assignment of ucc security interest

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Assignments and Security Interests Under UCC Article 9: A Worthy Decision

The March 2020 Commentary and its accompanying amendments to the Official Comments are critical steps in getting the commercial finance industry and, more importantly, courts aligned on how 9-406 and 9-607 work in concert.

December 16, 2022 at 10:30 AM

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The basic definitions of Article 9 align with this approach of applying to both an assignment of payment rights and a security interest in such assets. “[S]ecurity interest” in UCC Article 1, §1-201(b)(35) (General Definitions), includes “any interest of a … buyer of accounts, chattel paper, a payment intangible or a promissory note in a transaction that is subject to Article 9.” The definition of “secured party” in Article 9, §9-102(a)(73) (Definitions and Index of Definitions), includes a “person in whose favor a security interest is created or provided for under a security agreement,” as well as a “person to which accounts, chattel paper, payment intangibles or promissory notes have been sold.” Finally, the definition of “debtor” in Article 9, §9-102(a)(28), includes both a “person having an interest, other than a security interest or other lien, in the collateral” and a “seller of accounts, chattel paper, payment intangibles or promissory notes.”

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Secured Party Has Same Rights as Assignee Under UCC § 9-406

On November 22, 2022, the Court of Appeals issued a decision in Worthy Lending LLC v. New Style Contrs., Inc. , 2022 NY Slip Op. 06631 , holding that a secured party has the same rights as an assignee under UCC § 9-406, explaining:

Section 9-607 (a) (3), entitled “Collection and Enforcement by Secured Party,” provides as follows: If so agreed, and in any event after default, a secured party may enforce the obligations of an account debtor or other person obligated on collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral. An account debtor who receives a secured creditor’s notice asserting its right to receive payment directly can pay the secured creditor and receive a complete discharge (UCC 9-406 [a]) or, if in doubt, can seek proof from the secured creditor that it possesses a valid assignment and withhold payment in the interim (UCC 9-406 [c]). Here, Worthy is the “secured party,” with the authority to enforce the rights of its debtor (Checkmate) to collect on the obligations of the account debtor (New Style). The lower courts held that subsection 9-607 (e) bars Worthy from using the mechanism provided for in section 9-607, by providing that this section does not determine whether an account debtor, bank, or other person obligated on collateral owes a duty to a secured party. However, the plain language of subsection (e) merely states that UCC 9-607 does not itself determine whether an account debtor owes a duty to a secured party. The agreement between Worthy and Checkmate grants Worthy the right to direct Checkmate’s debtors to pay Worthy directly, and bars Checkmate from interfering with any such direction if given. Subsection (e) of 9-607 does not even imply, much less state, that parties cannot contractually assume duties concerning the right of a secured party to enforce the rights of a debtor as against account debtors. Indeed, section 9-607 (a) (3) expressly provides that “in any event after default,” a secured party may obtain collateral directly from an account debtor, and the secured party and debtor may agree that the secured party may do so by agreement, without regard to default—which they did here. Consistent with the statute’s text, the official comments of the UCC Permanent Editorial Board (PEB)[FN1] issued in 2020 explain that UCC 9-607 “establishes only the baseline rights of the secured party vis-a-vis the debtor” and permits “the secured party to enforce and collect [from an account debtor] after default or earlier if so agreed” (UCC 9-607, Comment 6; see also PEB Commentary No. 21 at 4 n 21). New Style contends that UCC 9-406 allows only assignors—not holders of security interests—to rely on the payment-redirection provisions contained in that section. UCC Section 9-406 (a) states: An account debtor on an account, chattel paper, or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor. The definition of “security interest” in the UCC itself does not distinguish between a security interest and an assignment and the definition section contains no separate definition of “assignment,” “assignor” or “assignee.” The commentary makes clear that a security interest is treated as an assignment. As the commentary explains, treating assignments and security interests identically promotes efficient dealings between the parties—they do not have to try to determine whether the interest is an assignment or a security interest by parsing contractual language. New York case law, state and federal, is consistent. The PEB recently amended the official UCC comments to clarify what has long been the case: the term assignment, as used in UCC article 9, refers to both an outright transfer of ownership and a transfer of an interest to secure an obligation. (Internal quotations and citations omitted).

