Secured Transaction Rule Statements
1. SCOPE: Pursuant to § 9-109(a), Article 9 applies to 1) transactions that creates a security interest in personal
property or fixtures by contract; 2) agricultural liens; 3) sales of accounts, chattel paper, payment intangibles,
or promissory notes; 4) consignments; and 5) reservations of a security interest…
a. Article 9 governs all consensual security interests in personal property, i.e., security interests in
personal property created by mutual agreement between the parties.
b. Much of a secured creditor’s recourse under Article 9 lies against debtors who are insolvent. Thus, if
a debtor were not yet insolvent, then that would likely prevent a creditor from being able to use
Article 9 remedies unless and until the debtor actually becomes insolvent.
2. NOT COVERED: Article 9 does not cover 1) conditional sales; 2) statutory liens; 3) negative pledges; 4)
obvious consignments; 5) leases; 6) surety bonds; 7) wage assignments; 8) non-financing assignments; 9)
accounts sold to debt collection agencies; 10) transfers of a single account; 11) consumer bank accounts; and
12) assignments of sums recovered in a law suit.
3. DEBTOR/OBLIGOR: The UCC defines an obligor as anyone that “owes payment or other performance of
an obligation.” U.C.C. § 9-102(a)(59). In contrast, a debtor is anyone that has an interest in collateral (i.e.,
the property subject to a security interest). U.C.C. § 9-102(a)(12) & (28).
4. CLASSIFICATION: In classifying collateral, Article 9 of the UCC always looks to how the debtor uses the
collateral, not the creditor’s or a third party’s use.
a. Accordingly, the same collateral can be classified in different ways in different transactions,
depending how different debtors in each particular transaction use the item.
5. CONSIGNMENT: Pursuant to § 9-102(a)(20), a consignment is a transaction in which a person delivers
good to a merchant for the purpose of sale and the merchant 1) deals in goods of that kind under a different
name than the consignor, 2) is not an auctioneer, and 3) is not generally known by its creditors to be engaged
in the selling of others goods.
a. Additionally, the aggregate value of the goods delivered must be more than $1,000 and the goods
must not have been consumer goods immediately before delivery.
i. Consignments falling within the scope of Article 9 permits a consignor to retain a purchase
money security interest in goods sold on its behalf, which the consignor may perfect under 9-
324(b).
1. When a creditor generally that a merchant sells the goods of others, and does know
thus is not covered by Article 9, the creditor knows that consignor, not the merchant,
owns the property. Therefore, the cosigner’s property is not subject to a security
interest.
b. Under Article 9, a consignment transaction requires three basic findings pertaining to : 1) the parties,
2) the goods, and 3) the existence of a security interest. First, for the parties, there must be a debtor
who delivers the goods to a merchant for sale. That merchant must be one that: 1) deals in goods of
that kind under a name other than the name of the person making the delivery, 2) is not an auctioneer,
and 3) is not generally known by its creditors to be substantially engaged in selling the goods of
others. See U.C.C. § 9-102(a)(20)(A). Second, to be a qualifying consignment, each delivery of
goods both must be worth $1,000 or more in the aggregate at the time of delivery. The delivery must
also not be consumer goods immediately before. See U.C.C. § 9-102(a)(20)(B) & (C). Finally, the
transaction must not create a security interest that secures an obligation. See U.C.C. § 9-102(a)(20)
(D). All these requirements must be met for a transaction to be a consignment under Article 9.
6. TRUE LEASE: Article 9 does not apply to true leases. Under 2A-103(1)(j) a lease is a transfer of the right
to possession or use for a term in return for consideration, the lessor never plans to give up title, it plans to
get the collateral back and it should still be economically useful when it does.
7. DISGUISED SALE: In contrasts, sales disguised as a lease are subject to Article 9. A factual inquiry is
required to determine whether a lease is actually just a sale w reservation of a security interest.
a. Under §1-203(b), a transaction in the form of a “lease” creates a security interest if 1) the lease is not
subject to termination by the lessee and 2) there is no economic life left in the leased equipment at
the end of the putative lease arrangement because the original lease term is greater to or equal than
useful life of goods; the lessee is bound to renew for remaining life or become owner; the lessee has
an option to renew for rest of life at nominal cost; or the lessee has an option to become owner at the
end of lease at nominal cost.
i. The fact that the lease price exceeds the economic value of the equipment is not, by itself,
dispositive in determining that a transaction is a sale according to § 1-203(c).
1. The economic realities test says: if at the end of the term of lease, the only
economically sensible course for the lessee is to exercise the option to purchase the
property, then the agreement is a security interest .
a. If (1) at the outset, the parties expected the goods to retain some significant
residual value at the end of the lease term and (2) the lessor retains some
possibility of gain or risk of loss of the goods at the end of the lease, then it’s
a true lease. If not, it may be a sale with reservation of a security interest,
even if it falls outside of 1-203(b)
8. SAFE HARBOR: If a person claims that a transaction is a lease, consignment, bailment, license, or
