Secured Transactions and Negotiable Instruments
Secured transactions and negotiable instruments are two important areas of commercial and business law. In a secured transaction a borrower agrees that the lender may take property owned by the borrower as collateral should the borrower default on a loan; in other words, it is a way to secure a loan. A negotiable instrument is a writing that promises the payment of a fixed amount of money. Both of these areas are essential to modern business loans and everyday transactions. If you have questions about secured transactions, negotiable instruments or another business-related matter, contact David, Brody & Dondershine, LLP in Reston, Virginia, today to schedule a consultation with an attorney.
Lenders often require more than just promises of repayment in order to extend credit to borrowers. The law of secured transactions deals with the collateral interests formed between a lender and borrower. The collateral interests secure the loan by allowing property to act as security for the borrower’s obligation to repay the loan.
A “security interest” is created by an agreement (“security agreement”) authorizing the lender to take specific collateral property owned by the borrower in the event the borrower defaults on the loan. A lender does not take the security interest out of a desire to own the property but rather as protection in case of a default. For example, if a bank lends one of its customers a sum of money in exchange for a security interest in the customer’s boat, then upon the customer’s default the bank is entitled to take possession of the customer’s boat as payment for all or part of the customer’s debts owed to the bank.
Uniform Commercial Code (UCC) Article 9
In general, the law of secured transactions is a form of contract law. Like sales, secured transactions are governed by state law; specifically, all states have adopted Uniform Commercial Code (UCC) Article 9 that deals specifically with secured transactions. Section 9-109 of the UCC states that it generally applies to any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract. This includes agricultural liens, sales of accounts, chattel papers, payment intangibles, promissory notes, consignments and various other security agreements.
Very broadly, Article 9 deals with the general structure and formalities of the relationship between the borrower and lender. In addition, Article 9 deals with the parties’ relationship to the property that is the subject of the security interest. This includes delineating what happens to the property when there are multiple security interests.
A negotiable instrument is an unconditioned writing that promises or orders the payment of a fixed amount of money. Negotiable instruments made payable to a specific party must be endorsed, and instruments payable to the “bearer” need no endorsement. A key feature of a negotiable instrument is that properly endorsed it is fully transferable. Checks, promissory notes and bills of exchange are common examples of negotiable instruments.
The law of negotiable instruments is generally governed by state law. Specifically, all states have adopted, in some form, Article 3 of the UCC which deals solely with negotiable instruments. In general, the law of negotiable instruments is a highly specialized type of contract law applying in narrow situations. However, a negotiable instrument may be distinguished from an ordinary contract by the fact that a negotiable instrument is transferable to other parties.
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The laws governing secured transactions and negotiable instruments are critical to the smooth and effective flow of commerce. An examination of the laws and concepts that govern both areas can be intimidating and confusing. If you have questions about secured transactions, negotiable instruments or any other commercial law matter, contact David, Brody & Dondershine, LLP in Reston, Virginia, today to schedule a consultation with a lawyer.
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