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Protecting your security interest in an llc membership interest: methods and considerations for perfecting.

By: Rochelle Hauser | September 18, 2018 Owning a Business

You have made the decision to provide financing, whether as a business owner or otherwise. Perhaps you are loaning money to a borrower, or selling a company you own and financing the purchase. You will likely require some type of collateral to secure repayment of the loan.

If your collateral includes a limited liability company (“LLC”) membership interest, there are important steps you need to follow to be sure you are protected in the transaction.

First, you need to review the organizational documents to determine whether the security interest in the membership interest is permitted. If not permitted, you need to obtain consent from the company and other members. Next, you will want to have a security agreement (often called a pledge agreement) granting you a security interest in the membership interest, signed by the borrower.

However, that’s only part of the process. You also need to “perfect” your security interest in the membership interest. Perfecting a security interest protects your rights in the collateral and determines your priority in relation to other creditors .

Perfection methods vary depending on the jurisdiction and the type of collateral. To determine the appropriate method to perfect your security interest in a membership interest, you must review the company’s organizational documents, as well as the Uniform Commercial Code (“UCC”) in the appropriate jurisdiction.

Methods for perfecting

General intangible : Most commonly, a membership interest in an LLC is considered a general intangible . To perfect a security interest in a general intangible, you must file a UCC-1 financing statement with the Secretary of State’s office in the state in which the individual resides, or in which the entity was formed, depending on whether the borrower is an individual or an entity.

Once you file the financing statement, your security interest is considered perfected. Generally, the timing of filing, among other factors, determines the order of priority among multiple secured parties, with the first to file having priority.

A financing statement lapses five years from the date of filing. If the loan will be longer than five years, you must file a UCC-3 continuation statement prior to the lapse date to maintain perfection. The continuation statement can be filed up to six months before the lapse date.

Security : An LLC, however, can elect to have its membership interests classified as securities under Article 8 of the UCC. Generally, the organizational documents must expressly state that the membership interests are to be treated as securities. Additionally, if the membership interests are certificated, they are also considered securities. As the secured party, you must review the organizational documents to determine whether the “opt in” language is included or the membership interests are certificated, to properly perfect your security interest.

If the membership interests are securities, then you perfect by taking possession or control of the securities – or both. If the membership interests are certificated, then you perfect by taking possession of the certificates and by taking control by having the security interest noted in the company’s records. If the membership interests are not certificated, then you perfect by taking control by entering into an agreement with the company that specifies the company will take instructions from you, the secured party, as well as having the security interest noted in the company’s records. In each case, the borrower will also give you an assignment of the membership interest so that you can transfer title if there is a default on the loan.

Note: You can also perfect by filing a UCC-1 financing statement. However, possession or control take priority over a UCC-1 filing, so they are better forms of protection.

Considerations after perfecting

After you have perfected your security interest, a company can amend its organizational documents to either opt in or opt out of Article 8, or to certificate or uncertificate its membership interests. If that occurs, the method of perfection could change, and your priority could be jeopardized.

As the secured party, you can protect your security interest as follows:

• Obtain a written commitment from the company that it will not alter the current status, whether it is opted in to or opted out of Article 8, until you are paid back your loan.
• Obtain a written commitment from the company that it will not change the membership interests from certificated to uncertificated, or vice versa, until you are paid back your loan.
• If the company has opted in to Article 8, request that the company provide certificates for its membership interests and then take possession of the certificates.
• Depending on the situation, you also may choose to file a financing statement, take possession of any certificates, and get the appropriate agreements and actions from the company.

Because of the complexity and varying factors involved in obtaining and perfecting a security interest, lenders should consider consulting with an attorney who can assist them with reviewing the organizational documents and properly obtaining and perfecting their security interest.

At Henson Efron, our attorneys have extensive experience assisting secured parties in protecting their collateral. If you’d like to learn more about how our experience and knowledge can help protect your business, please contact Henson Efron .

The purpose of this article is merely to provide general information and should not be construed as legal advice.

