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Security interests in collateral, as governed by Article 9 of the Uniform Commercial Code, are a deceptively simple tool and yet errors in their creation are easily made. Generally speaking, a security interest allows creditors to confirm their rights to collateral in securing value, the priority of those rights with respect to other creditors, and gives notice to third parties of that interest. To serve all of these purposes, Article 9 requires that the security interest be attached to the collateral, and perfected. There are multiple ways a creditor can do this, but one of the most straightforward, and the subject herein, is through a Security Agreement and filing of a Financing Statement.
Attachment, effectively the creation of the security interest in collateral, for our purposes today, requires a written agreement. This Security Agreement need not be long or complex, but must (1) state that a security interest is being granted, (2) sufficiently identify the collateral subject to the agreement and (3) be authenticated by the debtor. Article 9 provides multiple ways in which collateral can be sufficiently described and permits creating an interest not only in current property, but after-acquired property as well, if so specified. Importantly, while general descriptions like “inventory” or “equipment” may be used, supergeneric descriptions such as “all the debtor’s assets” do not reasonably identify collateral.
Assuming a proper Security Agreement is executed, Article 9 requires two other details for attachment of a security interest. Whether before or after the Agreement is executed, value must be given. For example, if a material supplier desired to create a security interest in the debtor’s current inventory, the security interest would not attach to said inventory until the supplier had actually provided materials to the debtor, even if a Security Agreement had already been executed. Furthermore, the debtor must actually have rights in the collateral, or the power to transfer rights in the collateral to the creditor. Property owned by a third-party, to which the debtor has no interest, cannot be encumbered by the creditor’s security interest.
As stated above, there are multiple ways to perfect a creditor’s security interest in collateral. Filing a Financing Statement is one clear way of doing so. In some ways, the Financing Statement is even simpler than the Security Agreement. Notably, Article 9 does not require the same specificity in identifying collateral in Financing Statements as it does for Security Agreements. Although similar descriptions are sufficient, a Financing Statement might also simply indicate that it covers “all assets or personal property.”