Article 9 of the Iowa UCC (Iowa Code Section 554.9101 et seq.) governs the purchase and sale of goods and related secured interests. This blog will deal with protecting a business during an initial transaction. My next blog will deal with placing the public on notice of a security interest.
Bill’s Bakery Supplies is an equipment wholesaler.
Joe Smith is CEO (and sole employee) of Smith’s Confectionary Inc.
Smith purchases equipment from Bill’s. If Smith cannot pay, how can Bill’s recoup the unpaid balance?
Often, security agreements arise where an item is sold on account (six months same as cash) or a loan is received for the purchase of an item (bank loan for a car), and the purchaser is allowed to pay off the balance over a period of time. A seller may want to retain certain rights to the goods until paid in full.
Smith pays 10 percent of the total price, signs the purchase agreement, and takes the equipment. Bill’s Bakery Supplies may be entitled to full payment on the account, but has it retained a security interest in the goods?
Likely no. In Iowa, an agreement to sell goods alone is not enough for a security interest to attach to the goods. Iowa Code Section 554.9203 provides that for a valid security agreement there must be:
(1) value given;
(2) a right in the collateral that the debtor can transfer to the secured party; and
(3) a signed security agreement with a description of the collateral or the collateral in possession of the secured party.
This means Bill’s no longer has an interest in the goods sold and, essentially, has an unsecured open account.
If your business wishes to keep a secured interest after sale, create an agreement that:
(1) specifies that a security interest is held by the seller;
(2) is signed by the purchaser; and
(3) includes a detailed description of the goods (e.g. serial number, make, and model).
 (Author’s Note: The UCC refers to a security agreement in this situation as a Purchase Money Security Interest, where the entity which gave the funds to the person to procure the good/s has a security interest in the goods as collateral.)