SECURITY AGREEMENTS, PERSONAL PROPERTY SECURED TRANSACTIONS, UNIFORM COMMERCIAL CODE – ARTICLE 9

SECURITY AGREEMENTS, PERSONAL PROPERTY SECURED TRANSACTIONS, UNIFORM COMMERCIAL CODE – ARTICLE 9

Agents in real estate transactions involving both personal and real property must be familiar with the transfer
and encumbrance of personal property. Because it is often difficult to determine whether or not a particular item
affixed to real property is a fixture, the obligation should be secured by both a trust deed/mortgage and a
personal property security instrument (mixed security).

Upon default and foreclosure of real property, Code of Civil Procedure Sections 580(b), 580(d) and 726
prevent or limit a deficiency judgment. Unless expressly stated in a contract between parties, no antideficiency
limitation exists in a personal property foreclosure.

Business opportunities. Business opportunity brokers are routinely involved in personal property transactions
which must fully satisfy the Bulk Sales Law (Uniform Commercial Code, Division 6) and the secured
transaction statutes (Uniform Commercial Code, Division 9). Assets of a business are commonly used as
collateral to create a security interest in the seller or lender.

Just as a trust deed or mortgage encumbers real property as security for an obligation (debt), a “security
agreement” creates a security interest in personal property.

To protect or “perfect” the interest created by a security agreement, as against other security interests and/or
lien creditors or subsequent purchasers, a Financing Statement (UCC-l) is usually filed. In most cases, a
security interest is perfected when it has attached and been properly filed with the appropriate filing officer (the
Secretary of State in Sacramento or the appropriate county recorder).

A security interest attaches when:

• there is agreement by the parties that it attach;

• value has been given; and

• the debtor has acquired rights in the collateral.

Once perfected, the secured party’s interest is protected against the debtor’s other creditors.

The Financing Statement should not be confused with the actual security agreement. The security agreement
creates the security interest.

Although a written agreement is not necessary where the collateral is in the possession of the secured party as a
pledge, a security interest is usually not enforceable unless there is a written security agreement, signed by the
debtor, describing the collateral.

Uniform Commercial Code (UCC)—Article 9

Division 9 (entitled “Secured Transactions, Sale of Accounts, Contract Rights and Chattel Paper”) of the
Uniform Commercial Code (UCC) contains the unified and comprehensive scheme for regulation and control
of the sale, creation and priority of all liens and security interests in personal property. It covers a transaction in
any form which is intended to create a security interest in personal property, including goods, documents,
installments, chattel paper, accounts or contract rights and similar items. The security interest gives the secured
party the right to foreclose and apply the sale proceeds toward the satisfaction of the secured obligation if the
debtor defaults.

Purpose of the UCC. The basic purpose of the Uniform Commercial Code is to provide a simple and unified
structure within which the immense variety of secured financing transactions can be completed.

As amended over the years, the UCC comprises a uniform, clear and easily available set of rules for the conduct
of commercial intra- and interstate transactions.

Filing system. Under the UCC, a Financing Statement, properly filed, perfects a security interest. Absent a
filed Financing Statement, subsequent purchasers without actual knowledge of the security interest might
acquire property free of the prior security interest. On the other hand, a secured party who does file is in most
cases protected from the interests of subsequent purchasers. UCC records are indexed by the true name of the
debtor.

Place of filing. The proper place to file in order to perfect a security interest is as follows:

• When the collateral is consumer goods, in the office of the county recorder in the county of the debtor’s
residence or, if the debtor is not a resident of this state, in the office of the recorder of the county in which
the goods are kept.

• When the collateral is crops growing or to be grown, timber to be cut or minerals or the like (including oil
and gas) or accounts subject to subdivision (5) of Section 9103, in the office where a mortgage on the real
estate would be recorded.

• In all other cases, in the office of the Secretary of State.

The proper place to file in order to perfect a security interest in collateral, including fixtures, of a transmitting
utility is the office of the Secretary of State. This filing also constitutes a fixture filing as to the collateral
described therein which is or is to become fixtures.

For filing purposes, the residence of an organization is its place of business if it has one or its chief executive
office if it has more than one place of business.

The proper place to file a financing statement as a fixture filing is in the office where a mortgage on the real
estate would be recorded.

Any subsequent filings such as Statements of Continuation, Termination, Release, Assignment and Amendment
must be filed in the same location as the original Financing Statement.

Erroneous filing. A filing made in good faith in an improper place or not in all of the places required is
nevertheless effective with regard to any collateral as to which the filing complied with the requirements and is
also effective with regard to collateral covered by the financing statement against any person who has
knowledge of the contents of the financing statement.

