Chapter 9 of the Texas Business and Commerce Code, titled “Secured Transactions,” governs consensual security interests in personal property and fixtures.
Important Reminder: This chapter presents an overview of chapter 9. It is necessarily limited in scope. It does not address a number of specialized areas of secured transactions within the scope of chapter 9. The rules for creating and perfecting a security interest are complex. Accordingly, in the context of any particular transaction to which chapter 9 is relevant, the practitioner should consult the statutory text, the official comments, secondary sources, and any relevant case law.
Generally, chapter 9 governs any interest, regardless of its form, in personal property and fixtures created by contract that secures payment or performance of an obligation. Tex. Bus. & Com. Code § 9.109(a)(1). That interest is called a security interest. Tex. Bus. & Com. Code § 1.201(b)(35). The property subject to a security interest is called collateral. Tex. Bus. & Com. Code § 9.102(a)(12). Chapter 9 also generally governs sales of accounts, chattel paper, payment intangibles, and promissory notes. Tex. Bus. & Com. Code § 9.109(a)(3). Chapter 9 also includes agricultural liens and all consignments, even true consignments, within its scope. Tex. Bus. & Com. Code § 9.109(a)(2), (a)(4).
§ 9.2:2Form of Transaction Irrelevant
The form of the transaction or the label that the parties give to the transaction is irrelevant for determining whether chapter 9 applies. Rather, whether chapter 9 governs a transaction is based on the economic reality of the transaction. The parties may characterize a transaction as a sale or a lease of goods, but if in economic reality a security interest is created, chapter 9 governs. Tex. Bus. & Com. Code § 9.109(a)(1). The parties are not required to provide in their documents that a “security interest” is being created under a “security agreement.” The parties may use other terms, such as assignment, hypothecation, conditional sale, trust deed, and so forth. Chapter 9 governs if a security interest in personal property is created. Tex. Bus. & Com. Code § 9.109(a)(1) (“regardless of its form”). Similarly, it is generally irrelevant whether title to collateral is in the name of the debtor or the secured party. Tex. Bus. & Com. Code § 9.202.
Chapter 9 governs most consensual security interests in personal property and fixtures. Certain consensual interests in personal property collateral are not governed by chapter 9. These interests include common-law bailments and true leases of personal property, the latter being governed by Texas UCC chapter 2A (see Tex. Bus. & Com. Code ch. 2A). True consignments, with exceptions for small and consumer consignments, are governed by chapter 9. Tex. Bus. & Com. Code § 9.102(a)(20) (defining “consignment”), § 9.109(a)(4).
Chapter 9 also excludes from its scope certain security interests on personal property collateral.
Federal Preemption: Chapter 9 does not apply to the extent it is preempted by federal law. Tex. Bus. & Com. Code § 9.109(c)(1). See also Tex. Bus. & Com. Code § 9.109 cmt. 8.
Landlord’s, Statutory, and Common-Law Liens; Agricultural Liens: Landlord’s liens and statutory and common-law liens for services or materials, except for agricultural liens, are not governed by chapter 9. Tex. Bus. & Com. Code § 9.109(d)(1), (d)(2). Agricultural liens are governed by chapter 9. Agricultural liens are generally nonpossessory statutory liens on a debtor’s farm products in favor of a landlord or supplier of goods or services for the debtor’s farming operations. Tex. Bus. & Com. Code § 9.102(a)(5) (defining “agricultural lien”), §§ 9.109(a)(2), 9.109(d)(1), (d)(2).
Security Interest Granted by State or Foreign Government or Governmental Unit: A security interest granted by a state or foreign government or governmental unit is included within the scope of chapter 9 if no other state or foreign statute governs security interests created by that entity. Tex. Bus. & Com. Code § 9.109(c)(2), (c)(3); see also Tex. Bus. & Com. Code § 9.102(a)(45) (defining “governmental unit”), § 9.102(a)(77) (defining “state”). Texas Government Code chapter 1208 governs creation, validity, and perfection of security interests granted by Texas governmental subdivisions; security interests granted by Texas political subdivisions are not governed by chapter 9. See Tex. Gov’t Code ch. 1208.
Certain Sales of Payment Intangibles and Promissory Notes: Chapter 9 govern sales of accounts, chattel paper, payment intangibles, and promissory notes but excludes from its scope sales of these types of collateral for collection or in satisfaction of preexisting debt. Tex. Bus. & Com. Code § 9.109(d)(5), (d)(7).
Insurance Claims; Health-Care Insurance Receivables: With one exception, chapter 9 excludes transfers of insurance claims as original collateral. Chapter 9 governs transfers of insurance claims, as original collateral, arising out of the provision of health-care goods and services. Tex. Bus. & Com. Code § 9.102(a)(46) (defining “health care insurance receivable”), § 9.109(d)(8).
Commercial Tort Claims: Noncommercial tort claims, such as consumer personal injury claims, are excluded from chapter 9. Chapter 9 does govern security interests in commercial tort claims. Tex. Bus. & Com. Code § 9.102(a)(13) (defining “commercial tort claim”), § 9.109(d)(12).
Deposit Accounts: Chapter 9 excludes from its scope an assignment of a deposit account in a consumer transaction. Chapter 9 governs an assignment of a deposit account in a transaction that is not a consumer transaction. Tex. Bus. & Com. Code § 9.102(a)(26) (defining “consumer transaction”), § 9.102(a)(29) (defining “deposit account”), § 9.109(d)(13). Chapter 9 provides rules governing the priority dispute between a depositary bank exercising its right of set-off against a deposit account and a secured party claiming a security interest in the same account, whether as original collateral in a nonconsumer transaction or as proceeds. Tex. Bus. & Com. Code §§ 9.109(d)(10)(A), 9.340.
Real Property Interests: Chapter 9 contains a real property interest exclusion. With an exception for fixtures, the creation or transfer of an interest in or a lien on real property, including a lease or rents (as defined in Tex. Prop. Code § 64.001) thereunder, is not governed by chapter 9. Tex. Bus. & Com. Code § 9.109(d)(11). The Texas UCC contains a nonuniform expansion to this exclusion and also excludes from chapter 9 “the interest of a vendor or vendee in a contract for deed to purchase an interest in real property, or the interest of an optionor or optionee in an option to purchase an interest in real property.” Tex. Bus. & Com. Code § 9.109(d)(11). By comparison, however, the definition of “account” under chapter 9 explicitly includes rights to payment for property (real or personal) sold. Tex. Bus. & Com. Code § 9.102(a)(2).
Effect of Exclusion: Even though a type of property may be excluded from chapter 9, a secured party may be able to obtain a security interest in property of that type using other federal or Texas statutes or common law.
§ 9.3:1Security Interest, Security Agreement, Collateral
Under chapter 9, security interest basically means “an interest in personal property or fixtures which secures payment or performance of an obligation.” Tex. Bus. & Com. Code § 1.201(b)(35). Additionally, security interests include “any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note.” Tex. Bus. & Com. Code § 1.201(b)(35).
A security agreement is an “agreement that creates or provides for a security interest.” Tex. Bus. & Com. Code § 9.102(a)(74).
Collateral is “the property subject to a security interest.” Tex. Bus. & Com. Code § 9.102(a)(12). To conform the scope of the term collateral to the scope of the term security interest, the definition of the term collateral includes “proceeds . . . accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and goods [under] a consignment.” Tex. Bus. & Com. Code § 9.102(a)(12).
Secured Party: The person to whom a security interest is granted is called the “secured party.” Tex. Bus. & Com. Code § 9.102(a)(73)(A). A secured party also includes a buyer of accounts, chattel paper, payment intangibles, or promissory notes (Tex. Bus. & Com. Code § 9.102(a)(73)(D)); a holder of an agricultural lien (Tex. Bus. & Com. Code § 9.102(a)(73)(B)); and a consigner (Tex. Bus. & Com. Code § 9.102(a)(73)(C)). When a secured party acts as a representative for holders of secured obligations, the representative may include not just an indenture trustee “or the like” but also any trustee, agent, or collateral agent. Tex. Bus. & Com. Code § 9.102(a)(73)(E).
Debtor and Obligor: The debtor is the person who has a property interest, other than a security interest or other lien, in the collateral. Tex. Bus. & Com. Code § 9.102(a)(28)(A). The debtor also includes a seller of accounts, chattel paper, payment intangibles, or promissory notes (Tex. Bus. & Com. Code § 9.102(a)(28)(B)); a person who has a property interest in collateral subject to an agricultural lien (Tex. Bus. & Com. Code § 9.102(a)(28)(A)); and a consignee (Tex. Bus. & Com. Code § 9.102(a)(28)(C)). The obligor is the person who owes the secured obligation. Tex. Bus. & Com. Code § 9.102(a)(60).
Secondary Obligor: A secondary obligor is a person who is secondarily obligated on the secured obligation or who has a right of recourse against others with respect to the secured obligation. Tex. Bus. & Com. Code § 9.102(a)(72). For example, a guarantor is a secondary obligor.
Chapter 9 classifies collateral into categories.
Goods: Goods are all things that are movable at the time the security interest attaches, including fixtures. Tex. Bus. & Com. Code § 9.102(a)(44). Money, documents, instruments, investment property, accounts, chattel paper, general intangibles, deposit accounts, letter-of-credit rights, and minerals before extraction are not goods. Software embedded in goods and customarily viewed as a part of the goods (for example, the computer chip in the airbag in an automobile) is considered goods. There are four subcategories of goods: consumer goods, inventory, farm products, and equipment. Tex. Bus. & Com. Code § 9.102(a)(23), (a)(33), (a)(34), (a)(48).
Consumer goods are goods used or bought for use primarily for personal, family, or household purposes. Tex. Bus. & Com. Code § 9.102(a)(23).
Inventory consists of goods, other than farm products, held by a person for sale or lease or consisting of raw materials, work in process, or materials consumed in business. Tex. Bus. & Com. Code § 9.102(a)(48).
Farm products are crops, livestock, or other supplies produced or used in farming operations, and they include products of crops or livestock in their unmanufactured state. For goods to be farm products, the debtor has to be engaged in farming operations with respect to the goods. Farming operations include aquatic farming operations. Farm products include aquatic goods produced in aquacultural operations. See Tex. Bus. & Com. Code § 9.102(a)(34), (a)(35).
Equipment is the residual subcategory of goods. It consists of goods that are not consumer goods, inventory, or farm products. Tex. Bus. & Com. Code § 9.102(a)(33).
Investment Property: Investment property comprises certificated and uncertificated securities, securities accounts, and security entitlements, all of which are defined in Texas UCC chapter 8. Tex. Bus. & Com. Code § 9.102(a)(49); see Tex. Bus. & Com. Code § 8.102(a)(15) (defining “security”), § 8.501 (defining “securities account”), § 8.102(a)(17) (defining “security entitlement”). Investment property also includes commodity contracts (see Tex. Bus. & Com. Code § 9.102(a)(15)) and commodity accounts (see Tex. Bus. & Com. Code § 9.102(a)(14)). Tex. Bus. & Com. Code § 9.102(a)(49).
Other Semi-Intangibles: Certain writings or records represent other rights of the debtor. These are defined in chapter 9 as documents, instruments, and chattel paper.
Documents: A document is a document of title, such as a bill of lading or warehouse receipt, including a deemed warehouse receipt under Business and Commerce Code section 7.201(b). Tex. Bus. & Com. Code § 9.102(a)(30); see also Tex. Bus. & Com. Code §§ 1.201(b)(16), 7.102(a)(5), 7.201(b).
A document may be electronic or tangible. See Tex. Bus. & Com. Code § 1.201(b)(16).
