Prior Uniform Statutory Provision: None.

Purposes:

1. Subsection (1) states the duty to preserve collateral imposed on a pledgee at common law. See Restatement of Security, §§17, 18. In many cases a secured party having collateral in his possession may satisfy this duty by notifying the debtor of any act which must be taken and allowing the debtor to perform such act himself. If the secured party himself takes action, his reasonable expenses may be added to the secured obligation.

Under Section 1-102(3) the duty to exercise reasonable care may not be disclaimed by agreement, although under that Section the parties remain free to determine by agreement, in any manner not manifestly unreasonable, what shall constitute reasonable care in a particular case.

2. Subsection (2) states rules, which follow common law precedents, and which apply, unless there is agreement otherwise, in typical situations during the period while the secured party is in possession of the collateral.

3. The right of a secured party holding instruments or documents to have them indorsed or transferred to him or his order is dealt with in the relevant sections of Articles 3 (Commercial Paper), 7 (Warehouse Receipts, Bills of Lading and Other Documents) and 8 (Investment Securities). (Sections 3-201, 7-506, 8-307.)

4. This Section applies when the secured party has possession of the collateral before default, as a pledgee, and also when he has taken possession of the collateral after default. See Section 9-501(1) and (2). Subsection (4) permits operation of the collateral in the circumstances stated, and subsection (2)(a) authorizes payment of or provision for expenses of such operation. Agreements providing for such operation are common in trust indentures securing corporate bonds and are particularly important when the collateral is a going business. Such an agreement cannot of course disclaim the duty of care established by subsection (1), nor can it waive or modify the rights of the debtor contrary to Section 9-501(3).

Cross References:

Point 1: Section 1-102(3).

Point 3: Sections 3-201, 7-506 and 8-307.

Point 4: Section 9-501(2) and Part 5.

Definitional Cross References:

"Chattel paper". Section 9-105.

"Collateral". Section 9-105.

"Debtor". Section 9-105.

"Instrument". Section 9-105.

"Money". Section 1-201.

"Party". Section 1-201.

"Secured party". Section 9-105.

"Security interest". Section 1-201.

Maker of collateral note cannot compel the pledgee, before enforcing it, to exhaust other securities held by him for the principal debt, even though the maker has a set-off available against the pledgor. 32 H. 343.

Broker has the right to rehypothecate customer's securities for amount not in excess of the customer's indebtedness against such securities. 33 H. 315. May pledge for more than indebtedness if agreement between broker and customer exists. Id.