COMMENTS TO OFFICIAL TEXT

Prior Uniform Statutory Provision: Various.

Purposes:

To state the sense in which certain words are used in this Article.

1. General. It is necessary to have a set of terms to describe the parties to a secured transaction, the agreement itself, and the property involved therein; but the selection of the set of terms applicable to any one of the existing forms (e.g., mortgagor and mortgagee) might carry to some extent the implication that the existing law referable to that form was to be used for the construction and interpretation of this Article. Since it is desired to avoid any such implication, a set of terms has been chosen which have no common law or statutory roots tying them to a particular form.

In place of such terms as "chattel mortgage," "conditional sale," "assignment of accounts receivable," "trust receipt," etc., this Article substitutes the general term "security agreement", defined in subsection (1)(h). In place of "mortgagor," "mortgagee," "conditional vendee," "conditional vendor," etc., this Article substitutes "debtor", defined in subsection (1)(d), and "secured party", defined in subsection (1)(i). The property subject to the security agreement is "collateral", defined in subsection (1)(c). The interest in the collateral which is conveyed by the debtor to the secured party is a "security interest", defined in Section 1-201(37).

2. Parties. The parties to the security agreement are the "debtor" and the "secured party."

"Debtor": In all but a few cases the person who owes the debt and the person whose property secures the debt will be the same. Occasionally, one person furnishes security for another's debt, and sometimes property is transferred subject to a secured debt of the transferor which the transferee does not assume; in such cases, under the second sentence of the definition, the term "debtor" may, depending upon the context, include either or both such persons. Section 9-112 sets out special rules which are applicable where collateral is owned by a person who does not owe a debt.

"Secured Party": The term includes any person in whose favor there is a security interest (defined in Section 1-201). The term is used equally to refer to a person who as a seller retains a lien on or title to goods sold, to a person whose interest arises initially from a loan transaction, and to an assignee of either. Note that a seller is a "secured party" in relation to his customer; the seller becomes a "debtor" if he assigns the chattel paper as collateral. This is also true of a lender who assigns the debt as collateral. With the exceptions stated in Section 9-104(f) the Article applies to any sale of accounts, contract rights or chattel paper: the term "secured party" includes an assignee of such intangibles whether by sale or for security, to distinguish him from the payee of the account, for example, who becomes a "debtor" by pledging the account as security for a loan.

"Account debtor": Where the collateral is an account, contract right, chattel paper or general intangible the original obligor is called the "account debtor", defined in subsection (1)(a).

3. Property subject to the security agreement. "Collateral", defined in subsection (1)(c), is a general term for the tangible and intangible property subject to a security interest. For some purposes the Code makes distinctions between different types of collateral and therefore further classification of collateral is necessary. Collateral which consists of tangible property is "goods", defined in subsection (1)(f); and "goods" are again subdivided in Section 9-109. For purposes of this Article all intangible collateral fits one of six categories, three of which, "accounts", "contract rights" and "general intangibles", are defined in the following Section 9-106; the other three, "documents", "instruments" and "chattel paper", are defined in subsections (1)(e), (1)(g) and (1)(b) of this Section.

"Goods": the definition in subsection (1)(f) is similar to that contained in Section 2-105 except that the Sales Article definition refers to "time of identification to the contract for sale", while this definition refers to "the time the security interest attaches".

For the treatment of fixtures, Section 9-313 should be consulted. It will be noted that the treatment of fixtures under Section 9-313 does not at all points conform to their treatment under Section 2-107 (goods to be severed from realty). Section 2-107 relates to sale of such goods; Section 9-313 to security interests in them. The discrepancies between the two sections arise from the differences in the types of interest covered.

For the purpose of this Article, goods are classified as "consumer goods", "equipment", "farm products", and "inventory"; those terms are defined in Section 9-109. When the general term "goods" is used in this Article, it includes, as may be appropriate in the context, the subclasses of goods defined in Section 9-109.

"Instrument": the term as defined in subsection (1)(g) includes not only negotiable instruments and investment securities but also any other intangibles evidenced by writings which are in ordinary course of business transferred by delivery. As in the case of chattel paper "delivery" is only the minimum stated and may be accompanied by other steps.

If a writing is itself a security agreement or lease with respect to specific goods it is not an instrument although it otherwise meets the term of the definition. See Comment below on "chattel paper".

"Documents": See the Comment under Section 1-201(15).

"Chattel paper": To secure his own financing a secured party may wish to borrow against or sell the security agreement itself along with his interest in the collateral which he has received from his debtor. Since the refinancing of paper secured by specific goods presents some problems of its own, the term "chattel paper" is used to describe this kind of collateral. The comments under Section 9-308 further describe this concept.

4. The following transactions illustrate the use of the term "chattel paper" and some of the other terms defined in this Section.

A dealer sells a tractor to a farmer on conditional sales contract. The conditional sales contract is a "security agreement", the farmer is the "debtor", the dealer is the "secured party" and the tractor is the type of "collateral" defined in Section 9-109 as "equipment". But now the dealer transfers the contract to his bank, either by outright sale or to secure a loan. Since the conditional sales contract is a security agreement relating to specific equipment the conditional sales contract is now the type of collateral called "chattel paper". In this transaction between the dealer and his bank, the bank is the "secured party", the dealer is the "debtor", and the farmer is the "account debtor".

Under the definition of "security interest" in Section 1-201(37) a lease does not create a security interest unless intended as security. Whether or not the lease itself is a security agreement, it is chattel paper when transferred if it relates to specific goods. Thus, if the dealer enters into a straight lease of the tractor to the farmer (not intended as security), and then arranges to borrow money on the security of the lease, the lease is chattel paper.

Chattel mortgages and conditional sales contracts are frequently executed in connection with a negotiable note or a series of such notes. Under the definitions in subsections (1)(b) and (1)(g) the rules applicable to chattel paper, rather than those relating to instruments, are applicable to the group of writings (contract plus note) taken together.

5. Comments to the definitions indexed in subsections (2) and (3) follow the sections in which the definitions are contained.

Cross References:

Point 2: Sections 9-104(f) and 9-112.

Point 3: Sections 2-105, 2-107, 9-106, 9-109, 9-308 and 9-313.

Definitional Cross References:

"Account". Section 9-106.

"Agreement". Section 1-201.

"Contract right". Section 9-106.

"Document of title". Section 1-201.

"General intangibles". Section 9-106.

"Holder". Section 1-201.

"Money". Section 1-201.

"Negotiable instrument". Section 3-104.

"Person". Section 1-201.

"Representative". Section 1-201.

"Rights". Section 1-201.

"Security". Section 8-102.

"Security interest". Section 1-201.

"Writing". Section 1-201.