Commercial Tort Claims: Article 9’s Ill-Fitting Puzzle Piece

Lending is a cornerstone of the American economy. Historically, lending practices were informal and relied on personal relationships and trust. As economies grew and trade expanded, a need for a more structured system of lending arose. This led to the rise of secured transactions. Secured transactions allow borrowers to grant security interest in their assets to creditors. The security interest reduces risk for creditors because it allows them to seize the borrower’s assets to recover any loans in the event the borrower defaults. Borrowers also benefit from secured transactions because they have access to larger levels of financing, often at lower interest rates. To bring uniformity among states regarding secured transactions, the American Law Institute and the Uniform Law Commission developed Article 9 of the Uniform Commercial Code (UCC). Nevertheless, even with these provisions in place, secured transactions still face unique challenges. The 2001 revision of the UCC allowed borrowers to grant lenders a security interest in their commercial tort claims. While this allowed for new lending opportunities, it also introduced risks. Section 9-108(e)(1) of the UCC requires borrowers and creditors to specifically identify commercial tort claims in security agreements designed to establish and perfect security interest. Moreover, section 9-204(b)(2) prohibits lenders from having security interests in any commercial tort claims that arise after the debtor has signed the security agreement. These provisions have caused numerous issues for creditors. Many creditors establish security interest in all a debtor’s assets, only to find that they do not have security interest in the debtor’s commercial tort claims because of section 9-108(e)(1) and section 9-204(b)(2). This Note argues that section 9-108(e)(1) and section 9-204(b)(2) must be removed to allow for more efficient handling of security interests in commercial tort claims.