Specifying Collateral by Type Using UCC Article 9 Definitions
Article 9 of the Uniform Commercial Code requires that a financing statement, to be effective, must indicate the collateral that it covers. A common and useful practice is to specify types of assets that are collateral using UCC Article 9 definitions of asset types.
Some common asset types defined under UCC Article 9 include accounts, chattel paper, documents, equipment, general intangibles, instruments, inventory, and investment property. See § 9‑102. It is important to be aware of the UCC Article 9 definitions. Though many people would be prompted to search for a definition of uncommon terms like chattel paper or general intangibles, many people fail to realize that otherwise ordinary terms like accounts, documents, and investment property have specific meaning under UCC Article 9. Here are some common misunderstandings:
An “account” is a “right to payment of a monetary obligation…” with certain specific exclusions, notably including “deposit accounts.” See § 9-102(a)(2). Typically, a bank account is a deposit account, but a bank account is rarely, if ever, an “account.”
A “document” is a “document of title or a receipt of the type described in § 7-201….” Books, business records, databases, customer lists, invoices, receipts, bank records, manuals, logs, and the like are not documents under the UCC Article 9 definition. The UCC Article 9 definition of “document” involves two more issues; it makes explicit reference to another article of the UCC, Article 7, and incorporates an implicit reference to still another article of the UCC, Article 1. The explicit reference to § 7-201 is easy to see; the use of “document of title,” which is defined in UCC Article 1, is more difficult to appreciate. See § 1-201(b)(16).
TIP: Article 1 of the Uniform Commercial Code includes a batch of approximately 40 definitions, including common words like “agreement,” “money,” and “security interest.” Article 1 also separately describes concepts such as “notice” and “value” and provides guidance on the difference between leases and security interest. Article 1 applies to all transactions under the UCC (see § 1-102). Familiarize yourself with Article 1!
“Investment property” does not rely on the investor’s intention, so things like precious metals, artwork, or other rare goods do not become investment property simply because one acquired them “as an investment.” Under the UCC Article 9 definition, investment property “means a security , security entitlement, securities account, commodity contract, or commodity account.” See § 9-102(a)(49). By the way, every one of those things is also a defined term under the UCC, some of which require reference to UCC Article 8.
Some people also overlook the context necessary to select an appropriate collateral type. As an example, the tools and machines that one can rent at the local rental shop may look like equipment to the renter but they are inventory to the rental company. (Remember, “inventory” includes goods for lease. See § 9‑102(48).)
Again, it is a useful practice to specify types of assets that are collateral using UCC Article 9 definitions, but doing so requires an understanding of the definitions. Start with § 9-102, but don’t stop there!
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