What a dirt lawyer needs to know about new Article 9 of the UCC

F. Restrictions on Transfers of Collateral

Modifications to Contracts. Construction lenders might take assignments of design and construction contracts. Section 9-405 of Article 9 allows a modification of or substitution for an assigned contract to be effective as against the secured party, who is the assignee, so long as it is made in good faith, if either the right to payment has not been fully earned by performance or payment has been fully earned, but the account debtor has not been notified of the security interest or assignment. The secured party or assignee's rights continue in the modified or substituted agreement. The secured party or assignee may provide in the security agreement with the debtor or assignor that any such modification or substitution is a default, but that agreement cannot invalidate the effectiveness of the modification or substitution.

allow the secured party to use the general intangible, such as a permit or contract right, against the third party if the restriction is otherwise enforceable. This section does not apply to true transfers of general intangibles other than payment intangibles; other law governs the enforceability of prohibitions on assignment other than in the context of the creation of a security interest.

This is a useful device for secured lenders of borrowers who require governmental permits to operate their businesses. For example, a lender to a hotel owner has often been disadvantaged because the lender could not take an effective security interest in the hotel's liquor license, which is a critical asset in the operation of the hotel. Under Article 9, the lender may take and perfect an effective security interest in the liquor license. While this rule does not allow the lender, or its assignee, to use the license to sell liquor, the lender would have an effective security interest against any creditor, including a trustee in bankruptcy. The lender would have a security interest in the proceeds of the sale of the hotel's liquor license (presumably in connection with a sale of the hotel), and the security interest would remain in effect against the new owner.121

G. Letter-of-Credit Rights

Lenders often make real estate loans to owners of income producing real estate leased to third parties. Often a tenant provides the landlord or borrower with a letter of credit to provide or enhance the security deposit. The lender, in addition to taking a security interest in the real estate and the rents, would want a security interest in the landlord or borrower's rights under the letter of credit. Article 9 addresses this circumstance in detail.122

makes a proper draw under the letter of credit.124 The secured party remains at the mercy of its borrower, the beneficiary of the letter of credit, to make the draw. If the secured party needs the right to draw under the letter of credit, the secured party must become a transferee beneficiary under letter of credit law. 125

Governing Law. For security interests in letter-of-credit rights, other than security interests perfected only by means of automatic perfection in a supporting obligation under the provisions of section 9-308(d) of Article 9,126 the local law of the issuer's or nominated person's jurisdiction governs perfection, the effect of perfection or nonperfection, and priority.127 The issuer's or nominated person's jurisdiction provides the law governing the liability of the issuer or nominated person with respect to the letter-ofcredit rights under U.C.C. section 5-116.128