Question

Laws for Accountants

- What is a security interest

- What does Art 9 of the UCC cover-and hat is not covered

- What does the word attachment mean under Art. 9

- What is required for a security interest to be perfected-how does perfection happen.

- Last but not least-why do we care about all of this

- Have you ever thought about how many credit transactions happen every day for purchases of things, not real estate? How much money do you think is involved?

Answer 1

A security interest is an interest in property real estate or otherwise that secures repayment of a debt or performance of some other obligation. If the party that grants the security interest fails to fulfill its obligation, then the holder of the security interest can normally take possession of the asset in question and sell it in order to recoup any losses. Security interest dramatically reduces the level of risk a lender takes on, thereby allowing for lower interest rates and other incentives to borrow. If a security interest is granted, the exchange is known as a 'secured transaction.'

Article 9 is an article under the Uniform Commercial Code  that governs secured transactions, or those transactions that pair a debt with the creditor’s interest in the secured property. Article 9 regulates the creation of security interests, and the enforcement of those interests, in movable or intangible property and fixtures. It encompasses a wide variety of possessory liens and determines the legal right of ownership if a debtor does not meet his or her obligations.

A creditor has a security interest in collateral, and becomes a secured party, if and when a security interest “attaches.” Under the UCC, a security interest generally does not attach unless three basic requirements are met. In simplest form, the requirements are that:

• value be given for the security interest
• the debtor has rights in the collateral (or power to transfer the collateral to a secured party); and
• the debtor “authenticates” a security agreement   

In order for a security interest to be enforceable against the debtor and third parties, UCC Article 9 sets forth three requirements: Value must be provided in exchange for the collateral; the debtor must have rights in the collateral or the ability to convey rights in the collateral to a secured party; and either the debtor must have "authenticated" a security agreement with a description of the collateral or the creditor must be in possession of the collateral. When all three of these formalities are met, the security interest "attaches" to the collateral and becomes enforceable.