Title

"Deemed" Security Interests in UCC Article 9: Avoiding Traps for the Unwary, 14 DePaul Bus. & Com. L.J. 79 (2015)

Document Type

Article

Publication Date

2015

Abstract

Uniform Commercial Code (“UCC”) Section 1-201(35) provides in its detailed definition of security interests that “security interest” means “an interest in personal property or fixtures which secures payment or performance of an obligation.” Other parts of the UCC demonstrate that two relatively distinct kinds of security interests exist. First, the UCC notes that parties to transactions can create security interests by executing “security agreements.” For convenience sake, the security interests created by security agreements can be called “conventional” or “agreed upon” security interests. Second, various sections of the UCC describe security interests that come into existence by operation of law rather than by execution of security agreements. For convenience sake, this second group of security interests will herein be called “deemed” security interests. The “deemed” terminology is drawn from the analog in some Commonwealth countries to Article 9 of the UCC. That Commonwealth analog is the Personal Property Security Act (PPSA). It is unclear why the PPSA uses the term “deemed” to describe these kinds of security interests. However, it appears that the PPSA uses the termed “deemed” for some security interests because in some cases the PPSA itself - rather than explicit agreement of the parties--creates security interests. “Deemed” security interests could also be called “operation of law” security interests. The contrast, of course, is to what herein are called “conventional” or “agreed upon” security interests, interests created by the execution of security agreements by the parties to transactions. For several reasons, it is important to differentiate conventional (agreed upon) security interests and “deemed” (created by law) security interests. First, with conventional security interests, everybody involved will know of the existence of the security interests because the parties to secured transactions will have intentionally created these interests. If you intentionally create something, you know that it exists. So, people or businesses that have conventional security interests in property will always know that they have secured claims that they can assert. That is NOT the case with deemed security interests because in lots of situations parties protected by deemed security interests won't even know that they are protected by such interests. This is because deemed security interests, as the following analysis demonstrates, sometimes are created by operation of law rather than by agreement of the parties6 If people don't know they are protected by interests, they will not know to assert those interests. Second, with conventional security interests, all parties will know - or should know - that in many cases (though not all cases) they must take affirmative steps to perfect the security interests that they have, with those affirmative perfection steps usually being having possession of or taking control of property or creating public records of the interests in that property by filing. Different things are likely to happen with deemed security interests. Because parties protected by deemed security interests sometimes don't know that these security interests exist, some parties protected by deemed interests do not take affirmative steps to perfect the interests when such affirmative steps are needed for perfection. Non-perfection of deemed security interests, in turn, can create two distinct problems. First, people or businesses who have unperfected deemed security interests in property are likely in many cases to lose out in priority battles to other creditors of the possessors of the pertinent property, and to the bankruptcy trustees or debtors in possession (DIP's) for the possessors of the property. Second, if parties protected by deemed security interests have only unperfected interests in the property, then the bankruptcy trustees or DIP's for the protected parties will get only unperfected security interests in the property. Thus, in unperfected deemed interest cases, the possessors of property might be able to keep that property away from the bankruptcy trustees or DIP's for the protected parties.

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