Part IV Creating an Enforceable Article 9 Security Interest
Chapter 7 Overview Of Enforceability And Attachment
You have learned that a secured debt is better than an unsecured debt. To secure a debt a creditor must get a "lien," i.e., an interest in property to secure a debt. When the lien is on personal property and is created by consent, the lien is a "security interest" and Article 9 likely governs in which case the interest is an "Article 9 security interest." Recall Chapter 3 (Article 9 in a Nutshell) and Chapter 4 (Scope of Article 9). The element of consent means that much of Article 9 is rooted in contract law, especially the principle that the objectively ascertainable intent of the parties is ultimately controlling.
To speak of an Article 9 security interest as “consensual” is to distinguish it from an interest, or “lien,” obtained by litigation. A lien by litigation is a “judicial lien.” See Chapter 4 (Scope of Article 9) and B & S (cited in Chapter 3), 4.03. 4.04 and 4.05. But, the fact that a debtor consents to the lien, i.e., voluntarily gives a creditor an interest in property to secure a debt, does not mean the interest – the lien – is enforceable.
Certain conditions must be met before a security interest is enforceable. Give some thought as to why this is so. In particular, consider the impact of an enforceable lien on other creditors. For example, if a debtor's only non-exempt property, see B & S (cited in Chapter 3), 8.01 and 8.04, is worth $1000 and it is subject to a perfected security interest to secure a debt of $1000 owed to Creditor A, what is the effect on Creditor B who is also owed $1000 but is unsecured?
For the most complete protection a security interest must be perfected. As will be seen in Part VI, to be perfected a security interest must have attached. But, an interest attaches only when it is enforceable. So, we are back to the matter of enforceability. The requirements that must be met for a security interest to become enforceable (and attach) are the focus of this and the remaining chapters in Part IV.
Generally speaking, under former Article 9, a security interest created under Article 9 (as distinguished from interests arising under other articles of the UCC) became enforceable (and hence attached) when three basic conditions were satisfied. New Article 9 employs essentially the same enforceability scheme used in former Article 9. Under new section 9-203(b) a security interest is enforceable, and hence attaches, when (1) the creditor has given value; (2) the debtor has rights in the collateral or the power to transfer an interest in the collateral and (3) one of the specific conditions stated in new section 9-203(b)(3) has been met.
The section (b)(3) conditions are (a) that debtor has authenticated a security agreement describing the collateral; (b) the creditor has possession of collateral (other than a certificated security) pursuant to an agreement; (c) collateral that is a certificate in registered form has been delivered to the creditor pursuant to a security agreement; or (d) the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights or electronic documents and the secured party has control pursuant to a security agreement.
Changes from former Article 9 include the addition of letters of credit and nominated persons under section 5-118 to the class of security interests arising under other articles of the UCC, the expansion of the scope of Article 9 to cover security interests in deposit accounts and electronic chattel paper as original collateral, see Chapter 4 (Scope of Article 9), and, more generally, an attempt to accommodate the movement to electronic commerce, something that has made rules tied exclusively to documents and signatures archaic and problematic. Possession, delivery of a certificated security and control, as conditions of enforceability are relatively infrequent and are best dealt with in the context of perfection which also can be effected by possession, delivery of a certificated security and control. See Chapter 15 (Perfection by Possession (Including Documents of Title)), Chapter 21 (Perfection as to Investment Property) and Chapter 22 (Perfection as to Deposit Accounts, Letter of Credit Rights and Electronic Chattel Paper). Most disputes as to as to enforceability involve the question of whether there is an authenticated security agreement that adequately describes the collateral and it is this condition of enforceability that is focused upon in the remainder of Part IV.
A final thought here is that all the requisites of enforceability must be met before a security interest is enforceable and before it can attach or be perfected, see 9-203(b), but the requirements need not be satisfied in any particular order. In similar fashion, to anticipate a bit, although some step (usually filing a financing statement) normally is needed to perfect a security interest, the step that is required to perfect may precede the satisfaction of the conditions of enforceability and attachment.
Notwithstanding these important realities about enforceability, attachment and perfection, enforceability and attachment are distinct from perfection and the fact that a security interest has been created and become enforceable and, hence, has attached does not mean it is perfected (except in the special case of “automatic” perfection, or as it is referred to in new Article 9, perfection on attachment). See, e.g., In re Cadiz Properties, Inc., 278 B.R. 744 (Bkcy N.D. Tex. 2002) (wherein the court quite properly concludes that an agreement to place securities in escrow to secure a loan operated to create a security interest that had to be separately perfected). It is for this reason that enforceability and attachment are considered separately (in Part IV) from perfection (in Part V).
The next problem illustrates the difference between creation and enforceability and how they relate to secured and unsecured credit.
Problem 7.1 (interactive)
Donald Debtor owes your client on an "open account." Donald owns a drill press the value of which is greater than Donald owes your client. However, Second Bank is asserting that it has an interest in the drill press to secure a debt that exceeds the value of the drill press.
How might your client defeat Second Bank's claim?
Why would your client wish to defeat Second Bank's claim?
CASE COMMENTARY
In re Sabol, 337 B.R. 195 (Bkcy C.D. Ill. February 6, 2006)
Wells Fargo Bank v. Robex, Inc., 711 N.W.2d 732 (Iowa App. 2006) (Unpublished opinion)
2009-02-01 update