An extremely important matter in connection with selling goods in the United States is the law of secured transactions. Generally, a seller in the United States does not retain legal title in the goods sold even if he has not yet received the full purchase price. After the execution of the purchase agreement, legal title passes over to the buyer. When merchants sell goods on credit or use some other payment plan deferring the satisfaction of the total purchase price, they protect their interest in the goods sold (but not yet paid in full) by obtaining a so-called “security interest.” The law of security interests in the United States is governed by the Uniform Commercial Code (UCC). I referred to the UCC in the previous post when I discussed the transactions involving sale of goods and mentioned that UCC is divided into nine articles, each containing provisions that relate to a specific area of Commercial Law. Article 9 of the UCC applies to the establishment and maintenance of the consensual security interests in personal property and fixtures (movable personal property attached to the real estate and thus becoming a part of the real estate, e.g., furnace, bar table). When real estate is involved, the mortgage law is utilized. Article 9 applies only to voluntary, consensual collateralization, not to statutory or judicial liens. It contains numerous nuances, however, a review of fundamental concepts may be appropriate and helpful to any person who participates in the business of selling goods.
The seller or the creditor upon agreement of the buyer or debtor may create an enforceable security interest when the next three requirements are met:
1. The creditor must give value to the debtor, usually by advancing money to or delaying the request for immediate full payment from the debtor;
2. The debtor must have rights in the personal property, known as collateral (personal property or fixture the creditor may use for satisfaction of its credit upon debtor’s default);
3. The parties must execute a written security agreement that describes the collateral and is signed or otherwise authenticated by the debtor.
After these three requirements are satisfied the security interests “attaches” and the creditor has an “attached” security interest.
The next step for the creditor to take is to “perfect” its security interest in the property at issue. “Perfection” is a legal term that refers for the act of filing a financing statement with the official state authorities and therefore, putting the world on notice of the creditor’s secured interest. Proper perfection protects the secured party from competing creditors. Any subsequent creditor who may consider to advance certain benefits to that debtor under the guarantee of the same collateral will be able to check and see that the interests of the first creditor will prevail in case of debtor’s default. If there are several creditors to whom the same collateral was pledged the U.S. law says “first in time, first in place”. That is why it is vitally important to promptly and properly accomplish the process of perfection. If the value of the collateral is greater than the debt owned to the secured creditor, and there is more than one creditor, the law is that the first two perfected creditors take all available value to satisfy their credits in full and then other creditors share the rest according to the line of their priority.
Filing a proper financing statement is the most popular method of perfecting the creditor’s rights. But there are other ways to attain perfection. Merchants selling goods in the United States must be familiar with the general rules of secured transactions. Article 9 of the UCC has extensive detailed provisions and guidance applicable almost to any conceivable commercial transaction that involves credit. Because of the strict time guidelines and numerous details it is very important to make sure that a security interest is properly attached and/or perfected. Otherwise, a seller may be left without any priority recourse against a defaulting buyer or other competing creditors.