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Foreclosing a Perfected Security Interest in LLC Membership Units/Interests

In our most recent edition of The Advisor, we discussed the process for a lender to obtain and perfect a security interest in membership units/interests in a limited liability company (“LLC”), as collateral for a loan. In this edition, we will address the lender’s rights to foreclose its security interest upon the occurrence of an event of a default under the loan.

In the event of a default under the loan, the lender may elect to foreclose its security interest in the LLC membership units/interest. Should the lender make such an election, the lender must exercise its rights under the applicable pledge agreement and the Uniform Commercial Code (“UCC”).

The first step will be for the lender, or its legal counsel, to prepare any notice of default and demand required by the applicable loan documents, providing the pledgor and any other necessary party with lender’s demand for payment and notice of the party’s right to cure the default, if any such right is provided for in the loan documents.

Assuming there is no cure, the lender then must gain control of the pledged membership units/ interests. If the membership units/interests are uncertificated, there is no physical certificate to possess, so control is not an issue. If the membership units/interests are certificated, the lender will generally have obtained possession of the certificates during the loan origination, so control, again, should not be an issue.

Once the membership units/interests are in the lender’s control, the next step is liquidation. The lender will look to the pledge agreement and the LLC’s organizational documents to determine if there is an obligation to first offer the membership units/interests to the LLC or its other members before liquidating the membership units/interests. If there is such a requirement, the terms of the pledge agreement or the LLC’s organizational documents will dictate the process. If not, the lender may proceed to sell the membership units/interests to a third party. In doing so, the primary choice the lender will face is whether to dispose of the membership units/interests by private or public sale. Whether the disposition is public or private dictates the type of “Notice of Disposition” that must be provided prior to the disposition of the membership units/interests.

Prior to preparing a Notice of Disposition, the lender must determine who must be provided with such notice. The UCC requires the lender to provide a Notice of Disposition to the debtor/ pledgor, any secondary obligor (i.e. guarantors), and any party holding a security interest or other lien in the membership units/interests, perfected by the filing of a UCC financing statement (collectively, “Parties of Interest”). Thus, the lender will need to perform a current UCC search on the pledgor to determine if any other security interests or liens encumber the membership units/interests.

The lender then must determine how many days notice must be provided. The UCC provides that ten (10) days notice prior to the disposition is “commercially reasonable”. However, twenty-five (25) days notice prior to the disposition is required when a state or federal tax lien has been filed.

Once the applicable period of notice has elapsed, the lender may dispose of the membership units/interests and apply the net proceeds to the amounts due and owing under the loan. The lender may then look to other collateral, the borrower, or any guarantors for payment of any remaining amounts due under the loan.

Finally, there is an alternative to the lender’s disposition of the membership units/interests—retaining ownership—which is much less frequently utilized. Under this alternative, the lender may accept and retain the membership units/interests in full or partial satisfaction of the debt due and owing. However, the debtor/pledgor must provide consent to the lender after the default (in the event of a partial satisfaction of the debt) or fail to object to the lender’s acceptance of the membership units/interests, after being provided with notice of lender’s intent to do so (in the event of a full satisfaction of the debt). Given that the relationship with the debtor/pledgor is often strained after the occurrence of an event of default, and that lenders typically do not desire to retain ownership of foreclosed collateral, this alternative is rarely utilized.

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Part 3. Perfection and Priority

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[Subpart 1. Law Governing Perfection and Priority] [Table of Contents]