Instruments: An instrument is a negotiable instrument governed by Texas UCC chapter 3 or another writing evidencing a right to the payment of money that, in the ordinary course of business, is transferred by delivery with any necessary endorsement or assignment. A negotiable instrument or other writing is not an instrument, as defined, if it is a lease or investment property. Tex. Bus. & Com. Code § 9.102(a)(47). A credit card slip is not an instrument. Tex. Bus. & Com. Code § 9.102(a)(47)(iii). The Texas legislature has adopted nonuniform language providing that a nonnegotiable certificate of deposit is not an instrument. Tex. Bus. & Com. Code § 9.102(a)(47)(iv).
The term promissory note is a subcategory of the collateral category “instrument.” Tex. Bus. & Com. Code § 9.102(a)(66). A promissory note is an instrument evidencing a promise to pay (rather than an order to pay, such as a check). An instrument, such as a certificate of deposit, by a bank acknowledging receipt of funds is not a promissory note. Tex. Bus. & Com. Code § 9.102(a)(66).
Chattel Paper: Chattel paper means writings or records that evidence both a monetary obligation and a security interest in or a lease of specific goods. A charter for the use or hire of a vessel is not chattel paper. Tex. Bus. & Com. Code § 9.102(a)(11). Chattel paper may be evidenced by writings or electronic records. Tex. Bus. & Com. Code § 9.102(a)(11), (a)(70) (defining “record”). Chattel paper also includes a monetary obligation secured by a security interest in specific goods and software used in those specific goods. Tex. Bus. & Com. Code § 9.102(a)(11).
Letter-of-Credit Rights: Chapter 9 uses the term letter-of-credit right to mean a right to payment or performance under a letter of credit, whether the letter of credit is written or electronic. The term does not include the debtor’s drawing rights as beneficiary under the letter of credit. Tex. Bus. & Com. Code § 9.102(a)(51). A letter-of-credit right may be a supporting obligation (see the discussion in this section below) or original collateral.
Other Intangibles: Pure intangibles that are not investment property are accounts, deposit accounts, commercial tort claims, or general intangibles.
Accounts: “Account” is defined to include a right to payment, whether earned by performance or not, for property (real or personal, tangible and intangible, not just goods) sold; for services rendered; for intellectual property licensed; for a suretyship obligation incurred; for a policy of insurance issued; arising out of the use of a credit card; and as government sponsored or licensed lottery winnings. A charter for the lease or hire of a vessel is an account. In addition, a health-care-insurance receivable is a subcategory of the collateral category account. Tex. Bus. & Com. Code § 9.102(a)(2).
A health-care-insurance receivable is an interest in or claim under a policy of insurance that is a right to payment of a monetary obligation for health-care goods or services provided. Tex. Bus. & Com. Code § 9.102(a)(46).
Deposit Accounts: A deposit account is a demand, time, savings, passbook, or similar account maintained with a bank (see Tex. Bus. & Com. Code § 9.102(a)(8), defining “bank”) but does not include investment property or an account evidenced by an instrument. Tex. Bus. & Com. Code § 9.102(a)(29). As defined, a deposit account includes an uncertificated certificate of deposit, for which there is no separate writing evidencing the bank’s obligation to pay. The Texas legislature has adopted nonuniform changes to the definition of deposit account to include a nonnegotiable certificate of deposit and to the definition of instrument to exclude from the latter a nonnegotiable certificate of deposit. Tex. Bus. & Com. Code § 9.102(a)(29), (a)(47). The Texas UCC also has a definition for the term nonnegotiable certificate of deposit. See Tex. Bus. & Com. Code § 9.102(a)(59). Accordingly, the official comment 12 to Tex. Bus. & Com. Code § 9.102 is not accurate for a nonnegotiable certificate of deposit governed by the Texas UCC’s version of revised chapter 9.
Commercial Tort Claims: A commercial tort claim is a claim of an organization (see Tex. Bus. & Com. Code § 1.201(b)(25), defining “organization”) arising in tort. Tex. Bus. & Com. Code § 9.102(a)(13)(A). A commercial tort claim is also a claim of an individual arising in tort if the claim arose out of the individual’s business and does not include damages for death or personal injury. Tex. Bus. & Com. Code § 9.102(a)(13)(B). After a commercial tort claim is contractually settled, it ceases to be a commercial tort claim. A right to payment of the contractually settled commercial tort claim may be evidenced by an instrument, chattel paper, or the settlement agreement itself. In the latter case, the right to payment is a payment intangible. See Tex. Bus. & Com. Code § 9.109 cmt. 15.
General Intangibles: General intangibles are any personal property other than goods, accounts, chattel paper, commercial tort claims, deposit accounts, documents, instruments, investment property, letter-of-credit rights, or money. Tex. Bus. & Com. Code § 9.102(a)(42). There are two special subcategories within the category of general intangibles: payment intangibles and software.
A payment intangible is a general intangible under which the principal obligation of the account debtor (see Tex. Bus. & Com. Code § 9.102(a)(3), defining “account debtor”) is to pay money. Tex. Bus. & Com. Code § 9.102(a)(62).
Software is a computer program and includes related supporting information. However, software embedded in goods and customarily viewed as a part of the goods is treated as part of the goods and not as software under chapter 9. Tex. Bus. & Com. Code § 9.102(a)(76).
Not all intangible personal property included in the collateral category of a general intangible is a payment intangible or software. Intangible personal property exists that is neither a payment intangible nor software that nevertheless is a general intangible.
Proceeds: Proceeds are generally not considered a separate category of collateral. Rather, a secured party has a claim to proceeds that is derived from the secured party’s security interest in other collateral. Proceeds include whatever is acquired on the sale, lease, license, exchange, or other disposition of collateral (Tex. Bus. & Com. Code § 9.102(a)(65)(A)) and also include collections of and distributions with respect to collateral (Tex. Bus. & Com. Code § 9.102(a)(65)(B)), rights arising out of collateral (Tex. Bus. & Com. Code § 9.102(a)(65)(C)), and claims, including insurance payable, for loss, defects, or damage to collateral (Tex. Bus. & Com. Code § 9.102(a)(65)(D), (a)(65)(E)). Cash proceeds are a subcategory of proceeds and consist of proceeds that are money, checks, deposit accounts, or the like. Tex. Bus. & Com. Code § 9.102(a)(9).
Supporting Obligations: A supporting obligation is a credit enhancement, such as a guaranty and letter-of-credit right, that supports underlying collateral consisting of an account, chattel paper, a document, a general intangible, an instrument, or investment property. Tex. Bus. & Com. Code § 9.102(a)(78). A supporting obligation is incident to the collateral it supports. Collections of and distributions with respect to a supporting obligation are proceeds of the underlying collateral and of the supporting obligation itself. This characterization as proceeds has significance under the priority rules for proceeds.
§ 9.4Creation and Attachment of Security Interest
A security agreement may provide for or create a security interest. Tex. Bus. & Com. Code § 9.102(a)(74). A security interest is not enforceable against a debtor until it attaches. Tex. Bus. & Com. Code § 9.203(a). Attachment occurs if—
1.value has been given (see section 9.4:2 below);
2.the debtor has rights in the collateral (see section 9.4:3 below); and
3.one of these conditions is met:
a.the debtor has authenticated a security agreement that contains a description of the collateral (see section 9.4:4 below);
b.under a security agreement with the debtor, the secured party has possession of the collateral (other than a certificated security) (see section 9.4:5 below); or
c.the secured party has control of the collateral if the collateral is investment property, a deposit account, electronic chattel paper, a letter-of-credit right, or an electronic document (see section 9.4:6 below).
Tex. Bus. & Com. Code § 9.203(b).
Value includes any consideration sufficient to support a simple contract. Examples include lending money, making a binding commitment to lend money, issuing a guarantee, or acting as an accommodation party. Value also includes satisfaction, in whole or in part, of a preexisting claim. Tex. Bus. & Com. Code § 1.204.
A debtor may grant a security interest only in those rights in collateral that the debtor holds. Similarly, a secured party may not enjoy greater rights in the collateral than the debtor holds, unless the Texas UCC provides otherwise. Tex. Bus. & Com. Code § 9.203(b) cmt. 6. The power of a debtor to transfer collateral is sufficient to satisfy the rights-in-the-collateral requirement. Tex. Bus. & Com. Code § 9.203(b)(2). Attachment of a security interest is conditioned on the debtor’s having rights in the collateral or the power to transfer rights in the collateral to a secured party. Limited rights in collateral, short of full ownership, are sufficient for a security interest to attach. A security interest attaches only to those rights a debtor has in collateral, however broad or limited those rights may be.
A security agreement may create or provide for a security interest in after-acquired collateral. Tex. Bus. & Com. Code § 9.204(a). A security interest in after-acquired collateral attaches when the debtor acquires rights in the after-acquired collateral.
Purpose and Effect: A debtor’s authentication of a security agreement describing the collateral provides evidence, similar to the evidence required to satisfy the statute of frauds, that the parties intend to create a security interest in the described collateral. That action also renders the security interest enforceable against the debtor and results in the security interest attaching to the described collateral. Tex. Bus. & Com. Code § 9.203(a), (b)(3)(A).
Authenticated by Debtor: A security agreement must be authenticated by the debtor. Tex. Bus. & Com. Code § 9.203(b)(3)(A). The term authenticated includes a signature on a writing; a process of adopting or accepting a retrievable electronic transmission; and attaching to or logically associating with a retrievable electronic record an electronic sound, symbol, or process with the intent of adopting or accepting that record. Tex. Bus. & Com. Code § 9.102(a)(7), (a)(70).
Reasonable Identification of Collateral: Chapter 9 requires security agreements to reasonably identify the collateral. Tex. Bus. & Com. Code §§ 9.108(a), 9.203(b)(3)(A). Reasonable identification of collateral may be by specific listing, category, type, quantity, computational formula, or any method under which the identity of the collateral is objectively determinable. Tex. Bus. & Com. Code § 9.108(b). In a security agreement, an all-asset description is, however, insufficient. Tex. Bus. & Com. Code § 9.108(c). A description by type alone is insufficient if the collateral is a commercial tort claim or, in a consumer transaction, if the collateral is consumer goods, a security entitlement, a securities account, or a commodity account. Tex. Bus. & Com. Code § 9.108(e). If the collateral is timber to be cut, a real estate description is required in the security agreement. Tex. Bus. & Com. Code § 9.203(b)(3)(A).
After-Acquired Property: Security agreements may contain after-acquired property clauses. Tex. Bus. & Com. Code § 9.204(a). A secured party generally may not obtain a security interest in after-acquired consumer goods unless the debtor acquires rights in the consumer goods within ten days after the secured party gives value. Tex. Bus. & Com. Code § 9.204(b)(1). A security interest in a commercial tort claim attaches only to one existing at the time the security agreement is entered into. A security interest will not attach to an after-acquired commercial tort claim. Tex. Bus. & Com. Code § 9.204(b)(2).
Future Advances and Cross-Collateralization: A security interest under chapter 9 may secure future advances, and the security agreement may provide for cross-collateralization of obligations. Tex. Bus. & Com. Code § 9.204(c). Comment 5 to section 9.204 expressly rejects the holdings of cases that require future advances to be of the same type or otherwise related to the original advance. Tex. Bus. & Com. Code § 9.204 cmt. 5.
Possession of collateral by a secured party pursuant to a security agreement with (but not necessarily authenticated by) a debtor also evidences that the parties intend to create a security interest in the possessed collateral. If a secured party so possesses the collateral, the security interest is enforceable against the debtor and attaches. Tex. Bus. & Com. Code § 9.203(a), (b)(3)(B), (b)(3)(C). A secured party may possess the collateral itself or through a third party who possesses the collateral.
