral into liquidity, for application to the secured debt. As far as the secured creditor is concerned, the amount of money the collateral brings in is, obviously, of crucial importance. Given the fact that, as discussed above, the debtor will often still be liable for any deficiency after foreclosure upon the collateral, the magnitude of the proceeds is critical to him as well. Therefore, the UCC requires that the secured creditor who undertakes to collect on or enforce an obligation that was given as collateral and is entitled to charge-back uncollected collateral or otherwise to recourse in case of a deficiency acts in a commercially reasonable manner.209 The Pledge law does not repeat this principle in this context, but given its general nature and its consistency with the good faith principle, it can be expected to apply in this case as well.

Now that the question of timing of the application of proceeds has been resolved, the next question becomes exactly to which debt and expenses those proceeds are to be applied. The first type of claims to be paid is the expenses of execution. Under Belgian law, this is a well-established principle.210 These expenses of execution do not, however, include the attorney’s fees of the creditor, although the parties can agree to a penalty clause in the event of default in order to compensate for this.211 Under US law, §9-608 UCC explicitly provides that the proceeds must first be applied to the reasonable expenses of collection and enforcement. If and to the extent that the agreement provides for it, reasonable attorney’s fees and reasonable legal expenses incurred by the secured party can also be charged to the collected amounts. Once these expenses are paid, the actual secured obligations will be fulfilled with the proceeds.212

206§9-607(a) UCC.

207§9-608(a) UCC.

208§9-607(a) and comment 4 to §9-607 UCC.

209§9-607(c) UCC; W. GIBSON, A Comprehensive Review of Revised Article 9 (Durham, NC: Carolina Academic Press 2007), p 150.

210Article 12 Pledge law; Arts 17 and 19, 1° Mortgage law; M.E. STORME, Zekerhedenen insolventierecht. Deel II en v., 9th edn (Gent-Mariakerke 2014), pp 218, 225 and 231, www. storme.be

211K. DELESIE & F. HELSEN, ‘Commentaar bij art. 17 Hyp.W.’, in X., Voorrechten en Hypotheken. Artikelsgewijze commentaar met overzicht van rechtspraak en rechtsleer (Mechelen: Kluwer) (loosel.), II.B.1.

212§9-608 UCC.

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The preceding paragraphs have assumed that the debtor of the receivable which served as collateral could be pressured into paying without recourse to the courts. It is, however, possible that the debtor will resist for a variety of reasons, such as financial distress, suspicions concerning the validity of the security interest or pledge and therefore the secured creditor’s right to demand payment, etc. Alternatively, it is also possible that the secured creditor does not want to wait for these or other problems to arise and elects to provisionally seize the collateral receivable (‘bewarend beslag’). In either case, Belgian law will again interpose the Belgian equivalent of the sheriff (gerechtsdeurwaarder/huissier de justice) into this conflict situation. The debtor of the collateral receivable will pay to the sheriff, who will apply and divide the proceeds according to the rules laid down in the judicial code.213 The sheriff will solicit other creditors who might hold claim to the receivable to submit their claims in order to create a concursus, a situation in which all creditors who can lay claim to an asset, both secured and unsecured, are invited to assert those claims, after which the order of priority among the creditors will need to be determined. The sheriff will then pay out each creditor in that order. These conflict situations are the subject of the next section.

7.Enforceability of Security Interest against Third-Party Claimants (Erga omnes Dimension)

7.1. Meaning of Erga omnes Enforceability

7.1.1.Concept

While the previous section dealt exclusively with those situations in which only the creditor and the debtor were involved, this section adds a layer of complexity that is crucial to understanding security interests by including the possibility of conflicts with third parties. Indeed, in addition to the stronger rights conferred upon the secured creditor by virtue of the security agreement in his dealings with the debtor, such as his stronger enforcement rights and the possibility of self-help repossession, the secured creditor will also enjoy more protection in priority conflicts with third parties.

The working hypothesis is that of a secured creditor, whose claims on the collateral conflict with those of another creditor, secured or unsecured, or a transferee of the collateral.214 The question then becomes: who has the stronger right; who has priority? In either case, the conflicting claim is made by an individual or entity who is a third party to the security agreement. The extent of enforceability of security interests against those who are not a party to them and the means by which this enforceability is achieved are both fundamental to their

213Article 67 Pledge law jo. Art. 1627 Judicial Code.

214§9-201 UCC.

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functioning, as well as the main source of controversy surrounding those interests.

This paper aims to provide actionable knowledge about the security interests system by comparing the UCC system with the new Belgian one. The main focus of this section will therefore be on the comparison of the actual mechanics of how parties can achieve fully enforceable security interests. First, however, it is necessary to set the stage by recalling the general principles of erga omnes enforceability and its consequences.

