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UCC Security Interests

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The Uniform Commercial Code (UCC) is a collection of laws that govern commercial sales in the United States. Its provisions created the guidelines all states follow today in commercial transactions, making trade throughout the country streamlined and predictable. Although all states have adopted at least some of the UCC’s provisions, a few have not adopted them all. In 2013, Wisconsin adopted Article 9, the article that governs security interests in personal property and fixtures.

A security interest is a creditor’s legal claim to a piece of collateral used to obtain a loan from them. When a security interest is part of a transaction, the process is known as a secured transaction. Secured transactions are often used by businesses to obtain loans. As a business owner, you will likely be involved in one or more secured transactions. Educate yourself about the business law that surrounds these transactions to ensure that you know your rights and how to protect them during interactions with creditors.

Parties Involved in a Secured Transaction

In order to understand how security interests work within secured transactions, it is important that you understand who is who and the assets involved in these transactions.

  • Creditor: the lender or seller who lends money or sells objects to a borrower;
  • Debtor: the individual or company that takes out a secured loan or makes a secured purchase;
  • Collateral: the asset the debtor provides to secure the loan or complete a sale. In the event the debtor defaults on his or her loan, the creditor has the right to take possession of this asset;
  • Security interest: the creditor’s right to seize the collateral used for a transaction. This collateral is what “secures” the transaction, hence the term secured transaction;
  • Attachment: the process through which a creditor becomes a secured party, a party with a security interest; and
  • Perfection: the act of registering a security interest with the appropriate authority to ensure that none of a debtor’s other creditors can claim it in the event the debtor becomes insolvent.

Attaching a Security Interest

For a creditor to become a secured party, they must assert their interest in a piece of collateral through a process known as attachment. To attach a security interest, the following three criteria must be met:

  • The security interest must be valued. This value is derived from the value given by the creditor, such as the amount of money lent or the value of a sale. The security interest’s value is included in the security agreement;
  • The debtor must have rights to the collateral. Whether the debtor owned the collateral before using it in a secured transaction or it purchased the collateral as part of a secured transaction, the debtor must have the right to use the collateral to obtain credit or complete a purchase. Otherwise, the creditor cannot attach a secured interest in the collateral; and
  • The security agreement must be authenticated by the debtor. A security agreement is a document that states that the debtor is willingly granting the creditor the right to attach a security interest to the collateral they provided. This document must describe the collateral in enough detail that it can easily be identified. In other words, a debtor cannot agree to use “all of his or her assets” or a similarly vague collection of property as collateral in a secured transaction.

Attaching a security interest to a piece of collateral can be a complex process. When you are considering using this type of transaction to support your business, be sure to work with an experienced business lawyer who can guide you through the process and ensure that your security agreement protects your rights and interests.

Once a security interest is attached, the creditor can perfect it. This is done by filing a financing statement with the State of Wisconsin Department of Financial Institutions. When a creditor perfects a security interest, they have priority over other creditors to claim its collateral if the debtor files for bankruptcy.

Work with an Experienced Wisconsin Civil and Business Litigation Attorney

When you need experienced legal advice and representation in the business arena, work with one of the experienced Appleton business lawyers from Hammett, Bellin & Oswald, LLC. Contact our office today to set up your complimentary legal consultation with us. We can answer any questions you have and guide you toward the most effective course of action for your secured transaction or any other business matter. Our team is not just familiar with state and federal business laws, but with the court systems in many Wisconsin counties, making us well-equipped to handle your unique case.

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