Generally, a secured party will not rely on possession of the collateral pursuant to an unauthenticated security agreement with the debtor to create an enforceable, attached security interest in collateral. Rather, secured parties will generally obtain an authenticated security agreement, as described in section 9.4:4 above. In addition to being a means of causing a security interest to attach to collateral, possession is also a means of perfecting a security interest. Perfection by possession is more likely to occur than attachment by possession. Therefore, a more detailed discussion of the requirements of possession is contained at section 9.5:4 below, which discusses perfection by possession.
Control under chapter 9, as a method of attachment and perfection of a security interest, applies to investment property, deposit accounts, electronic chattel paper, electronic documents, and letter-of-credit rights. Tex. Bus. & Com. Code § 9.203(b)(3)(D). Control under chapter 9 does not have its common, colloquial meaning. Rather, control as used in chapter 9 has specific meanings, and specified actions must be taken to obtain control. Moreover, different actions are required to obtain control of different types of collateral. The actions to obtain control of a deposit account are set forth in section 9.104, of electronic chattel paper in section 9.105 (see also Tex. Bus. & Com. Code § 9.102(a)(31), defining “electronic chattel paper”), of investment property in sections 9.106 and 8.106, of electronic documents in section 7.106, and of letter-of-credit rights in section 9.107. Additionally, the secured party must have control of the collateral pursuant to the debtor’s security agreement. Tex. Bus. & Com. Code § 9.203(b)(3)(D). Another agreement with a third party—for example, a bank for a deposit account or a broker for a securities account—may be the agreement that establishes control of the collateral. Although attachment by control without a debtor-authenticated security agreement is possible, secured parties generally will obtain a debtor-authenticated security agreement as described in section 9.4:4 above and rely on control for perfection of the security interest, not attachment. Perfection by control is discussed in section 9.5:5 below.
§ 9.5Perfection of Security Interest
An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected. Tex. Bus. & Com. Code § 9.317(a)(2). Stated another way, a perfected security interest prevails over a judgment creditor using the judicial process to obtain a judgment lien on the collateral, including a trustee in bankruptcy that has the status of a lien creditor on the commencement of a bankruptcy proceeding for the debtor. Only an attached security interest may be a perfected security interest. Tex. Bus. & Com. Code § 9.308(a).
There are four basic methods of perfecting an attached security interest. First, a properly completed financing statement (see Tex. Bus. & Com. Code § 9.102(a)(39)) may be filed in the appropriate UCC filing offices. Second, the collateral may be in the possession of the secured party. Third, the secured party may have control of the collateral. Fourth, in a few cases, attachment of a security interest automatically perfects the security interest. For a specific category of collateral, there may be only one method of perfection or several.
A security interest in many types of collateral may be perfected by filing a properly completed financing statement or statements in the appropriate UCC filing offices. For certain types of collateral, a properly completed financing statement must be filed in the appropriate UCC filing offices to perfect a security interest in that collateral. Tex. Bus. & Com. Code § 9.310(a). Filing a properly completed financing statement is the only method of perfecting a security interest in accounts, a commercial tort claim, and general intangibles except for a security interest arising out of certain sales of accounts or payment intangibles. Filing a properly completed financing statement is an alternative method of perfecting a security interest in goods (other than goods governed by a certificate of title or another form of registration), negotiable documents, instruments, chattel paper, and investment property. If filing a financing statement is an alternative method of perfecting a security interest in collateral, then, with certain exceptions for goods, generally a secured party that perfects its security interest by another method can obtain priority over the secured party who perfects by filing.
Contents of Financing Statement: A financing statement under chapter 9 must (1) set forth the debtor’s name (rules for determining a debtor’s name are contained in Tex. Bus. & Com. Code § 9.503(a); see also section 9.14:2 below); (2) set forth the debtor’s mailing address; (3) indicate whether the debtor is an individual or an organization; (4) if the debtor is an individual, indicate the debtor’s surname; (5) indicate the name of the secured party or the secured party’s representative; (6) list the mailing address of the secured party or its representative; and (7) indicate the collateral covered by the financing statement. Tex. Bus. & Com. Code §§ 9.502(a), 9.516(b)(3), (b)(4), (b)(5). If the collateral is timber to be cut, as-extracted collateral (defined in Tex. Bus. & Com. Code § 9.102(a)(6)), or fixtures, additional information must be included on the financing statement. Tex. Bus. & Com. Code §§ 9.502(b), (c), 9.516(b)(3)(D). A secured party may file a financing statement without the debtor’s signature if the debtor authorizes the filing. Tex. Bus. & Com. Code § 9.509(a)(1). By entering into a security agreement, a debtor automatically authorizes the filing of a financing statement covering collateral described in the security agreement. Tex. Bus. & Com. Code § 9.509(b). A secured party needs separate, express authorization from the debtor to file a financing statement before the debtor has entered into a security agreement. Even though an all-asset collateral description is insufficient in a security agreement, an indication in a financing statement that the collateral is all assets or all personal property is sufficient. Tex. Bus. & Com. Code § 9.504. A financing statement containing minor errors that are not seriously misleading may be effective. Tex. Bus. & Com. Code § 9.506(a).
Where to File in a State: Chapter 9 contains choice-of-law rules to determine the jurisdiction in which filings must be made. Those rules are discussed in section 9.6 below. Chapter 9, like the official text of Uniform Commercial Code article 9, generally requires that financing statements be filed in only one office in a jurisdiction. For Texas, that is the office of the secretary of state. Local filings are required only for as-extracted collateral (defined in section 9.102(a)(6)), timber to be cut, or fixtures. Tex. Bus. & Com. Code § 9.501(a)(1). The local filing office is the real estate recording office for a mortgage on the related real property.
What Constitutes Filing: Communication of the financing statement to the filing office and tender of the correct filing fee, the so-called tender rule, constitutes filing. Tex. Bus. & Com. Code § 9.516(a). The word communication (defined in Tex. Bus. & Com. Code § 9.102(a)(18)) is used to accommodate electronic filing. Chapter 9 sets forth the reasons a filing office may refuse to accept a financing statement for filing, rendering the filing ineffective. Tex. Bus. & Com. Code § 9.516(b). Under section 9.520(a) of the Texas Business and Commerce Code, a filing office may refuse to accept a financing statement or an amendment or other record related to a financing statement only for a reason set forth in section 9.516(b). If a filing office could reject the filing, but nevertheless accepts it, the filing is effective if the financing statement contains sufficient information under sections 9.502(a) and (b). Tex. Bus. & Com. Code § 9.520(c). If a filing office refuses to accept a financing statement or other record for filing for an impermissible reason, the financing statement or record is deemed as effective as if it were filed, except against a purchaser for value of the collateral that reasonably relies on the absence of the filing. Tex. Bus. & Com. Code § 9.516(d).
How Filings Are Indexed: Filings under chapter 9 are to be indexed according to the name of the debtor so they can be located by subsequent searchers. Tex. Bus. & Com. Code § 9.519(c)(1), (f)(1). Once an initial filing is made, the filing office is required to index any amendment, assignment, or continuation statement relating to the initial filing in a way that links it to the initial filing. Tex. Bus. & Com. Code § 9.519(c)(1), (f)(2). The filing office may not delete its records pertaining to any financing statement until at least one year after the financing statement has lapsed. Tex. Bus. & Com. Code § 9.522(a).
Continuation; Lapse; Termination: Filings generally expire after five years and must be continued within six months before the end of the five-year period by the filing of a continuation statement. Tex. Bus. & Com. Code § 9.515. A filing office may reject a continuation statement that is not filed during that period. Tex. Bus. & Com. Code §§ 9.516(b)(3)(B)(ii), 9.516(b)(7). If an initial financing statement is filed in connection with a public finance transaction (defined in Tex. Bus. & Com. Code § 9.102(a)(68)) or a manufactured-home transaction (defined in Tex. Bus. & Com. Code § 9.102(a)(54)) and the financing statement indicates that fact, the financing statement is effective for thirty years. Tex. Bus. & Com. Code § 9.515(b). If a financing statement lapses, a security interest perfected by the filing becomes unperfected (unless perfected by another method such as possession) and is deemed never to have been perfected against a purchaser for value. Tex. Bus. & Com. Code § 9.515(c). When the secured obligation has been satisfied and the secured party has no obligation to extend credit, the secured party is obligated to file, or in a commercial transaction provide to the debtor, a termination statement. Tex. Bus. & Com. Code § 9.513. A debtor may file a termination statement if the secured party is required to file or provide the termination statement and has failed to do so. Tex. Bus. & Com. Code § 9.509(d)(2). A termination statement filed by a debtor must indicate that the debtor authorized the filing of the termination statement. Tex. Bus. & Com. Code § 9.509(d)(2).
Bogus Filings: There used to be no nonjudicial means for a debtor to correct a financing statement filed against the debtor that the debtor believed was wrongful, a so-called bogus or fraudulent filing. Chapter 9 permits a debtor who believes that a filing concerning the debtor is inaccurate or was wrongfully filed to file an information statement containing the basis for the debtor’s belief that the record is inaccurate or was wrongfully filed. The information statement becomes part of the filing record but does not affect the effectiveness of an initial financing statement or other filed record. Tex. Bus. & Com. Code § 9.518. Texas has adopted a nonuniform additional section in chapter 9 that permits an owner of property covered by a fraudulent filing to recover civil penalties against the filer and to sue to request release of the filing. Tex. Bus. & Com. Code § 9.5185. Certain financing statements by inmates and their representatives are presumptively fraudulent. For special restrictions on filings by such parties, see Tex. Civ. Prac. & Rem. Code §§ 12.001–.007 and Tex. Gov’t Code §§ 51.901, 405.022. See also section 2.113 in this manual for a description of criminal and other civil actions that may be brought against a fraudulent filer.
Other Filing Provisions: Additional details concerning financing statements and the UCC filing system are contained in subchapter E of chapter 9.
§ 9.5:4Perfection by Possession
A secured party may perfect a security interest by having possession, by itself or through a third party, of the collateral. Types of collateral that may or must be perfected by possession are summarized in the following paragraphs.
Money: The only way a secured party may perfect its security interest in money (defined in Texas Business and Commerce Code section 1.201(b)(24)) is by possession. Tex. Bus. & Com. Code § 9.312(b)(3).
Instruments: A secured party may perfect a security interest in an instrument by either filing or possession. Tex. Bus. & Com. Code §§ 9.312(a), 9.313(a). The priority of a security interest in an instrument differs depending on whether perfection is by filing or possession. There is a separate perfection rule for a sale of an instrument that is a promissory note. Such a sale is a security interest under section 1.201(b)(35) and section 9.109(a)(3). A security interest arising out of a sale of a promissory note is perfected automatically, without additional action, when it attaches. Tex. Bus. & Com. Code § 9.309(4).
Even though a secured party may perfect a security interest in an instrument by merely obtaining possession of the instrument without obtaining an endorsement of the instrument, a secured party will want to obtain an endorsement to be entitled to holder-in-due-course status under Texas UCC chapter 3. Tex. Bus. & Com. Code §§ 3.302(a), 3.201 (defining “negotiation”).
Letter-of-Credit Rights: Under chapter 9, possession of a written letter of credit does not perfect a security interest in proceeds under the letter of credit. Instead, a security interest in a letter-of-credit right that is a supporting obligation (defined in Tex. Bus. & Com. Code § 9.102(a)(78)) is automatically perfected if the security interest in the related collateral is perfected. Tex. Bus. & Com. Code § 9.308(d). If a letter-of-credit right is original collateral, and not a supporting obligation to other collateral, a security interest therein may be perfected only by control. Tex. Bus. & Com. Code § 9.312(b)(2).