The importance of enforceability of an interest in particular goods against those who were not a party to the security agreement arises predominantly in two contexts. The first one is the case of insolvency of the debtor. In this case, there simply is not enough money to satisfy all creditors, so that enjoying priority in an asset increases recovery. The second context is that of a transfer of an encumbered good to a third party, whether or not the debtor is insolvent. Since the security interest only covers particular goods, the ability to challenge these transfers is essential to protecting the security.

7.1.2.Priority in Case of Insolvency

Functionally speaking, one of the essential qualities of security interests, and

according to some their quintessential quality, is that they confer priority to the secured creditor over other claims in case of insolvency. In simpler terms: the value of the collateral, in the form of either proceeds after disposition or the collateral itself in natura, will be used first to satisfy the secured claim.215

Depending on the type of insolvency procedure and the jurisdiction, the rights of secured creditors will be subject to certain limitations to facilitate the outcome envisioned by the procedure. The most central and obvious example of such limitation is the automatic stay.216 Nevertheless, the basic principle of

215For the widespread validity of this principle, see i.a. J. DRUKARCZYK, ‘Secured Debt, Bankruptcy, and the Creditor’s Bargain Model’, 11(2). International Review of Law and Economics 1991, p 203; L. BEBCHUK & J. FRIED, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’, 105(4). Yale L. J. 1996, p 859; M. HERBERT, Understanding bankruptcy (New York, NY: Matthew Bender-Irwin, 1995), p 5; M.E. STORME, Insolventierecht in kort bestek (Gent-Mariakerke, 2014), p 132, www.storme.be. See also IX. – 1:102 DCFR and accompanying comments. For a more critical voice, underlining the priority-independent benefits of security, see L. BEBCHUK & J. FRIED, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’, 105(4). Yale L. J.

1996, p 872.

216Belgian law: Art. 26 Bankruptcy Law; K. TROCH, ‘Gevolgen van het faillissement’, in X.,

Faillissement en Reorganisatie (Mechelen: Kluwer) (loosel.), 15; M.E. STORME, Zekerhedenen insolventierecht. Deel II en v. 9th edn (Gent-Mariakerke, 2014), p 213, www.storme.be; M.E. STORME, ‘Paritas creditorum, voorrang en roerende zekerheden’, TPR 2006, afl. 2, p 954.

US law: §362 Bankruptcy Code; M. HERBERT, Understanding Bankruptcy (New York, NY: Matthew Bender-Irwin, 1995), p 165.

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priority remains, and a comprehensive exposition of these limitations would lead us too far.

Priority conflicts can arise in two different forms. On the one hand, there is the conflict between categories of security, that is, between an unsecured and a secured creditor or between a senior and a junior secured creditor. On the other hand, conflicts can arise within a category of security, between creditors enjoying the same level of security.

The resolution of the first type of conflict hinges on the question whether the secured creditor has a security interest that is enforceable against third parties. If so, then the secured creditor enjoys priority over those creditors who are junior to him. The resolution of the second conflict between multiple creditors who have an in rem right, such as a fully enforceable security interest, is based in first instance on the anteriority principle, also known as the first in time, first in right rule.217 This rule, in turn, is a logical consequence of the nemo plus iuris transferre potest quam ipse habet adage.218 Exceptions to this rule can arise from the desire to protect third parties acting in good faith or from the specific nature of other priority rights, such as the superpriority accorded to the expenses of the procedure.219 Critical to the application of the anteriority principle is the moment when the creditor obtained his fully enforceable security interest, which will be analysed below.

7.1.3.Challenging Transfers of the Collateral

A security interest would loose much of its value if it would disappear upon sale of the collateral by the debtor. Indeed, security interests, in principle, come with the right to follow the collateral in whoever’s hands it may be found.220 This, too, is a consequence of the nemo plus iuris transferre potest quam ipse habet adage; if the asset is encumbered with a (fully enforceable) security interest, the debtor cannot transfer it free and clear of that interest, unless the security agreement or type of security interest so provides. However, where the collateral consists of inventory

217US law: D. BAIRD & T. JACKSON, ‘Possession and Ownership: An Examination of the Scope of Article 9’, 35(2). Stan. L. Rev. 1983, p 175.

Belgian law: Arts 15 and 57 Pledge law; M.E. STORME, ‘Paritas creditorum, voorrang en roerende zekerheden’, TPR 2006, afl. 2, p 975.

218M.E. STORME, Insolventierecht in kort bestek (Gent-Mariakerke 2014), p 57, www.storme.be.

219Compare Art. 17 Mortgage Law to §503 US Bankruptcy Code; M.E. STORME, ‘Paritas creditorum, voorrang en roerende zekerheden’, TPR 2006, afl. 2, No. 57.

220For expressions of this basic principle, see:

US law: §9-201(a) UCC; J. BROOK, Secured Transactions (Frederick, MD: Wolters Kluwer 2014), p 339.

