Martin Silver is a practicing attorney with offices in Hauppauge, N.Y. He was a flooring installer before and during the time he went to law school and has since represented numerous industry people and companies. To contact him, call 631-435-0700.
A secured transaction
A seller of goods on long-term credit will often take a "security interest" in the goods being sold. Likewise, a lender of money to a business might also demand the transaction be "secured" by the borrower with some particular property.
When this type of transaction involves property such as inventory, motor vehicles or almost anything except real property (land) it is governed by Article 9 of the Uniform Commercial Code (UCC), "Secured Transactions."
A secured transaction is one in which the seller, or lender, requests the obligation of the buyer, or borrower, to be secured by certain collateral to insure the payment or performance of his debt, by furnishing the creditor with a resource to be used in case of non-payment of the principal debt.
If the transaction involves land, the creditor will usually demand a mortgage or deed of trust be recorded in the appropriate county clerk's office, giving notice to the world there is a lien on that property. Anyone who subsequently buys or acquires an interest in that property takes it subject to this lien or security interest. The lender always knows where the land is located, and, since it obviously cannot be moved, knows it will be there if it becomes necessary to foreclose on the property.
When the collateral is something other than land, it most likely cannot be as "secure." Article 9 attempts to give a seller, or a lender, a means to secure a loan with property other than land.
A secured transaction under the code involves two steps. The first is the security agreement itself. This agreement, signed by the debtor, states he has agreed certain property is being used as collateral for an obligation, and the one to whom that obligation is owed has a security interest in the property. This agreement will also spell out the rights and obligations of the parties with respect to that collateral.
If the collateral is inventory, say 50 rolls of carpet delivered to a dealer, the agreement will allow that dealer to sell the carpet in "the normal course of business." This means the retail customer who buys a 12 x 50-foot cut off one of the rolls takes it free and clear of any lien provided for in the security agreement. A sale not in the ordinary course of business, such as an auction of all inventory, will most likely not eliminate the lien cost.
All of this applies only if the seller or lender has completed the second step- referred to in the code as the "perfection" of the security interest. In most cases a security interest is perfected by filing a UCC notice in the office of the county clerk where the goods are located and/or at the department of state in the state capital. The purpose is, obviously, to give notice to any buyer not in the ordinary course of business that the property has a lien attached to it.
Depending on the type of collateral however, perfection may be made by means other than filing. A creditor who takes possession of the collateral at the time the security agreement is made will be considered to have a perfected interest. This is not very practical when we are dealing with 50 rolls of inventory or a motor vehicle.
Speaking of autos, we should note in most states a secured interest on a car or a truck is perfected by the recording of the lien on the Certificate of Title to the vehicle. Since this certificate must be signed over if the vehicle is transferred, anyone who later acquires it will have notice and knowledge of the lien.
Edited by Admin 4/21/2008