Certificated Securities: Under chapter 9, a secured party’s taking delivery of a certificated security under section 8.301 and Tex. Bus. & Com. Code § 9.313(a) perfects its security interest. Like mere possession of an instrument, a secured party’s taking delivery of a certificated security under section 8.301, without an endorsement, perfects the secured party’s security interest in the certificated security. The secured party will want to obtain an endorsement to be entitled to “protected purchaser” status under Texas UCC chapter 8 (see Tex. Bus. & Com. Code §§ 8.303, 8.106(b)(1)) and the priority status afforded a secured party in control of a certificated security. Tex. Bus. & Com. Code § 9.328(1), (5).
If the collateral is a certificated security in registered form, attachment of a security interest occurs when the certificated security is delivered to the secured party under Texas Business and Commerce Code section 8.301. Tex. Bus. & Com. Code §§ 9.203(b)(3)(C), 9.313(e). Delivery of a certificated security to a secured party occurs when the secured party acquires possession of the certificated security, when a third party (who is not a securities intermediary) acquires possession of the certificated security on behalf of the secured party, or when a third party (who is not a securities intermediary) who already has possession of the certificated security acknowledges that it holds the certificated security for the secured party. Tex. Bus. & Com. Code § 8.301(a)(1), (a)(2).
Delivery of a certificated security to a secured party for purposes of attaching and perfecting a security interest in the security certificate by possession also occurs when a securities intermediary (for example, a securities broker), acting on behalf of the secured party, acquires possession of the security certificate. The certificate must be in registered form and registered in the name of the secured party, payable to the order of the secured party, or endorsed to the secured party, not to the securities intermediary or in blank. Tex. Bus. & Com. Code § 8.301(a)(3).
Certificated securities are seldom endorsed on the back in the space provided for an endorsement by the registered owner to a purchaser, including a secured party. Rather, the general practice is for the registered owner to sign a stock power with respect to the certificated security. Frequently stock powers are signed in blank, that is, without designating the transferee of the certificate. If a secured party intends to perfect a security interest in a certificated security by possession, which occurs by delivery of the certificated security to a securities intermediary or broker that acts on behalf of the secured party, the secured party should take care to ensure that the security is in registered form and is appropriately endorsed, either on the back of the certificate or by an appropriate stock or bond power.
If a secured party intends to perfect its security interest by delivery of a certificated security to a securities intermediary, as described above, the secured party should also take steps to ensure that the securities intermediary retains possession of the certificated security. After a securities intermediary acquires a certificated security for a customer, in this case for the secured party, the securities intermediary often credits the security to a securities account held by the securities intermediary for its customer. The securities intermediary usually will not retain possession of the certificated security but rather will transfer the certificated security to the securities intermediary’s clearing corporation. The records of the securities intermediary will reflect the securities credited to its customer’s account. The secured party in such a situation would have to rely on “control” (see section 9.5:5 below) as the method of maintaining the perfected status of its security interest, even if the security certificate was appropriately delivered to the securities intermediary to initially perfect the secured party’s security interest by possession.
Chattel Paper: A security interest in tangible chattel paper may be perfected by possession. Tex. Bus. & Com. Code § 9.313(a). A security interest in electronic chattel paper may not be perfected by possession but may be perfected by control or filing. Tex. Bus. & Com. Code §§ 9.312(a), 9.314(a).
Other Collateral: Other collateral that may be perfected by the secured party’s taking possession of the collateral includes goods and tangible negotiable documents. Tex. Bus. & Com. Code § 9.313(a).
Possession by Third Parties: A secured party desiring to perfect a security interest in collateral by possession when the collateral (other than a certificated security or goods covered by a document) is in the possession of a third party must obtain an authenticated record (for example, a signed writing) from the possessor of the collateral acknowledging that it is holding the collateral for the secured party. Tex. Bus. & Com. Code § 9.313(c)(1) (compare with Tex. Bus. & Com. Code §§ 8.106(a), (b), 8.301(a)(2) for certificated securities). The third party in possession of the collateral may not be the debtor or a lessee in the ordinary course from the debtor. Tex. Bus. & Com. Code § 9.313(c). If a secured party or a third party on behalf of the secured party has possession of collateral, possession is not relinquished if the collateral is delivered with appropriate instructions to a possible purchaser of the collateral (other than the debtor or an ordinary-course lessee of the collateral) for inspection or return. Tex. Bus. & Com. Code § 9.313(h).
Perfection of a security interest by control applies to investment property, deposit accounts, electronic chattel paper, electronic documents, and letter-of-credit rights. Tex. Bus. & Com. Code §§ 7.106, 9.104–.107, 9.314(a).
Investment Property: A security interest in investment property may be perfected by control or filing. Tex. Bus. & Com. Code §§ 9.312(a), 9.314(a). A secured party that has control of investment property has priority over another secured party that perfects its security interest in the same property by filing a financing statement. Tex. Bus. & Com. Code § 9.328(1). Generally, chapter 9 defers to Texas UCC chapter 8 to set forth the requirements for control of investment property. Tex. Bus. & Com. Code § 9.106(a). Control of investment property includes delivery, with endorsement, of a certificated security to the secured party; an agreement by the issuer of an uncertificated security that the issuer will honor instructions from the secured party without further consent of the debtor; and an agreement by a bank, broker, or other securities intermediary holding a securities account or by a commodity intermediary that it will honor instructions from the secured party concerning the account without further consent of the debtor. Banks, brokers, and other securities intermediaries that regularly hold securities accounts for their customers typically require the use of their own form of a so-called control agreement. Control also includes registering a security, a securities account, or a commodity account in the name of the secured party. If a secured party is the debtor’s securities intermediary or commodity intermediary, the secured party automatically has control. Tex. Bus. & Com. Code §§ 8.106, 9.106.
Deposit Accounts: A secured party may perfect a security interest in a deposit account as original collateral only by obtaining control of the deposit account. Tex. Bus. & Com. Code §§ 9.312(b)(1), 9.314(a). Filing a financing statement does not perfect a security interest in a deposit account as original collateral. Tex. Bus. & Com. Code § 9.312 cmt. 5. A secured party has control of a deposit account if it is the depositary bank or if the deposit account is in the secured party’s name. A secured party also has control if the depositary bank agrees to comply with instructions from the secured party concerning the deposit account without further consent from the debtor. Tex. Bus. & Com. Code § 9.104(a). Form 9-19 is a form of deposit account control agreement that restricts the ability of the debtor to use the account. Form 9-20 is a form of deposit account control agreement that allows the debtor to use the account before an event of default. Banks typically require the use of their own form of deposit account control agreement.
Electronic Chattel Paper: A security interest in electronic chattel paper may be perfected by filing or by control. Tex. Bus. & Com. Code §§ 9.312(a), 9.314(a).
The requirements for control of electronic chattel paper are in Tex. Bus. & Com. Code § 9.105.
Letter-of-Credit Rights: A secured party may perfect its security interest in a letter-of-credit right that is not a supporting obligation for other collateral only by obtaining control of the letter-of-credit right. Tex. Bus. & Com. Code §§ 9.312(b)(2), 9.314(a). A secured party has control of a letter-of-credit right if the issuer or nominated person has consented to an assignment of proceeds of the letter of credit under Texas Business and Commerce Code section 5.114(c). Tex. Bus. & Com. Code § 9.107.
Electronic Documents: A security interest in an electronic document of title may be perfected by filing or by control. Tex. Bus. & Com. Code §§ 9.312(a), 9.314(a). A secured party has control of an electronic document of title if a system employed for evidencing the transfer of interests in the electronic document reliably establishes the secured party as the person to which the electronic document was issued or transferred. Tex. Bus. & Com. Code § 7.106(a).
In some cases, a security interest is automatically perfected if it has attached; no additional action other than attachment is necessary to perfect the security interest. Tex. Bus. & Com. Code § 9.309.
Automatic Perfection: The security interests that are automatically perfected on attachment under chapter 9 are—
1.a purchase-money security interest in consumer goods;
2.a sale of payment intangibles and promissory notes;
3.an assignment of accounts that does not, alone or in conjunction with other assignments to the same assignee, transfer a significant part of the outstanding accounts of the assignor;
4.an assignment of payment intangibles that does not, alone or in conjunction with other assignments to the same assignee, transfer a significant part of the payment intangibles of the assignor;
5.a security interest arising under Texas UCC chapter 2, 2A, or 4;
6.a security interest in investment property created by a securities intermediary or commodity intermediary;
7.for a temporary period, a security interest in instruments, certificated securities, and negotiable documents;
8.an assignment of a health-care-insurance receivable to the health-care provider;
9.for a temporary period, a security interest in proceeds;
10.a sale by an individual of lottery winnings; and
11.a security interest in favor of an issuer or nominated person in documents presented to the issuer or nominated person for draw under a letter of credit.
Tex. Bus. & Com. Code §§ 9.309(1)–(8), (10), (11), (14), 9.312(e), 9.315(d). See Tex. Bus. & Com. Code § 5.118.
Supporting Obligation: If a security interest in an account, chattel paper, document, general intangible, instrument, or investment property is perfected, a security interest in a supporting obligation for that collateral is automatically perfected. Tex. Bus. & Com. Code §§ 9.203(f), 9.308(d). A supporting obligation is a letter-of-credit right or secondary obligation, such as a guaranty, that supports the payment or performance of an account, chattel paper, document, general intangible, instrument, or investment property. Tex. Bus. & Com. Code § 9.102(a)(78).
§ 9.5:7Other Perfection Provisions under Chapter 9
The temporary automatic perfection periods for instruments, certificated securities, and negotiable documents is twenty days (Tex. Bus. & Com. Code § 9.312(e)), as is the temporary perfection period of a security interest in proceeds. Tex. Bus. & Com. Code § 9.315(d). A financing statement must be filed to perfect a security interest in a beneficiary’s interest in a common-law trust. Tex. Bus. & Com. Code § 9.309(13). A security interest in titled-goods inventory held for sale or lease by a dealer in the business of selling goods of that kind is perfected by filing, not by notation of the security interest on the certificate of title. A security interest in titled-goods inventory held for sale or lease by a person in the business of leasing such goods is perfected by notation on the certificate of title and not by filing. Tex. Bus. & Com. Code § 9.311(d).
§ 9.5:8Other Means of Perfection
Federal and state statutes may provide a means of perfecting a security interest in vessels, aircraft, intellectual property, and titled goods (such as motor vehicles that are not inventory of a dealer). Compliance with these forms of perfection constitutes perfection by filing under chapter 9. Tex. Bus. & Com. Code § 9.311(a), (b).
Chapter 9 contains choice-of-law provisions that determine which jurisdiction’s law governs attachment of a security interest, perfection of a security interest, and priority over another interest. If a dispute occurs in a UCC jurisdiction, the choice-of-law rules in chapter 9 of the forum jurisdiction determine which jurisdiction’s laws the forum jurisdiction is required to apply. The choice-of-law rules in the UCC do not address which law a non-UCC jurisdiction would apply.
If a security agreement specifies a governing law, and if the transaction has a reasonable relationship with the chosen jurisdiction, the forum jurisdiction should apply the law of the jurisdiction specified in the security agreement to determine the contractual rights and obligations of the debtor and the secured party. Tex. Bus. & Com. Code § 1.301(a). Regardless of the jurisdiction chosen by the parties to govern their rights and obligations, the secured party and the debtor by their contract may not vary the mandatory choice-of-law rules in chapter 9 concerning perfection and priority of a security interest. Tex. Bus. & Com. Code § 1.301(b). See also Tex. Bus. & Com. Code ch. 271.