• § 9-312. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER, DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS, INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT RIGHTS, AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY PERFECTION WIT
• § 9-313. WHEN POSSESSION BY OR DELIVERY TO SECURED PARTY PERFECTS SECURITY INTEREST WITHOUT FILING.
• § 9-314. PERFECTION BY CONTROL.
• § 9-315. SECURED PARTY’S RIGHTS ON DISPOSITION OF COLLATERAL AND IN PROCEEDS.
• § 9-316. EFFECT OF CHANGE IN GOVERNING LAW.
• § 9-317. INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF SECURITY INTEREST OR AGRICULTURAL LIEN.
• § 9-318. NO INTEREST RETAINED IN RIGHT TO PAYMENT THAT IS SOLD; RIGHTS AND TITLE OF SELLER OF ACCOUNT OR CHATTEL PAPER WITH RESPECT TO CREDITORS AND PURCHASERS.
• § 9-319. RIGHTS AND TITLE OF CONSIGNEE WITH RESPECT TO CREDITORS AND PURCHASERS.
• § 9-320. BUYER OF GOODS.
• § 9-321. LICENSEE OF GENERAL INTANGIBLE AND LESSEE OF GOODS IN ORDINARY COURSE OF BUSINESS.
• § 9-322. PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND AGRICULTURAL LIENS ON SAME COLLATERAL.
• § 9-323. FUTURE ADVANCES.
• § 9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS.
• § 9-325. PRIORITY OF SECURITY INTERESTS IN TRANSFERRED COLLATERAL.
• § 9-326. PRIORITY OF SECURITY INTERESTS CREATED BY NEW DEBTOR.
• § 9-327. PRIORITY OF SECURITY INTERESTS IN DEPOSIT ACCOUNT.
• § 9-328. PRIORITY OF SECURITY INTERESTS IN INVESTMENT PROPERTY.
• § 9-329. PRIORITY OF SECURITY INTERESTS IN LETTER-OF-CREDIT RIGHT.
• § 9-330. PRIORITY OF PURCHASER OF CHATTEL PAPER OR INSTRUMENT.
• § 9-331. PRIORITY OF RIGHTS OF PURCHASERS OF INSTRUMENTS, DOCUMENTS, AND SECURITIES UNDER OTHER ARTICLES; PRIORITY OF INTERESTS IN FINANCIAL ASSETS AND SECURITY ENTITLEMENTS UNDER ARTICLE 8.
• § 9-332. TRANSFER OF MONEY; TRANSFER OF FUNDS FROM DEPOSIT ACCOUNT.
• § 9-333. PRIORITY OF CERTAIN LIENS ARISING BY OPERATION OF LAW.
• § 9-334. PRIORITY OF SECURITY INTERESTS IN FIXTURES AND CROPS.
• § 9-335. ACCESSIONS.
• § 9-336. COMMINGLED GOODS.
• § 9-337. PRIORITY OF SECURITY INTERESTS IN GOODS COVERED BY CERTIFICATE OF TITLE.
• § 9-338. PRIORITY OF SECURITY INTEREST OR AGRICULTURAL LIEN PERFECTED BY FILED FINANCING STATEMENT PROVIDING CERTAIN INCORRECT INFORMATION.
• § 9-339. PRIORITY SUBJECT TO SUBORDINATION.
• § 9-340. EFFECTIVENESS OF RIGHT OF RECOUPMENT OR SET-OFF AGAINST DEPOSIT ACCOUNT.
• § 9-341. BANK’S RIGHTS AND DUTIES WITH RESPECT TO DEPOSIT ACCOUNT.
• § 9-342. BANK’S RIGHT TO REFUSE TO ENTER INTO OR DISCLOSE EXISTENCE OF CONTROL AGREEMENT.
• § 9-301. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS.
• § 9-302. LAW GOVERNING PERFECTION AND PRIORITY OF AGRICULTURAL LIENS.
• § 9-303. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN GOODS COVERED BY A CERTIFICATE OF TITLE.
• § 9-304. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN DEPOSIT ACCOUNTS.
• § 9-305. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN INVESTMENT PROPERTY.
• § 9-306. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN LETTER-OF-CREDIT RIGHTS.
• § 9-307. LOCATION OF DEBTOR.
• § 9-308. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS PERFECTED; CONTINUITY OF PERFECTION.
• § 9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT.
• § 9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO WHICH FILING PROVISIONS DO NOT APPLY.
• § 9-311. PERFECTION OF SECURITY INTERESTS IN PROPERTY SUBJECT TO CERTAIN STATUTES, REGULATIONS, AND TREATIES.

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Ucc assignment and federal uspto assignment: one word, two meanings.

Fairly frequently, I am asked the following question:

“Do assignment filings made with the USPTO have the same effect as assignment filings made under Article 9 of the Uniform Commercial Code?”

While in certain situations the answer is yes, the more helpful and short answer is no . UCC assignments are typically filed centrally or locally in each state, IP filings are made at the federal level. Moreover, the word ‘assignment’ may have a different meaning. 

