Part 1: Basics – A Short Series On Security Interests For Credit Managers

 

by Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.

Many people misunderstand the use of security interests and their enforcement. While the subject is much too broad to cover completely here, there are some highlights we can hit.

A security interest is a lien in personal property. “Personal property” means anything other than real estate. It does not mean just the customer’s (debtor’s) clothes or her coin collection. Equipment is an example of personal property. On the other hand, a mortgage (or deed of trust) or a judgment lien will create a lien on real property.

Security interests are governed by Article 9 of the Uniform Commercial Code (UCC), which has been adopted in every state. Although many states have varying versions, there are basic uniform provisions. To have a security interest, there must be (1) an agreement in writing (signed by the customer) granting a security interest, (2) the debtor (customer) must have rights in the collateral, and (3) the secured party must have given “value” in exchange for the security interest. When these three things are present, a security interest “attaches” to the property. There are, as you may guess, thousands of decisions about whether each of these requirements was met in any given case.

Often, there will be language in the contract or the sales slip that grants the security interest. These situations may be as mundane as the grant of a security interest to the retailer for the refrigerator you buy on credit or as complicated as the grant of a security interest to you in the specialized equipment a vendor is building for you and for which you have made a substantial down payment.

Usually, the issue of the existence of a security interest only comes up when the debtor (the one who owes the money) is in default. Other times it becomes an issue if someone else wants to take a security interest and wants to make sure there are no prior liens. In either case, the first question is whether there is a security interest. If there is, then the debtor and the secured party (creditor) are bound by it. The more important question, however, may be whether the interest is “perfected” so it is good against other, third parties.

Perfection is the concept of making the lien good against other people so they cannot get rights in the property higher than the party with the perfected lien. Next week, more about perfection.

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