General Rule—Location of Debtor: Except as noted below, the law of the jurisdiction in which the debtor is located governs perfection of a security interest in collateral. Tex. Bus. & Com. Code § 9.301(1). For a debtor with multistate operations, if a security interest in collateral is perfected by filing, the jurisdiction in which the debtor is located is the filing jurisdiction. Because of the importance of the location of the debtor to the choice-of-law rule, chapter 9 provides rules to determine a debtor’s location.
Registered organizations: A registered organization is one formed or organized in a state or the United States by the filing with, issuance of a public organic document by, or enactment of legislation by the state or the United States. Tex. Bus. & Com. Code § 9.102(a)(71) (defining “registered organization”); see also Tex. Bus. & Com. Code § 1.201(b)(25) (defining “organization”); Tex. Bus. & Com. Code § 9.102(a)(68–a) (defining “public organic record”); Tex. Bus. & Com. Code § 9.102(a)(77) (limiting the definition of “state” to jurisdictions in the United States and its territories and possessions). A registered organization that is organized under the law of a state is located in that state. Tex. Bus. & Com. Code § 9.307(e). For example, if a debtor is a corporation, limited liability company, or limited partnership organized under the laws of a particular state, the debtor is located in that state. See Tex. Bus. & Com. Code §§ 9.102 cmt. 11, 9.307 cmt. 4.
Other debtors: If the debtor is an individual, the debtor is located at his residence. If the debtor is an organization but is not a registered organization, the debtor is located at the debtor’s place of business if the debtor has only one place of business or at the debtor’s chief executive office if the debtor has more than one place of business. Tex. Bus. & Com. Code § 9.307(b).
Foreign debtors: If the debtor is located in a jurisdiction outside the United States and that jurisdiction does not provide for a public filing system for nonpossessory security interests for a secured party to prevail over a subsequent lien creditor, the debtor is deemed to be located in the District of Columbia. Tex. Bus. & Com. Code § 9.307(c).
Possessory Security Interests: If a security interest is perfected by possession, the law of the jurisdiction in which the collateral is located governs perfection (that is, the requirements of possession) and priority of that security interest. Tex. Bus. & Com. Code § 9.301(2).
Fixtures: If a security interest in fixtures is perfected by a fixture filing, the law of the jurisdiction in which the fixtures are located governs whether perfection has occurred and the priority of conflicting security interests. Tex. Bus. & Com. Code § 9.301(3)(A).
Titled Goods: If goods are covered by a certificate of title (defined in Tex. Bus. & Com. Code § 9.102(a)(10)) issued by a particular jurisdiction, the law of the certificate-issuing jurisdiction governs whether perfection occurs. Tex. Bus. & Com. Code § 9.303(c). An exception to this rule for certificate-of-title goods applies if the goods are inventory. If titled goods are inventory, the law of the jurisdiction of the debtor’s location determines whether a security interest is perfected. Tex. Bus. & Com. Code § 9.301. Under section 9.311(d), titled goods that are inventory of a person in the business of selling such goods are treated as ordinary goods for determining whether a security interest in such goods is perfected; a notation on a certificate of title for titled goods that are inventory of such a person is not necessary or effective to perfect a security interest. See Tex. Bus. & Com. Code § 9.303 cmt. 5.
Agricultural Liens: The law of the jurisdiction in which the farm products are located governs whether an agricultural lien on the farm products is perfected. Tex. Bus. & Com. Code § 9.302.
Investment Property: If a security interest in investment property is perfected by filing, the law of the jurisdiction in which the debtor is located governs perfection. Tex. Bus. & Com. Code § 9.305(c)(1). If a security interest in investment property collateral is perfected by a means other than filing, (1) if the collateral is a security certificate, the law of the jurisdiction in which the security certificate is located determines whether a security interest in the certificated security is perfected (Tex. Bus. & Com. Code § 9.305(a)(1)); (2) if the collateral is an uncertificated security, the law of the jurisdiction under which the issuer of the uncertificated security is organized governs perfection of a security interest in the uncertificated security or, if permitted by the law of that jurisdiction, the law of another jurisdiction specified by the issuer (Tex. Bus. & Com. Code § 8.110(d)); (3) if the collateral is a security account or a security entitlement, the agreement of the parties to the account or entitlement determines the jurisdiction governing perfection for the security account or security entitlement; if, however, the parties do not provide for a jurisdiction, the jurisdiction is determined by sections 8.110(e) and 9.305(a)(3) of the Texas Business and Commerce Code; and (4) if the collateral is a commodity account, the agreement of the parties to the account determines the jurisdiction governing perfection for the commodity account; if, however, the parties do not provide for a jurisdiction, the jurisdiction is determined by Tex. Bus. & Com. Code § 9.305(b).
Deposit Accounts: The law of the jurisdiction of the depositary bank governs perfection of a security interest in a deposit account. Tex. Bus. & Com. Code § 9.304(a). Chapter 9 contains rules for determining where a depositary bank is located. Tex. Bus. & Com. Code § 9.304(b). Those rules are similar to the rules for determining the location of a securities intermediary.
Letter-of-Credit Rights: The law of the jurisdiction of the issuer or nominated person of a letter of credit generally governs perfection of a security interest in a letter-of-credit right, other than a letter-of-credit right that is a supporting obligation. The issuer’s or nominated person’s jurisdiction is determined under section 5.116 of the Texas Business and Commerce Code. Tex. Bus. & Com. Code § 9.306. If the issuer’s or nominated person’s jurisdiction is not a state (defined in Tex. Bus. & Com. Code § 9.102(a)(77)), the law of the debtor’s location determines perfection of a security interest in a letter-of-credit right. See Tex. Bus. & Com. Code § 9.306 cmts. 2, 3.
§ 9.6:4Effect of Perfection or Nonperfection and Priority
The jurisdiction whose law governs the effect of perfection or nonperfection and priority of a security interest is sometimes different from the jurisdiction whose law governs perfection.
Tangible Negotiable Documents, Goods, Instruments, Money, and Tangible Chattel Paper: The jurisdiction whose law governs the effect of perfection or nonperfection and priority of a nonpossessory security interest (for example, one perfected by filing) is the jurisdiction in which the collateral is located. Tex. Bus. & Com. Code § 9.301(3)(C).
Certificated Securities: The jurisdiction whose law governs the effect of perfection or nonperfection and priority of a security interest in a certificated security is the jurisdiction in which the security certificate is located. Tex. Bus. & Com. Code § 9.305(a)(1).
Uncertificated Securities: The jurisdiction whose law governs the effect of perfection or nonperfection and priority of a security interest in an uncertificated security is the jurisdiction of the issuer of the uncertificated security. Tex. Bus. & Com. Code § 9.305(a)(2).
Security Entitlements, Security Accounts, Commodity Contracts, and Commodity Accounts: The jurisdiction whose law governs the effect of perfection or nonperfection and priority of a security interest in a security entitlement, security account, commodity contract, or commodity account is the jurisdiction of the securities intermediary or commodity intermediary. Tex. Bus. & Com. Code § 9.305(a)(3), (a)(4).
Other Collateral: Otherwise, generally the jurisdiction whose law governs perfection of a security interest also governs the effect of perfection or nonperfection and priority of that security interest. See section 9.301(1) for accounts, commercial tort claims, and general intangibles; section 9.301(2) for possessory security interests; section 9.301(3)(A) for fixtures; section 9.301(3)(B) for timber to be cut; section 9.301(4) for as-extracted collateral; section 9.302 for farm products; section 9.303(c) for certificate-of-title goods that are not inventory; and section 9.304 for deposit accounts.
This chapter of the manual does not cover all the issues involved in complex secured transactions. Rather, this chapter provides forms and analysis to create, attach, and perfect a security interest in straightforward secured transactions.
Certain types of collateral are subject to statutes that require other steps for perfecting the security interest and are beyond the scope of this manual. See Tex. Bus. & Com. Code §§ 9.109(c), (d), 9.311(a). The following are examples.
Titled Vehicles: If the title to the collateral is created by a certificate of title, such as for a car, boat, or trailer, proper perfection is by registering the lien on the title.
Patents, Copyrights, and Trademarks: The federal patent office registers liens on patent, copyright, and trademark rights.
Ships and Aircraft: Federal statutes govern perfection requirements for large ships and aircraft.
Additionally, issues not applicable to other types of collateral arise if the collateral consists of fixtures or farm products.
Goods are fixtures if they become so related to particular real estate that an interest in them arises under the real property law of the state in which the real property is situated. Tex. Bus. & Com. Code § 9.102(a)(41). Texas cases have generally held that personalty becomes a fixture if it is affixed to realty in such a manner that it cannot be removed without damage to the realty. The intent of the “annexing party” is a major factor in the determination. Building materials incorporated into realty are not fixtures. Tex. Bus. & Com. Code § 9.334(a).
If the secured party has a deed-of-trust lien on real property, the secured party does not need a separate security interest in the fixtures on that real property or a separate financing statement filed in the real property records. A recorded deed of trust creates and perfects a lien on the fixtures as an interest in real property if the deed of trust contains certain information. Tex. Bus. & Com. Code § 9.502(c). The deed of trust as a security agreement and financing statement is discussed at section 8.9 in this manual.
Fixtures have characteristics of both real and personal property. This dual nature accounts for the special treatment of fixtures in the security agreement and the financing statement. In the security agreement, forms 9-1 through 9-4 in this chapter, the debtor warrants that the collateral is not a fixture except as provided in the agreement. The debtor also covenants to give the secured party certain rights if the collateral becomes a fixture.
In priority conflicts involving fixtures, the parties competing with the secured party are those with real estate interests, such as a lien on the real property to which the goods are affixed. See Tex. Bus. & Com. Code § 9.334 cmt. 4. If fixtures were treated like other personalty and if the financing statements were filed with the secretary of state, parties with real estate interests would not learn of the security interest by a title search. Thus, a security agreement and financing statement covering fixtures must describe the real estate, and the financing statement must be filed in the real property records. Tex. Bus. & Com. Code § 9.502(b).
If there is any doubt about whether collateral is or may become a fixture, the secured party should file a Uniform Commercial Code fixture filing. Sections 9.5:3 above and 9.14:5 below discuss additional rules for filing.
§ 9.7:2Farm Products and Agricultural Liens
Creating and perfecting a security interest in farm products collateral requires action under two separate and distinct systems. Creating and perfecting a security interest against competing creditors is governed by Texas Business and Commerce Code chapter 9. Perfection of that same security interest in farm products against buyers in the ordinary course of business requires compliance with the federal Food Security Act of 1985. 7 U.S.C. § 1631.
Perfection under chapter 9 is normally accomplished by the execution of a security agreement and the filing of an appropriate financing statement. In Texas, perfection against buyers in the ordinary course of business under 7 U.S.C. § 1631 (so-called “superperfection”) requires the creditor to deliver notice of the security interest to the purchaser of the farm product at any time within one year before the sale occurs. To determine which potential buyers must receive this notice, the secured party may require the debtor to list likely purchasers of the farm products collateral (see form 9-7 in this chapter). Texas has no central filing system for farm products liens under the Food Security Act. To be effective, the superperfection prenotification notice must be delivered to the farm products buyer before the sale of the farm products. The notice remains effective for only one year after it is delivered. Secured creditors should exercise diligence to determine that their prenotification notices are timely delivered and remain effective. Farm products are not infrequently sold under forward contracts. The date of a sale under a forward contract may be ambiguous. Additionally, farm products are often warehoused after harvest for an extended period. A notice may expire during the period that farm products are warehoused. A new notice, with its new one-year effectiveness, may have to be delivered to the farm products buyer of warehoused farm products.