Change in debtor’s/collateral’s location. A filing which is made in the proper place in this state continues
effective even though the debtor’s residence or place of business or the location of the collateral or its use,
whichever controlled the original filing, is thereafter changed.

Proper filing. Presentation for filing of a Financing Statement, tender of the filing fee and acceptance of the
statement comprise filing under the code.

Duration of filing. A Financing Statement is effective for five years from the date of filing. For extension, the
secured party must file a Continuation Statement any time within the six-month period preceding expiration.
Succeeding Continuation Statements may thereafter be filed in the same manner to continue the effectiveness of
the original Financing Statement.

Filing information. If the Standard Form UCC-l or UCC-2 is used for filing, the filing officer will note the file
number and date and hour of filing and return the acknowledged copy to the person or firm indicated in the box
at the bottom of the standard form. If a non-standard form is used, the filing party must request an
acknowledgment and send the filing officer a duplicate copy of the form filed, which will be acknowledged and
returned.

The Secretary of State will furnish a certificate showing whether there is on file in its office any presently
effective Financing Statement, naming the Debtor and, if there is, giving the date and hour of filing of each
such statement and the names and addresses of each secured party named therein. This information and copies
of the pertinent financing statements may be obtained by filing a Request for Information or Copies form
(UCC-3) with the Secretary of State.

Priorities

One purpose of the Uniform Commercial Code Article 9 is to give lien rights to providers and installers of
fixtures. A provider’s perfected security interest in fixtures has priority over the conflicting interests of owners
and subsequent encumbrancers [Section 9313 (4) ].

A secured creditor who is first to make a proper filing has priority, regardless of when his/her claim arose.
However, Sections 9301(2) and 9312(4) grant sellers special priority on purchase money security interests
when perfected within 10 days of the purchaser’s receiving possession of the collateral.

Section 9312 of the UCC sets forth the basic rules of priority among conflicting security interests in the same
collateral and Section 9313 gives the priority rules for liens of a trust deed and other fixture filings.

Failure to File

If a Financing Statement is not filed, subsequent purchasers and secured parties without actual knowledge of it
take the property free of the prior security interest. Section 9201 provides, however, that the (unperfected)
Security Agreement is still valid between the debtor and secured party.

Escrow - Early Filing

A Financing Statement may be filed before a security agreement is made or before a security interest otherwise
attaches. In an escrow for a bulk sales transaction there is often need to promptly perfect a seller’s purchase
money security interest to establish priority over other liens which will be perfected when the legal ownership
changes. An escrow holder often files a Financing Statement to perfect the seller’s interest before escrow
closes. (If escrow fails to close, the escrow holder files a UCC-2 Termination Statement to remove the UCC-l
from the record.)

Fixture Filings

Under the UCC, tangible personal property includes “goods” and personal property deemed fixtures under the
law, meaning goods which are so related to particular real property that an interest in them arises under real
estate law. However, ordinary building materials to be incorporated into a building are not deemed fixtures.

A security interest in fixtures can be created by (1) specific provisions included in a trust deed or mortgage
secured by the real property or (2) a fixture filing in the form of a Financing Statement. Both must be recorded
in the county where the real property is located.

In either case, to qualify as a fixture filing, the instrument must contain:

1. a description of the goods which are or will become fixtures;

2. a legal description of the real property;

3. a statement that the goods are, or will become, fixtures; and

4. an assertion that the statement will be recorded in the county where the real property is located.

A fixture filing in the form of a Financing Statement is a lien on the fixture for 5 years from the date of filing,
unless a Continuation Statement is recorded prior to expiration to extend the Financing Statement/lien an
additional 5 years. A fixture filing in the form of a trust deed or mortgage is effective as long as the trust deed
or mortgage remain a lien.

As to enforcement, a fixture filing in the form of a Financing Statement is enforced according to the provisions
for personal property secured interests in the UCC. If the fixture filing is contained in a trust deed or mortgage,
the secured party has the option of proceeding under the UCC to enforce the lien or by foreclosure proceedings
under the trust deed/mortgage to enforce the lien on both the real and the personal property.

UCC 9402 provides:

• a Financing Statement form to be used as a fixture filing;

• the formal requisites of a Financial Statement; and

• amendments and contents of a mortgage to be used as a Financing Statement.

A copy of a security agreement signed by the debtor is sufficient as a Financing Statement if it contains all the
information required by Section 9402.

Caution

This discussion of the Uniform Commercial Code should not serve as a substitute for:

• statutory analysis when dealing with specific problems;

• consultation with legal counsel on legal matters; or

• proper financial advice on banking or financing problems.