Business and Commercial Law Info Center

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 collateral owned by the borrower 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. An attorney with experience in business and commercial law can help you with your secured transaction and/or negotiable instruments questions.

Secured Transactions

Secured collateral interests are often needed when a party borrows money from an individual, bank, or other lending institution. 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") that the lender may take specific collateral property that the borrower owns should the borrower default on the loan. A lender does not take the security interest out of a desire to own the property. The collateral is simply a protection in case of a default. For example, if the borrower is unable to fulfill his obligation to make loan payments as agreed, then the lender may take possession of a specified security property.

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 Article 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.

Negotiable Instruments

A negotiable instrument is a check, promissory note, bill of exchange, or other specialized document that represents money that is to be paid to another. It is an unconditioned writing that promises or orders the payment of a fixed amount of money. A key feature of a negotiable instrument is that it is transferable. Negotiable instruments made payable to a specific party must be endorsed and instruments payable to the "bearer" need no endorsement.

In general, there are two types of instruments. The first is called a "draft." A draft is a document that orders the payment of money, such as a check. The second is a "note." A note is a promise to pay a sum of money.

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.

Conclusion

Secured transaction and negotiable instrument laws are very important for smooth and effective commerce. An examination of the UCC concepts that govern both areas can be intimidating. An attorney with experience in business and commercial law can help with your secured transaction or negotiable instrument questions.

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