The required contents of a prenotification notice are unique to the Food Security Act and are much more extensive than the information contained in a financing statement. See the prenotification statement at form 9-6 for the contents of the notice.
In addition, the perfection and priority of agricultural liens may be subject to rules outside of chapter 9 of the Texas Uniform Commercial Code. For example, notwithstanding the provisions of chapter 9, an agricultural lien granted under subchapter E of Texas Property Code chapter 70 has priority over certain prior liens if certain conditions are met. See Tex. Prop. Code § 70.4045. Similarly, the statutory trust created upon acceptance of commodities to which the Perishable Agricultural Commodities Act applies may also have priority over certain previously filed UCC liens. See 7 U.S.C. §§ 499a–499s; see, e.g., Bocchi Americas Associates, Inc. v. Commerce Fresh Marketing, Inc., 515 F.3d 383 (5th Cir. 2008).
A federal tax lien notice covering all personal property of a debtor may be filed in an office that is different from the office in which a financing statement against the debtor is filed. All personal property of a taxpayer that is a corporation or partnership is deemed located where the principal place of the business is located; for other taxpayers, at the taxpayer’s residence; and for a taxpayer located outside of the United States, in the District of Columbia. 26 U.S.C. § 6323(f)(2)(B). Under section 14.002 of the Texas Property Code, a notice of a federal tax lien should be filed in the office of the secretary of state for a corporation or partnership whose principal executive office is in Texas and, in all other cases, in the office of the county clerk in the county in which the person against whom the lien applies resides when the notice is filed. Tex. Prop. Code § 14.002.
As referenced in Texas Property Code section 14.002, “corporation” may refer to any entity taxed as a corporation for federal income tax purposes, and “partnership” may refer to any entity treated as a partnership for federal income tax purposes. A single-member limited liability company that does not elect to be taxed as a corporation for federal income tax purposes and is disregarded for federal income tax purposes may also be disregarded for purposes of federal tax lien notice filings. A notice of a federal tax lien filing may be made against such a limited liability company under the name of its single-member owner, and the federal tax lien may attach to the otherwise (for state law purposes) separate property of the limited liability company. Searches for outstanding liens against a debtor should also be made in the offices in which a federal tax lien notice may have been filed.
§ 9.8Deed of Trust as Security Agreement and Financing Statement
In addition to creating a lien on the real property conveyed, the deed of trust can be modified to create a security interest in other collateral. See form 8-1 in this manual. See also section 8.11, which describes the use of a deed of trust as security agreement and financing statement.
§ 9.9Instructions for Completing Security Agreement Forms
In the following instructions for completing the security agreement, forms 9-1 through 9-4 in this chapter, different classifications of collateral are considered separately if appropriate; otherwise, the remarks apply to all classifications of collateral. Form 9-1 is designed for use if the collateral is consumer goods or documents with respect to goods, equipment, or inventory. If addendum form 9-5 is attached, form 9-1 may also be used if the collateral is farm products. Form 9-2 is designed for use if the collateral is accounts, chattel paper, general intangibles, or a commercial tort claim. Form 9-3 is designed for use if the collateral is instruments, including a promissory note, or investment property. Form 9-4 is designed for use if the collateral is a debtor’s interest as a partner in a general or limited partnership or as a member in a limited liability company.
Parties and Name of Debtor: For general information about designation of parties and the name of the debtor, see sections 9.5:3 and 9.14:2 and chapter 3 in this manual.
Classification of Collateral: The secured party should list all classifications of the collateral subject to the security agreement. If the debtor and the secured party agree that the collateral is or may become a fixture, that fact should be noted in the classification, with language such as “equipment to become a fixture,” and the security agreement should include a legal description of the real property. See section 9.3:3 above for a list of the classifications.
Collateral: Any description of personal property or real estate is sufficient, whether it is specific or not, if it reasonably identifies what is described. Tex. Bus. & Com. Code § 9.108. In a consumer transaction, however, a description by collateral type alone is not sufficient if the collateral is consumer goods, a security entitlement, a security account, or a commodity account. Tex. Bus. & Com. Code § 9.108(e). A description by type alone is also not sufficient for a commercial tort claim. Tex. Bus. & Com. Code § 9.108(e). Several examples of alternate clauses are included in the security agreement forms, but the attorney may use any description that meets the requirements of section 9.108. See Tex. Bus. & Com. Code § 9.108 cmt. 2.
Debtor’s Representations Concerning Debtor and Locations: The security agreement forms have the debtor representing the location of the collateral, the location of the debtor’s records concerning the collateral, and the location of the debtor. If a secured party has to enforce its security interest, the secured party will need to know where the collateral and records pertaining to the collateral are located. The debtor’s location is important because under chapter 9 the filing jurisdiction generally depends on the location of the debtor. See Tex. Bus. & Com. Code § 9.301(1) and section 9.6:3 above. The filing jurisdiction under chapter 9 may be different from the jurisdiction in which the collateral is located. The security agreement may show the location where the debtor intends to keep the collateral and records concerning the collateral; the location of the debtor’s place of business or chief executive office if the debtor has more than one place of business; if the debtor is an individual, the location of the debtor’s place of business or chief executive office if the debtor has more than one place of business and the location of the debtor’s residence; and, if the debtor is a registered organization, the jurisdiction in which the debtor is organized. For most purposes, a street address or other unambiguous location should be sufficient.
The remaining representations concerning the debtor deal with information needed to complete the financing statement form.
If the collateral is or will become timber to be cut, this part of the agreement should describe the land where the collateral is or will be located. Tex. Bus. & Com. Code § 9.203(b)(3)(A). The secured party should file a financing statement in the real property records to perfect its security interest in timber to be cut, as-extracted collateral, or fixtures. Tex. Bus. & Com. Code § 9.501(a)(1). Financing statements for these types of collateral require a description of the real property. Tex. Bus. & Com. Code § 9.502(b)(3). For general information about property descriptions, see section 3.7 in this manual.
Security agreement form 9-1 is drafted for consumer goods, equipment, or inventory. With addendum form 9-5, form 9-1 can also provide coverage for farm products. By appropriately wording paragraph H.14., the parties may incorporate the addendum into the agreement. Use of the addendum for farm products to security agreement form 9-1 together with additional forms for listing of potential buyers, commission merchants, and selling agents (form 9-7) and the prenotification statement (form 9-6) allows compliance with the federal Food Security Act (7 U.S.C. § 1631).
There are two methods for documenting a security interest in a note secured by real property. One method, use of the security agreement, is discussed in the following paragraphs. The other method, use of the collateral transfer of note and lien, is discussed in section 9.18 below.
Use of security agreement form 9-3, with appropriate alternate clauses, will create a security interest in the note. Chapter 9 provides that it governs a security interest in a secured obligation (such as a note secured by real property) notwithstanding that the underlying collateral (for example, the real property) is not governed by chapter 9. Tex. Bus. & Com. Code § 9.109(b). Furthermore, if a security interest attaches under chapter 9 to a secured obligation, the security interest automatically attaches to the security interest, mortgage, or other lien that secures the secured obligation. Tex. Bus. & Com. Code § 9.203(g). Additionally, perfection of the security interest in the secured obligation automatically perfects a security interest in the security interest, mortgage, or other lien that secures the secured obligation. Tex. Bus. & Com. Code § 9.308(e). If the note is secured by real property, a properly completed transfer-of-lien form should be filed in the real property records of the county clerk in the county in which the real property is located. See form 9-1. The transfer of lien provides notice to anyone searching the real property records of the secured party’s interest in the real property. If the note is secured by personal property, a properly completed UCC3 financing statement amendment (form 9-14) should be filed in the appropriate place for the type of collateral covered. The assignment provides notice to anyone searching the personal property records of the secured party’s interest in the personal property. See section 9.12 below for further discussion.
A secured party may perfect its security interest in a note by either filing a financing statement or obtaining possession of the note. Tex. Bus. & Com. Code §§ 9.312(a), 9.313(a). A secured party that has possession of an instrument may have priority over a secured party that perfects its security interest in the instrument by filing. Tex. Bus. & Com. Code § 9.330(d). For the secured party to become a holder or a holder in due course of the note, with all the benefits that entails under chapter 3 of the Texas Business and Commerce Code, the payee or, if different, the current holder of the note must endorse the note to the secured party. Among the advantages of a secured party becoming a holder in due course of the note is that the secured party also becomes the person entitled to enforce the note. Tex. Bus. & Com. Code § 3.301. The note transferred may be endorsed as follows:
[Date of transfer]
Pay to the order of [name of secured party] as collateral in accordance with the security agreement dated [date].
[Name of payee/holder]
Additionally, notice of the security interest may be given to the maker of the note to prevent a prepayment of the note to the payee.
§ 9.10:1After-Acquired Property
The Texas Business and Commerce Code authorizes and validates a security interest in after-acquired property if the security agreement so provides. See Tex. Bus. & Com. Code § 9.204(a). The secured party may include the parenthetical language whether now owned and all after-acquired collateral of the same classification on forms 9-1 through 9-4 in this chapter, under the heading “Collateral,” to include after-acquired property. No security interest attaches to after-acquired consumer goods (other than accessions) if they are given as additional security, unless the debtor acquires rights in the goods within ten days after the secured party gives value. Tex. Bus. & Com. Code § 9.204(b). Additionally, a security interest in a commercial tort claim attaches only to such a claim that exists when the security agreement is entered into and not to an after-acquired claim. Tex. Bus. & Com. Code § 9.204(b).
§ 9.10:2Other Debt/Future Advances
The Texas Business and Commerce Code provides that a security interest secures future advances to the debtor if the security agreement so provides. See Tex. Bus. & Com. Code § 9.204(c). To secure future advances, include the appropriate optional language under the heading “Obligation” in forms 9-1 through 9-4 in this chapter or use a modified form of the all-indebtedness or other-indebtedness clauses in form 8-6 in this manual.
§ 9.10:3Purchase-Money Security Interest
If the secured obligation is advanced as purchase money for the collateral, the security agreement should contain the appropriate clause from form 8-3 in this manual acknowledging the purchase-money security interest. Sections 9.317 and 9.324 contain special priority rules for purchase-money security interests. See Tex. Bus. & Com. Code §§ 9.317, 9.324. Section 9.103 contains rules for determining when a security interest is a purchase-money security interest. Tex. Bus. & Com. Code § 9.103.
§ 9.10:4Attorney’s Fee Provision
The attorney’s fee provision in forms 9-1, 9-2, 9-3, and 9-4 in this chapter is in paragraph D.2. If the loan transaction to which the security agreement relates is governed by Texas Finance Code chapter 342, then section 502 of that chapter limits attorney’s fees that may be charged and assessed to those assessed by a court. Tex. Fin. Code § 342.502(b)(2). A loan is governed by chapter 342 if it is made by a lender engaged in the business of making, arranging, or negotiating loans governed by that chapter; the interest rate exceeds 10 percent per year; the loan proceeds will be used for personal, family, or household use; and either the loan is not secured by a lien on real property or the loan is a secondary mortgage loan. Tex. Fin. Code § 342.005. See also the commentary on promissory notes at section 6.2:7 in this manual. If the related loan is governed by chapter 342, the attorney’s fee clause should be modified as indicated.
For almost all transactions involving a security agreement, at least two other documents are necessary. The promissory note is described in chapter 6 in this manual, and the UCC1 financing statement, form 9-11, is described in section 9.13 below.