Belgian law: Art. 24 Pledge law; S. SNAET & R. DERINE, ‘Zakelijke rechten’, in X., Het onroerend goed in de praktijk (Mechelen: Kluwer, (losbl.)), I.C.3-1, www.jura.be; J. BAECK & M. KRUITHOF, Het nieuwe zekerheidsrecht (Antwerpen: Intersentia 2014), p 52.

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or other kinds of goods ordinarily sold by the debtor, a general inability of the debtor to dispose of such collateral free and clear of any security interest would severely limit his ability to run his business. Both jurisdictions therefore use a default rule allowing the debtor to dispose of the collateral in the ordinary course of business, unless the parties agree otherwise.221

While most discourse concerning security interests in collateral focuses on their function of protecting the value of the secured debt, the in rem character of these interests confers an additional benefit upon the secured creditor. The creditor can use his security interest to target the specific collateral goods, demanding that they remain the property of the debtor. Unless the security agreement so provides or the creditor agrees, the debtor cannot simply replace the collateral with different goods of a purported similar value. This link to particular goods will allow for increased monitoring benefits of security interests.222

7.2. Conditions for Enforceability

7.2.1.Overview

Now that the stage has been set, it is time to shift to the main focus of the section on erga omnes enforceability: the mechanics of attaining this enforceability in practice. Depending on the type of asset, different methods can be used in both jurisdictions. As the focus of this paper lies with providing actionable knowledge in the application of the new Belgian Pledge law, the exposition below will be tailored accordingly.

Much like the concept of attachment is used in Article 9 UCC to frame the enforceability of the security interest between the parties, the achievement of enforcement erga omnes is centred on the concept of perfection. The Belgian law, in general, and the Pledge law, in particular, do not use a similar overarching concept. Functionally, however, the same concerns are dealt with in highly similar ways.

In both jurisdictions, there are several different ways in which a security interest can be perfected or made generally enforceable. The mechanism that will be treated most extensively below is the publication of the security interest by ‘filing’ or ‘registering’ it in a form of database that can be searched by third parties. Secondly, the secured creditor can take possession of corporeal movable collateral in order to publicize his interest and make it generally enforceable. Thirdly, with respect to intangible assets consisting of claims and various kinds of investment property, the taking of control over these assets will serve the same

221US law: §9-320 UCC; Belgian law: Art. 21 Pledge law.

222S. LEVMORE, ‘Monitors and Free Riders in Commercial and Corporate Settings’, 92(1). Yale L. J.

1982, p 51.

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purpose. Finally, some kinds of security interests will be perfected or made

generally enforceable automatically, without any further action by the parties.

7.2.2.Registration or Filing

The first means of obtaining erga omnes enforceability is by way of registration in a register or filing system that is, at least to some extent, publicly accessible. This type of ‘perfection’ is the most prominent one and the most interesting from a comparative perspective.

In the implementation of the Pledge law, the Belgian executive is currently setting up the National Pledge Register. This register will be an online database, in which parties will be able to enter information regarding the pledges they have agreed to. On the output side, third parties will be able to search this register in order to find information on granted pledges.223 At this point, it is still unclear who exactly will have access to the information gathered in the register, as privacy considerations dictate limitations on such access.224 It is, however, important to keep in mind that the functionality of the system hinges on its accessibility. It is quite trivial that a system of publicity can only serve its purpose if it is in fact public.225 The fact that, in American legal scholarship, the question of limiting access to the filing system for privacy reasons is given little if any attention is quite instructive in this regard. Perhaps it would be advisable to bifurcate access to the register based on whether the pledger is a consumer. If not, then the pledger is much more likely subject to financial reporting requirements, which in Belgium are rather substantial, so that the issue of privacy concerning financial information is mostly overridden anyway.226 To close any remaining gap in the protection of the debtor’s privacy, one could restrict access to those who have obtained the debtor’s permission to search the register for any entries against him, so that their competitors wouldn’t have access.

The largest advantage of the Belgian system, as compared with the UCC filing system, is its centralized and modern nature. The UCC is a model law, adopted and implemented by the individual states, resulting in as many as 4,300 offices and registries that handle Article 9 filings, each of which has different

223Article 26 Pledge law.

224See i.a. Advies van de Commissie voor de bescherming van de persoonlijke levenssfeer 22/2012 van 4 juli 2012, http://www.privacycommission.be/nl/adviezen-cbpl; Advies van de Commissie voor de bescherming van de persoonlijke levenssfeer 15/2014 van 26 februari 2014, http:// www.privacycommission.be/nl/adviezen-cbpl.

225A. MORELL & F. HELSEN, ‘The Interrelation of Transparency and Availability of Collateral: German and Belgian Laws of Non-possessory Security Interests’, 3. ERPL 2014, p 434.

226See i.a. Law of 17 Jul. 1975 pertaining to the financial accounting of enterprises (Published 4 Sep. 1975), recently absorbed by Book III of the Economic Law Code; Art. 92 Company Law Code.

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