Saturday, April 1, 2017

Types of Collateral

Article 9 of the UCC (Secured Transactions) is difficult.  The complexity makes it daunting in the relatively short time available for students to learn it for the bar exam.  But an important first step in getting a grip on this subject is to understand the different categories of collateral that can form the basis of a security interest.  The rules throughout this subject will often refer back to these categories (for example, some rules only apply to consumer goods, a type of tangible collateral) and building this foundation by simply understanding the types of collateral can set you up to far better understand the subject as a whole.

In total there are 3 main categories with sub-categories within each one to keep in mind.  The three main categories are tangible collateral, intangible collateral, and proceeds.

I:  Tangible Collateral (often referred to as "goods"):

(1):  Consumer goods:
These are goods bought or used for personal, family, or household purposes.

(2):  Inventory:
These are goods held for sale or lease and goods consumed by a business.

(3):  Farm products:
These are goods used or produced in farming that are in the possession of or used by a farmer.

(4): Equipment:
These are goods that do not fit within any of the 3 above categories.

II:  Intangible Collateral

(1): Instruments:
Instruments include notes, drafts, and certificates of deposit.

(2):  Documents:
Documents include bills of lading and warehouse receipts.

(3)  Chattel Paper:
Chattel paper are records evidencing both a monetary obligation and a security interest in specific goods or a lease of specific goods.

(4):  Accounts:
These are rights to payment for goods, services, etc.

(5):  Deposit Accounts:
These are savings accounts, passbook accounts, etc.

(6):  Investment Property:
These include stocks, bonds, mutual funds, brokerage accounts, etc.

(7):  Commercial tort claims:
These are tort claims filed by organizations and tort claims filed by an individual that arose out of the individual's business and do not involve personal injury.

(8):  General intangibles:
These are intangibles not fitting within any of the above 7 types of intangibles.

III: Proceeds

Proceeds include whatever is received upon the sale, exchange, collection or other disposition of collateral or other proceeds.  Insurance payable by reason of loss or damage to collateral is also deemed to be proceeds unless it is payable to someone other than the debtor or secured party.

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