I’ll explore some of the similarities and differences between Article 9 assignments and assignments made with the U.S. Patent and Trademark Office (USPTO) to explain why.

What is an Assignment?

Let's start with setting the scope of what we mean by the term ‘assignment’. When used with respect to property, particularly in the legal world, assignment is defined as “the act of transferring an interest in property or some right (such as contract benefits) to another”.

UCC Assignment

Article 9 of the  Uniform Commercial Code (UCC)  allows a secured party (SP) to file assignments via UCC3 amendments. In the UCC Article 9 world, an assignment (UCC3) is linked to the initial financing statement (UCC1) in the public record so that the relationship between the two filings is clear. Both filings, the UCC1 and UCC3, are indexed together so that a search of the public record by a debtor name will reveal both the financing statement and the amendment in one search.

There are several types of UCC assignment filings a secured party may make with the appropriate central filing office and/or local filing office: 

• The secured party (assignor) may assign all of its rights to another party (assignee). (This is considered a full assignment.)
• The secured party may assign the rights to some portion or percentage of all the collateral covered by the initial UCC financing statement to another party. (A partial assignment.)
• The secured party may assign the rights of the 100% interest in a  portion  of the collateral to another party. (Also a partial assignment.)

USPTO Assignment

Like the rights to security interests that may be fully or partially assigned under the UCC,  intellectual property (IP) , such as patents and trademarks, may also have ownership rights transferred in full or in part on the public record at the USPTO. In both cases, when an IP or UCC assignment filing is made, the filings end up in the public record so that searchers can find them.

At the USPTO, however, assignments and other changes are not directly linked on one index when searching by name, which is ordinarily how due diligence searching is conducted. A name search of the USPTO index will not yield one set of complete results containing both trademark applications and registrations and all trademark assignment filings. Separate searches are needed in different sections of the USPTO website. Once those searches are completed, a searcher may need to manually review the results in order to determine if there is a parent-child relationship between the records.

This is also important to note because an IP assignment can be filed before a patent is granted or a trademark application and registration appears on the USPTO records, because it might still be going through the review process at the USPTO.

On top of that, some filings categorized as ‘assignments’ at the USPTO, because they are indexed in the assignments database, are not assignments by definition. In other words,  a filing on the USPTO assignment database may NOT be transferring rights in full or in part . This means that search results will include actual assignments and other records that are not assignments in the true sense of the rights of transfer. 

USPTO Assignment Recordation Examples

So, what other filings are included as ‘assignments’ at the USPTO that are not really assignments? As an example, let’s say that the owner of IP changes their name while retaining ownership in their IP. Searching either of the assignment indexes at the USPTO may include name change results. Technically, this is not an assignment by definition – there was no transfer of rights – but the name change is filed on the assignment index. A security interest in IP is another example of a type of lien filing found on the USPTO assignments database but is not, by definition, an assignment.

Adding to the confusion, IP filers can choose to file using the option of ‘Other’ and can enter a conveyance type not already provided as a standard selection, which means that almost anything can be included on the ‘assignment’ records at the USPTO. 

A Rule of Thumb for UCC and IP Assignments

The main point to take away from this discussion is that while assignments of UCCs are always assignments, assignments of IP are not as clear. Assignments of UCCs are always linked to the initial financing statements and are usually reflected in a single search, but assignments of IP filings are found on a different USPTO database from the trademark application and registration database, and patent grant and published pending patent databases, which all require separate searches (and thus, yield separate search results) on the USPTO website. It is necessary for the searcher to match up IP assignments to the parent record, if there is a parent record available.

The terminology may appear the same, but the meaning – and the search processes – for USPTO assignments and UCC assignments are completely different.

