Uniform Commercial Code – Article 9

Buyers and sellers of businesses are routinely involved in personal property transactions which must fully satisfy the Bulk Sales Law (Uniform Commercial Code, Division 6) and the secured transaction statutes (Uniform Commercial Code, Division 9). Assets of a business are commonly used as collateral to create a security interest in the seller or lender.

Just as a trust deed or mortgage encumbers real property as security for an obligation (debt), a “security agreement” creates a security interest in personal property.

To protect or “perfect” the interest created by a security agreement, as against other security interest and/or lien creditors or subsequent purchasers, a Financing Statement (UCC-1) is usually filed. In most cases, a security interest is perfected when it has attached and been properly filed with the appropriate filing officer (the Secretary of State in Sacramento or the appropriate county recorder).

A security interest attaches when:

• There is agreement by the parties that it attach;
• Value has been given; and
• The debtor has acquired rights in the collateral.

Once perfected, the secured party’s interest is protected against the debtor’s other creditors.

The Financing Statement should not be confused with the actual security agreement. The security agreement creates the security interest.

Although a written agreement is not necessary where the collateral is in the possession of the secured party as a pledge, a security interest is usually not enforceable unless there is a written security agreement, signed by the debtor, describing the collateral.