If a security agreement, like form 9-4, covers a debtor’s interest as a partner in a general or limited partnership or as a member in a limited liability company, the secured party may need the consent of other partners, managers, or members, as applicable, to be able to create, attach, perfect, enforce, and foreclose its security interest. For entities formed under Texas law, a limited partnership agreement may restrict assignability of a partner’s partnership interest in the limited partnership (see Tex. Bus. Orgs. Code § 153.251); a general partnership does not have to give effect to a transfer or assignment of a partner’s partnership interest that is prohibited by its partnership agreement (see Tex. Bus. Orgs. Code § 152.405); and the regulations of a limited liability company may restrict assignability of a member’s membership interest in the limited liability company (see Tex. Bus. Orgs. Code § 101.108(a)).
Partnership agreements and regulations of limited liability companies frequently contain provisions prohibiting any assignment, including a grant of a security interest, of a partner’s or member’s interest in the applicable entity and stating that any such purported assignment or grant of a security interest is void. Sometimes assignment of an interest is permitted after obtaining consent. The requirements for consent may vary widely. The attorney for the secured party should review the applicable partnership agreement, limited liability company regulations, or comparable document for an entity formed under the laws of another jurisdiction to determine the assignability of the debtor’s interest in the entity and what consents may be required. Restrictions on assignability of personal property as security for an obligation are disfavored under chapter 9.
Generally, the interest of a partner in a general or limited partnership or of a member in a limited liability company is a general intangible under chapter 9 and not a security, certificated or uncertificated, under chapter 8. See Tex. Bus. & Com. Code § 8.103(c). Under chapter 9, a term in an agreement relating to a general intangible that prohibits, restricts, or requires consent to the assignment or transfer of, or creation, attachment, or perfection of a security interest in, the general intangible is ineffective to impair the creation, attachment, or perfection of a security interest or to render such creation, attachment, or perfection a default or breach of the agreement. Tex. Bus. & Com. Code § 9.408(a). Section 9.408 does not, however, apply to an interest in a partnership or a limited liability company. Tex. Bus. & Com. Code § 9.408(e). Thus, restrictions on assignability in a partnership agreement, in regulations of a limited liability company, or in comparable documents for partnership or limited liability companies formed under laws of other states are effective to prevent the creation, attachment, or perfection of a security interest in a partner’s or member’s interest in the entity and to render such creation, attachment, or perfection a default under the partnership agreement, limited liability company agreement, or other comparable document if so provided in the entity’s documents.
Moreover, even if a security interest is created, attached, and perfected in a person’s interest in such an entity and there are anti-assignment provisions in the entity’s organizational documents, neither the entity nor its partners or members owe any duty to the secured party and the secured party may not enforce its security interest. Tex. Bus. & Com. Code § 9.408(d). Depending on the bargaining position of the parties and more likely depending on the relative ownership interest of the debtor in the entity, the secured party may be able to obtain the consent by the entity or other owners of the entity to the creation, attachment, perfection, and enforcement of its security interest. The required consent should come from the persons whose consent is required under the organizational documents of the entity to an outright assignment of an owner’s interest in the entity. In paragraph C.5. of security agreement form 9-4, the debtor represents that it has obtained the consent of all persons necessary to authorize the secured party to exercise its rights under the security agreement. This provision should be modified if such a consent is required under the organizational documents of the entity in which the debtor has an interest but is not obtained. A form of a consent is at form 9-10.
§ 9.12Assignment of Security Interest
The secured party may assign the security interest created by the security agreement either before or after the interest is perfected, in accordance with section 9.514 of the Texas Business and Commerce Code.
If the financing statement is not filed before assignment of the security interest, the financing statement may show the assignment by giving the assignee’s name and address. Tex. Bus. & Com. Code § 9.514. One way to show the assignment is to prepare a form UCC1Ad financing statement addendum (form 9-12 in this chapter) to the UCC1 financing statement (form 9-11) to reflect the assignee of the secured party. The financing statement addendum should be attached to and filed with the financing statement.
If the financing statement is filed before the assignment, the parties should prepare a form UCC3 financing statement amendment (form 9-14), including the financing statement’s file number and date of filing, the assignor’s name, and the assignee’s name and address. The financing statement amendment should be filed in the same filing office or offices as the assigned original financing statement. Tex. Bus. & Com. Code § 9.514. See section 9.15:2 below for additional instructions concerning the UCC3 financing statement amendment.
The assigning secured party should endorse the note and deliver it, the original security agreement, and the filing officer’s acknowledgment copy of the original financing statement to the assignee.
§ 9.13Financing Statement and Other UCC Forms
§ 9.13:1General Considerations
The UCC1 financing statement, form 9-11 in this chapter, perfects a security interest for most classifications of collateral if it is filed with either the secretary of state in Austin or the county clerk, depending on the classification. Tex. Bus. & Com. Code § 9.501(a). See also Tex. Bus. & Com. Code § 9.310(a). The security agreement establishes the secured party’s rights against the debtor, but perfection of the security interest by filing a financing statement, obtaining possession of the collateral, or obtaining control of the collateral establishes the rights of the secured party against competing parties, such as other secured creditors. Tex. Bus. & Com. Code § 9.201(a). See Tex. Bus. & Com. Code § 9.308 cmt. 2.
Filing a financing statement will not perfect a security interest in certain classifications of collateral. See section 9.5 above for an explanation of the different methods of perfecting a security interest and the type of collateral that may be perfected under each method.
Another exception to the financing statement requirement is a purchase-money security interest in consumer goods, which is perfected automatically. Even though this automatic perfection protects the retailer’s rights against the consumer, retailers selling expensive merchandise often file a financing statement to protect themselves in case a debtor sells to another consumer. Without a financing statement on file, the subsequent sale would destroy the retailer’s interest in the collateral. Tex. Bus. & Com. Code §§ 9.309, 9.320(b).
See section 9.5:3 above for a discussion of the contents of a financing statement. The financing statement is not intended to describe the full agreement of the parties but rather to give public notice of the security interest. See Tex. Bus. & Com. Code § 9.502 cmt. 2.
A financing statement is constructive notice to all parties of a secured party’s rights in collateral. To give constructive notice of a security interest, the financing statement must be filed in the proper office. If there is doubt about the proper filing place, the attorney should file the financing statement in every place that might be appropriate. See Tex. Bus. & Com. Code § 9.501(a).
Certain types of collateral, such as motor vehicles and manufactured housing, are covered by other statutes and may require additional documentation, such as certificates of title. Other examples of such collateral include patents, trademarks, rolling stock, ships, and aircraft. See Tex. Bus. & Com. Code § 9.311(b).
§ 9.14Instructions for Completing Form UCC1
§ 9.14:1General Considerations
Nonstandard forms of financing statements should not be used in Texas. Texas filing offices may reject tendered written filings that are not on a standard form adopted by rule by the Texas secretary of state. Tex. Bus. & Com. Code § 9.5211.
See section 9.19 below for how to obtain a UCC1 and other financing statement forms. The attorney should review section 9.310(b) for a listing of collateral for which a financing statement is either unnecessary or ineffective in perfecting a security interest. See also section 9.5 above for a discussion of perfection of a security interest.
§ 9.14:2Blocks 1, 2, and 3: Names of Debtor and Secured Party
For general information about designation of parties, see chapter 3 in this manual.
The debtor’s correct name is crucial to the validity of the financing statement because records are indexed on that basis. The names of the debtor and of the secured party should appear on this form exactly as they appear on the security agreement. If the debtor is a registered organization, the debtor’s name is the name stated to be the registered organization’s name on the public organic record most recently filed with, issued by, or enacted by the debtor’s jurisdiction of organization that states, amends, or restates the debtor’s name. Tex. Bus. & Com. Code § 9.503(a)(1). For a Texas filing entity (as defined in Tex. Bus. Orgs. Code § 1.002(22)), this means that the debtor’s name is the name stated to be the name of the filing entity on its certificate of formation or a restated certificate of formation and all amendments to an original or restated certificate of formation. Special rules apply for an entity that is a trust or a decedent’s estate. Tex. Bus. & Com. Code § 9.503(a)(1), (a)(2), (a)(3), (f), (h). If the debtor is an individual, the financing statement must use the name of the debtor as shown on the most recently issued unexpired Texas driver’s license or most recently issued unexpired Texas Department of Public Safety–issued identification certificate and indicate the debtor’s surname. Tex. Bus. & Com. Code §§ 9.503(a)(4), (g), 9.516(b)(3). If the debtor does not have a driver’s license or identification certificate, the financing statement must provide the individual name of the debtor or the surname and first personal name of the debtor. Tex. Bus. & Com. Code § 9.503(a)(5). A trade name is not a sufficient name of a debtor. Tex. Bus. & Com. Code § 9.503(c). Any name used for a debtor other than the correct name renders the financing statement insufficient and seriously misleading unless the name used is so similar to the debtor’s correct name that a search under the debtor’s correct name, using the filing office’s standard search logic, would disclose the filing with the incorrect name. Tex. Bus. & Com. Code § 9.506(c).
If the debtor’s name changes and the change renders the original form seriously misleading, the secured party must file a UCC3 financing statement amendment (form 9-14 in this chapter) with the correct name within four months of the change to continue the security interest. Tex. Bus. & Com. Code § 9.507(c). A filing is seriously misleading if a search under the changed, now correct name, using the filing office’s standard search logic, would not disclose the filing under the former, now incorrect, name. Tex. Bus. & Com. Code § 9.506(c).
§ 9.14:3Block 4: Classification and Description of Collateral
For a general discussion of the significance of classification of collateral, see section 9.3:3 above.
The Texas Business and Commerce Code specifies that the description of collateral in the financing statement is sufficient if it “indicates the collateral covered by the financing statement.” Tex. Bus. & Com. Code § 9.502(a)(3). A financing statement indicates the collateral covered if it contains a description of the collateral under section 9.108 or indicates that it covers all assets or all personal property. Tex. Bus. & Com. Code § 9.504.
A financing statement that correctly describes the original collateral continues perfection in after-acquired property, proceeds, and future advances without specific reference to these interests in the financing statement. If a financing statement is recorded and the general description in the financing statement shows that a security interest exists, any affected creditor should contact the secured party to determine if the security interest extends to such after-acquired property, proceeds, or future advances.
If the collateral is timber to be cut, fixtures, or as-extracted collateral, the description in the financing statement must include a description of both the collateral and the real property where it is located. Tex. Bus. & Com. Code § 9.502(b). The real property description must be “sufficient to give constructive notice of a mortgage under the law of this state if the description were contained in . . . a mortgage.” Tex. Bus. & Com. Code § 9.502(b)(3). For a general discussion of property descriptions, see section 3.7 in this manual.
Block 3 of the form designates the secured party or its assignee. If the financing statement has been filed before assignment of the interest, the assignor should prepare a written assignment and also complete a form UCC3 financing statement amendment (form 9-14 in this chapter) for each UCC1 on file. Tex. Bus. & Com. Code § 9.514(b). See section 9.12 above for further suggestions.
A financing statement may be filed without the debtor’s signature on it if the debtor authorizes the filing. See Tex. Bus. & Com. Code § 9.509(a)(1). By entering into a security agreement a debtor automatically authorizes the filing of a financing statement covering the collateral described in the security agreement. Tex. Bus. & Com. Code § 9.509(b). If a secured party wants to file a financing statement before the debtor has entered into a security agreement, the secured party needs separate express authorization from the debtor. One way to evidence the debtor’s authorization is to have the debtor sign the financing statement. However, the UCC1 financing statement standard form does not provide a space for the debtor’s signature. Another way to evidence the debtor’s authorization is to have the debtor sign a statement, to which a copy of the completed form UCC1 is attached, authorizing the filing of the form.