For insight on how intellectual property due diligence dovetails with more traditional types of searches, access our free webinar below:

This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Article 9 Filing, Searching and Due Diligence , UCC , Intellectual Property Due Diligence

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Perfecting A Security Interest In A Life Insurance Policy

Answered by:  James W. Bruce, III

Filing a financing statement on the policy is not required. Revised Article 9 does not apply to security interests in life insurance policies. See R evised Art. 9, Section 9-109(d)(8) . The security interest in the policy is perfected by filing the assignment with the insurance company. OCU Law Professor Alvin Harrell, in his book "The Law of Personal Property Secured Transactions," suggests that "it may also be desirable to obtain possession of the policy itself." First published on BankersOnline.com 07/07/03

First published on 07/07/2003

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Is Your Chattel Paper All Wet? A Deep Dive Into the Super-Priority Rule

Active members of the equipment leasing and finance industry are often familiar with the super-priority rule contained in Article 9 of the UCC. Under certain circumstances, this rule allows a party that takes possession of chattel paper in connection with an outright or collateral assignment of chattel paper (possessor) to obtain a prior interest to another claimant who perfects its interest by filing (filer). The next two editions of Dispatches from the Trenches take a deeper dive into the text of this super-priority rule found in UCC §9-330. Part one discusses the super-priority rule generally and focuses further on the key requirements of new value and possession. Part two will address the two separate and distinct super-priority rules which apply in different contexts.

The UCC defines chattel paper as “a record or records that evidence both a monetary obligation and a security interest in specific goods… or a lease of specific goods.” 1 The definition expands to include a security interest in, or license of, software used in connection with the specific goods. 2 In the simplest terms, the vast majority of equipment leasing and finance transactions originated within our industry are reflected by one or more documents constituting chattel paper.

An assignment of this chattel paper falls within the scope of Article 9, irrespective of whether the transaction constitutes an outright sale of chattel paper or, alternatively, only a security interest in chattel paper. 3 This rule is in effect because it is sometimes difficult to distinguish a true sale of chattel paper from an outright assignment. 4 In both contexts, the UCC requires the assignee to perfect its interest in the chattel paper.

For this reason, two groups in our industry must be aware of the super-priority rule that allows a possessor to trump the interests of a filer even if the filer perfected its interest first:

• Funders/investors that take assignment of chattel paper from originators
• Lessors/lenders with collateral packages from lessees/ borrowers that involve a collateral assignment of chattel paper

In many transactions, the super-priority rule provides comfort to funders, leading to a belief that it will obtain a priority interest in the chattel paper in connection with an outright assignment. Often in the same transaction, the purchaser/assignee receives a representation and warranty from a reputable and established company that the assignor owns the chattel paper, has not assigned or pledged it to anyone else and is conveying it to the assignee free and clear of liens arising through or created by the assignor. A strong representation and warranty of this nature by a reputable and creditworthy entity can lessen the desire to walk through the text of the super-priority rule as carefully.

Unfortunately, the representation and warranty is not enough in many contexts, and a deep dive into the text of the rule may reveal some astonishing treasures or some surprises as intellectually shocking as a mythical sea creature.

General Observations

Although other requirements will be discussed in the next edition of Dispatches , in all cases, a possessor can only take priority over a filer if three conditions are met. The possessor must:

• Take its interest in good faith and in the ordinary course of the possessor’s business,
• Give new value, and
• Take possession of the chattel paper (or obtain control of electronic chattel paper)

Whether a possessor takes its interest in good faith and in the ordinary course of business is a factual matter not discussed in detail here.

Whether a possessor gives new value is worth further discussion. The UCC defines new value as “(i) money, (ii) money’s worth in property, services or new credit or (iii) release by a transferee of an interest in property previously transferred to the transferee. The term does not include an obligation substituted for another obligation.” 5

Generally speaking, this rule means that the possessor has to provide new value for the assignment of the chattel paper. This requirement is satisfied when a funder/investor takes assignment of chattel paper from an originator. However, it should be considered carefully when a lessor/lender merely takes collateral assignment of chattel paper originated by its lessee/borrower as additional collateral in connection with an equipment lease or financing. In that context, the funds provided by the lessor relate to the acquisition or other financing of the equipment, and therefore may not constitute new value for purposes of the assignment of the chattel paper.

There is one notable exception in which “the holder of a purchase money security interest in inventory gives new value for chattel paper constituting proceeds of the inventory.” As the official comments to the UCC explain: “Accordingly, the purchase-money secured party may qualify for priority in the chattel paper under [the 9-330 super-priority rule], even if it does not make an additional advance against the chattel paper.” 6 For this reason, a lessor/lender with a purchase money security interest in the leased or financed equipment has a stronger claim under the super-priority rule to the chattel paper than a lessor/lender that does not have a purchase money security interest. Note, all that is required is a purchase money security interest, not necessarily the priority that such an interest is afforded if the purchase money super-priority rules are followed.

