The Uniform Commercial Code (UCC) is a standardized set of laws adopted by all U.S. states that governs the rules for commercial transactions. This includes the sale of goods, transactions involving collateral as a security interest, and promissory notes. Key sections of the UCC include Article 2 (sale of goods), Article 3 (negotiable instruments), and Article 9 (secured transactions). The UCC facilitates interstate business transactions by ensuring that all U.S. states evenly enforce rules.

Article 2 governs the sale of goods between merchants. A “merchant” is a person that regularly buys or sells a particular type of product or otherwise holds themselves out as having a specific expertise regarding the goods being transacted. Contracts for the sale of goods must comply with the statute of frauds if the goods are priced at $500 or more. The statute of frauds is a legal doctrine that requires certain types of contracts to be in writing and signed by the party being charged.

Article 3 governs negotiable instruments, which include specialized financial products such as checks, certificates of deposit, and promissory notes. Promissory notes are commonly used by small businesses and individuals to provide short-term financing. Negotiable instruments must be unconditioned, in writing, and involve the payment of a fixed amount of money. UCC Article 3 protects the rights of “holders in due course” to collect on debt. The holder in due course doctrine allows parties acting in good faith to collect on debt payments, provided that they did not have notice of an issue challenging the validity of the negotiable instrument such as competing claims, forgery, or other suspicious circumstances.

Article 9 governs secured transactions, which are debt transactions backed by collateral. It provides creditors with legal protections and establishes the order of priority of creditor claims in the event that the debtor defaults. Under Article 9, collateral is classified based on the debtor’s use into four main categories: consumer goods, inventory, equipment, and farm products.

In order for a creditor to establish a legally enforceable right to the debtor’s collateral, which is personal property pledged to enforce the debt obligation, the creditor must have a valid security interest in the collateral. The process of making a security interest enforceable is referred to as attachment. A security interest attaches when value is given, the debtor demonstrates it has rights in the collateral, and an authenticated security agreement is executed.

The process of a creditor establishing priority over other creditors over the same collateral is referred to as perfection. The default method of perfecting a claim to collateral is to file a UCC-1 financing statement with the secretary of state’s office in the state where the debtor is located. Alternatively, evidence of possession or control can satisfy the perfection requirement. When a deposit account is used as collateral, the execution of a deposit account control agreement (DACA) will establish perfection.

A purchase money security interest (PMSI) provides an exception to the perfection rules. It creates super-priority for certain types of collateral that the creditor enabled the debtor to

purchase by lending money, such as inventory or equipment. Security interests in consumer goods are perfected automatically upon attachment without requiring the filing of a UCC-1 financing statement. Examples of consumers goods include furniture and other household item.