If Texas is the correct state in which to file a financing statement and no other statutory perfection rules apply, the proper office in which to file is determined by the classification of the collateral. Generally, the secretary of state’s office in Austin is the proper place to file a financing statement.
Exceptions to this general rule involve collateral significantly related to real property. For timber to be cut or as-extracted collateral, or if the financing statement is filed as a fixture filing, the proper place to file is in the real property records of the county clerk in the county in which the related real property is located. However, if the secured party has a deed-of-trust lien on the real property and a security interest in the timber to be cut, as-extracted collateral, or fixtures, the secured party does not need to file a separate financing statement in the real property records, assuming that the deed of trust otherwise meets the requirements of a financing statement. Tex. Bus. & Com. Code § 9.502(b), (c).
The secretary of state accepts electronic filing of UCC financing statements through its website, www.sos.state.tx.us/ucc/uccforms.shtml.
A party in doubt about the proper place to file should file the statement in every possible place.
These rules apply only to Texas transactions. Filings may be required in other jurisdictions. See the discussion of perfection at section 9.6:3 above.
A typical security interest transaction requires a note, discussed in chapter 6 in this manual; a security agreement, forms 9-1 through 9-4 in this chapter; and a financing statement. Other documents that may be necessary include a form UCC1Ad financing statement addendum (form 9-12), a form UCC3 financing statement amendment (form 9-14), a form UCC3Ad financing statement amendment addendum (form 9-15), and a form UCC11 information request (form 9-16).
§ 9.15:1Financing Statement Addendum
The form UCC1Ad financing statement addendum, form 9-12 in this chapter, serves several purposes.
The financing statement addendum may be used to identify an additional debtor, if there are more than two (the first two may be identified on the form UCC1 financing statement) (see item 11 of the form UCC1Ad); identify an additional secured party (see item 12 of the form); and reflect an assignment by the initial secured party to an assignee (see item 12 of the form). The form may also be used to indicate if the financing statement covers timber to be cut, as-extracted collateral, or fixtures (see item 13 of the form); if so the form provides space to include a description of the real estate (see item 14 of the form) and the name of the record owner (if the debtor does not have a record interest) (see item 15 of the form). The form also provides space for an expanded description of the collateral (see item 16 of the form). The form may be used to indicate whether the debtor is a trust, a trustee for property held in trust, a decedent’s estate (see item 17 of the form), or a transmitting utility (see item 18 of the form) or to indicate whether the filing is for a manufactured housing transaction or a public finance transaction (see item 18 of the form).
The name of the first debtor, identified in item 1 on the form UCC1 financing statement, should be inserted in item 9 of the related financing statement addendum to relate the financing statement addendum to the financing statement. The remaining items of the form should be completed only if appropriate.
The form UCC1Ad financing statement addendum should be attached to and filed with its related form UCC1 financing statement and not filed separately.
§ 9.15:2Financing Statement Amendment
The form UCC3 financing statement amendment, form 9-14 in this chapter, serves several purposes, some of which are discussed in sections 9.9, 9.12, 9.14:2, and 9.14:4 above, in relation to the security agreement and financing statement.
The form provides for continuation of a security interest beyond the five-year duration of the original filing (Tex. Bus. & Com. Code § 9.515); assignment of a security interest if the assignment is made after the original financing statement is filed (Tex. Bus. & Com. Code § 9.514(b)); termination of a security interest, which is a required procedure for the secured party if “there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value” (Tex. Bus. & Com. Code § 9.513(a)(1), (c)(1)); partial release of collateral; and amendment of the financing statement.
A separate form UCC3 should be used for each form UCC1 already filed, and each form UCC3 should relate to a particular financing statement by giving the financing statement’s file number and, because the Texas secretary of state does not use a unique number system that distinguishes among filings made in different years, the date of filing. The form UCC3 does not provide a separate block for the filing date of the related initial financing statement. The date of filing should be inserted in block 1a after the initial financing statement file number. The form UCC3 financing statement amendment should be filed in the same filing office or offices as the original financing statement to which it relates.
If, after a financing statement is filed in the correct state, the jurisdiction of the location of the debtor changes (for example, for a registered organization, the debtor changes its jurisdiction of organization; or for an organization that is not a registered organization, the debtor changes the state in which its place of business is located or, if the debtor has more than one place of business, the state in which its chief executive office is located; or for an individual debtor, the debtor changes his state of residence), the original filing is effective for only four months after the move. Tex. Bus. & Com. Code § 9.316(a)(2). The financing statement becomes ineffective to continue a perfected security interest unless the secured party files a form UCC3 in the state in which the debtor has relocated within the four-month period. Tex. Bus. & Com. Code § 9.316(a), (b). A mere change of an address within a state of the location of the collateral, the location of a debtor’s place of business or chief executive office, or the location of an individual’s residence does not render an original filing ineffective.
If, after a financing statement is filed using the debtor’s then-correct name, the debtor’s name changes and the change renders the original filed financing statement seriously misleading, a UCC3 financing statement amendment with the changed, now correct name of the debtor must be filed within four months of the name change to continue the perfection by filing of the security interest. Tex. Bus. & Com. Code § 9.507(c). An original filing becomes seriously misleading if a search under the changed, now correct name, using the filing office’s standard search logic, would not disclose the filing under the former, now incorrect name. Tex. Bus. & Com. Code § 9.506(c).
§ 9.15:3Financing Statement Amendment Addendum
The form UCC3Ad financing statement amendment addendum, form 9-15 in this chapter, is used to indicate additional information that cannot be included in the spaces provided in the form UCC3 financing statement amendment, form 9-14. It should be attached to and filed with the related form UCC3 financing statement amendment and not filed separately.
§ 9.15:4Financing Statement Search
The form UCC11 information request, form 9-18 in this chapter, is the device commonly used to search for records of other secured interests in the property that may have priority over the interest being created. See Tex. Bus. & Com. Code § 9.523(c). To expedite this process, the attorney may use a private service that can complete a search quickly or an online service that can immediately verify the existence of a financing statement.
Like form UCC1, form UCC11 provides adequate instructions on its reverse side for completing the form.
§ 9.16Extension and Termination
Most financing statements are effective for five years, after which they automatically expire. Tex. Bus. & Com. Code § 9.515(a). A financing statement filed in connection with a manufactured-home transaction or a public-finance transaction that indicates that fact is effective for thirty years from the date it is filed. Tex. Bus. & Com. Code § 9.515(b). The secured party may file a form UCC3 financing statement amendment (form 9-14 in this chapter) as a continuation statement not earlier than six months before the termination date. See sections 9.15:2 and 9.15:3 above. Once a financing statement has expired, the previous priority position is gone and a refiling of the financing statement will be effective on the date of refiling. Tex. Bus. & Com. Code § 9.515(c). The secretary of state accepts electronic filing of continuation and termination financing statements through its website, www.sos.state.tx.us/ucc/uccforms.shtml.
If after a financing statement is filed there is no longer an obligation secured by the collateral covered by the financing statement and there is no commitment to make an advance, incur an obligation, or otherwise give value, a termination statement on form UCC3 should be filed. Tex. Bus. & Com. Code § 9.513(a), (c). When a termination statement is filed the related financing statement ceases to be effective. Tex. Bus. & Com. Code § 9.513(d).
§ 9.17Prefiling Financing Statement
A financing statement may be filed at any time, even before the security agreement is made. Tex. Bus. & Com. Code § 9.502(d). To fully protect the secured party, a financing statement can be filed, and then, after the filing office confirms that the secured party has the desired priority position, the funds can be advanced. The debtor must authorize the secured party to file a financing statement before a security agreement is made. See sections 9.5:3 and 9.14:4 above.
§ 9.18Collateral Transfer of Note and Lien
§ 9.18:1General Considerations
In most secured transactions, the collateral (for example, the equipment) is the source of the security. However, in a transaction involving the pledge of a note secured by real property, the note itself may not be the primary source of security; the underlying real property may be the actual collateral. Therefore, the secured party and the attorney must carefully review the underlying transaction to understand the value of the collateral. The title policy, deed of trust, survey, financial reports, engineering reports, appraisals, and environmental reports may contain critical information.
§ 9.18:2Instructions for Completing Collateral Transfer of Note and Lien
Parties: For general information about designation of parties, see chapter 3 in this manual.
Collateral Note: The collateral transfer of note and lien, form 9-8 in this chapter, contains a sample description of the note being pledged to the secured party. The description must be drafted to cover the actual note.
Current Balance: The current balance is that of the underlying collateral note. It is part of the debtor’s representations in the agreement.
Collateral Note Security: The form contains a sample description of the deed of trust on the underlying collateral note. The description must be drafted to cover the actual deed of trust and other collateral documents.
Property Description: For general information on property descriptions, see chapter 3.
Obligation: The agreement should identify the note that the collateral secures.
The subheading “Other obligation” is appropriate if the form secures an obligation other than a note, such as the performance of a guaranty or indemnity or performance under a lease agreement.
Collateral Note Payments: Two alternate example clauses are shown on the agreement.
The security interest may be perfected by possession or by filing a financing statement covering the collateral note. A secured party that perfects its security interest in a collateral note by possession has priority over a secured party that perfects its security interest in the collateral note by filing a financing statement.
It is recommended that the secured party record the collateral transfer of note and lien as soon as possible in the real property records, to put all parties dealing with the real property on notice of the secured party’s interest in the collateral note and the real property securing the collateral note. Merely recording the collateral transfer of note and lien in the real property records does not perfect the secured party’s security interest if the secured party (or a third party on its behalf) does not obtain possession of the collateral note or file a financing statement covering the note.
To obtain the rights of a holder and of a holder in due course under Texas Business and Commerce Code chapter 3, the secured party must secure the payee’s (or, if different, the current holder’s) endorsement on the collateral note. Among the advantages of a secured party becoming a holder in due course of the collateral note is that the secured party also becomes the person entitled to enforce the collateral note. Tex. Bus. & Com. Code § 3.301. The endorsement may read as follows:
Pay to the order of [name of secured party] as collateral in accordance with collateral transfer of note and lien dated [date].
After the debt is repaid, the secured party should return the collateral note to the debtor. Additionally, either the secured party should endorse the collateral note to the debtor, or the debtor, on reacquiring the collateral note, may cancel its endorsement to the secured party. Tex. Bus. & Com. Code § 3.207. If the collateral transfer of note and lien has been recorded, the secured party should sign a release of collateral transfer of note and lien (see form 10-21 in this manual), and that document should be recorded.
§ 9.18:6Collateral Note Maker’s Estoppel Certificate
As additional security for the loan, the secured party should consider requiring the collateral note maker to sign the certificate set forth as form 9-9 in this chapter.
The UCC forms in this manual are available in a fill-in-the-blank format over the Internet from the Texas secretary of state at www.sos.state.tx.us/ucc/uccforms.shtml.
Collins, Susan E., and Paul Hodnefield. “UCC Update: Article 9.” In Advanced Business Law Course, 2007. Austin: State Bar of Texas, 2007.
Kaiser, Stephanie E. “Article 9—Perfection, Priorities, and Other Unique Issues to be Aware Of.” In Collections and Creditors’ Rights Course, 2018. Austin: State Bar of Texas, 2018.
Kearney, Amy. “Uniform Commercial Code Impact on Real Estate.” In Advanced Real Estate Law Course, 2019. Austin: State Bar of Texas, 2019.
Tarry, Stephen C. “Traps for the Unwary in Perfecting UCC Security Interests.” In Essentials of Business Law: Protecting Your Business Course, 2018. Austin: State Bar of Texas, 2018.