Prudent equipment leasing and finance companies may also want to include specific language in any lease or financing documents where chattel paper is key collateral. The language should state that any advance by the lessor or lender of any funds in a connection with the transaction is being made specifically for the applicable chattel paper and that the lessor/lender is giving new value and otherwise qualifies for a priority security interest in chattel paper under §9-330 of the UCC.

Possession or Control

Possession seems to be a simple concept, but official comments to the super priority rule mention two common practices that have raised particular concerns.

The first problematic practice occurs when there are multiple originals of the chattel paper. The UCC notes, as follows: “In some cases the parties create more than one copy or counterpart of chattel paper evidencing a single secured obligation or lease. This practice raises questions as to which counterpart is the ‘original’ and whether it is necessary for a purchaser to take possession of all counterparts in order to ‘take possession’ of the chattel paper. The problem raised by [this] first practice is easily solved. The parties may, in the terms of their agreement and by designation on the chattel paper, identify only one counterpart as the original chattel paper for purposes of taking possession of the chattel paper.” 7

The second problematic practice occurs when there is a master agreement with multiple schedules, each intended to evidence a different lease or financing. The UCC notes as follows:

“Parties sometimes enter into a single ‘master’ agreement. The master agreement contemplates that the parties will enter into separate ‘schedules’ from time to time, each evidencing chattel paper. Must a purchaser of an obligation or lease evidenced by a single schedule also take possession of the master agreement as well as the schedule in order to ‘take possession’ of the chattel paper?” 8

Careful drafting also easily solves concerns about the second practice. Each schedule should incorporate the terms of the master agreement, not the other way around. This will make it clear that each schedule is a stand-alone document.

The concept of control is intended to be the high-tech equivalent of possessing electronic chattel paper. Because of the many wrinkles to this developing concept, which has been increasingly taking shape over the last several years, a detailed discussion is beyond the scope of this edition of Dispatches.

All of the above requirements apply anytime a possessor desires to take advantage of the super priority rule. There is also another element, which differs depending on the context. It may surprise some to learn that there are actually two separate and distinct super-priority rules, one which applies to an interest in chattel paper claimed merely as proceeds of inventory and another in which the interest is claimed other than merely as proceeds of inventory. The next edition of Dispatches will discuss this aspect of the super-priority rule. Until then, watch the new value and possession concepts carefully and stay dry.

• UCC §9-102(a)(11)
• See, e.g., UCC §9-109 and comments, noting that Article 9 covers a security interest in chattel paper as well as the sale of chattel paper unless the sale of chattel paper is (a) part of the sale of the business out of which they arose or (b) an assignment for collection purposes only); UCC §9-102(71)(D) defining “secured party” to include a purchaser of chattel paper that been sold and UCC §1-201 defining “purchase” to include the taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest , issue or reissue, gift or any other voluntary transaction creating an interest in property.
• UCC §9-109, Official Comment No. 2.
• UCC §9-102(a)(57)
• UCC §9-330, Official Comment 3
• UCC §9-330, Official Comment No. 4

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What Is a UCC-1 Statement?

Understanding ucc-1 statements, types of ucc-1 statements.

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UCC-1 Statement: Definition, Types, and Example

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Dennis Madamba / Investopedia

A Uniform Commercial Code (UCC) financing statement (also referred to as UCC-1 or UCC Lien) is a legal document filed by creditors that serves as a public notification of its interest in a borrower's property. When a business obtains a loan, the lender may file a UCC-1, indicating their legal right to seize collateral if the loan remains unpaid.

This form details the specific assets that will be seized—and in what order—from debtors in the event they default. While virtually any type of asset may serve as such collateral, the most commonly used items include real estate properties, motor vehicles, manufacturing equipment, inventory, and investment securities such as stock and bond holdings.

Various assets may be used as collateral for a loan—equipment, vehicles, real estate—and creditors have a legal right to seize those assets if the loan remains unpaid.

The Uniform Commercial Code (UCC) filing system regulates secured loans involving personal property in the United States.

Key Takeaways

• A Uniform Commercial Code-1 (UCC-1) statement is a legal notice filed by creditors that publicly declares their right to seize the assets of debtors who've defaulted on loans.
• These forms are mainly used to smooth out collection processes, often by helping lenders secure court orders authorizing them to seize assets from delinquent borrowers.
• These forms must be filed with agencies located in the state where the borrower’s business is incorporated.
• There are two types of UCC-1 statements: blanket liens, and liens attached to specific collateral.

The UCC-1 statement serves as a lien on secured collateral , where the components and filing procedures are comparable to the lien requirements in residential mortgage loan contracts.

Lenders must incorporate completed UCC-1 statements in a business loan’s contract for it to be deemed effective. The statements must include detailed information about the borrower, and they must itemize descriptions of all assets named as the secured collateral for the loan.

As with any ordinary lien, lenders must file the UCC-1 with the appropriate agency in the state where the debtor company is incorporated. In most cases, UCC-1 statements are filed with the secretary of state’s office, which subsequently time-stamps the document and assigns a file number to the associated parties.

The process of issuing UCC-1 notices is referred to as “perfecting the security interest” in the debtor’s property.

Lenders have the option of filing the following two types of UCC-1 statements:

• Specific collateral UCC-1 statements: These are most commonly used in real estate or equipment transactions. They give lenders first-order secured rights to real estate properties or specific collateral, such as the equipment purchased with the loaned funds.
• Blanket lien: Blanket liens are also referred to as “all-asset” liens. This gives the lender secured rights to a range of assets, as long as the terms of these liens are detailed in the collateral section of the UCC-1 statement. Lenders tend to prefer this type of lien.

How a UCC Filing Affects Credit Scores

Like individuals, most businesses have a credit report and score . While a UCC-1 will appear on the credit report for a business, it won’t necessarily have an immediate negative impact on the business's credit score (unless, of course, the business defaults on the underlying loan.

The loan attached to the UCC filing will also increase a business’ credit utilization ratio , which—if it gets too high—can negatively impact the credit score. Furthermore, the business won’t be able to use the same piece of property as collateral for a different loan if there is a lien attached to it.

Suppose a construction company, called Alex’s Excavation, applies for a business loan to purchase two new hydraulic excavators. Bank XYZ is interested in offering Alex's Excavation a loan; as part of the contract, it files a UCC-1. Shortly afterward, Alex’s Excavation loses one of its biggest construction contracts and then another; the company is forced to file for bankruptcy .

Because the company had several lenders, it’s likely that Bank XYZ would not be given first-order rights to Alex’s property; Bank XYZ might have to wait until all other lenders were paid. However, because the bank filed a specific collateral lien on the two excavators, it received the property/cash mentioned in the UCC-1 statement in a timely fashion.

Filing a UCC-1 allows creditors to collateralize (or “secure”) their loan by utilizing the personal property assets of their customers (debtors). In the event of a customer defaulting on their loan or filing for bankruptcy, a UCC-1 elevates the lender’s status to a secured creditor, ensuring that it will be paid.

While rules vary by state, there are essentially two ways to remove a UCC lien:

• The first is to ask the lender to immediately remove the lien upon full payment of the loan by filing a UCC-3 statement.
• The other option, if your lender fails to file a UCC-3 after you’ve paid off the loan, is to visit your local secretary of state’s office and swear under oath that you have fulfilled the debt in full and request to have the UCC-1 removed.

A UCC-1 statement is effective for five years. After this five-year period, the lien becomes null and void.

A continuation statement is an amendment attached to a UCC-1 financing statement. Continuation statements extend the lender’s lien on the borrower’s collateral past the original financing statement’s expiration date. When a lender files a continuation statement, the continuation statement extends the UCC-1 financing statement by five years from the date of filing.

A UCC-1 financial statement lets creditors notify other creditors about any assets that a business is using as collateral for a secured transaction. UCC-1s filed with the appropriate secretary of state’s offices serve as public notice of the creditor’s interest in the assets. To check for UCC filings, visit your secretary of state’s website.

National Association of Secretaries of State. “ UCC Filings .”

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