Rights in Collateral and Estoppel Under U.C.C. Article 9

 
In its simplest sense, the requirement that the debtor have rights in the collateral before the security interest can attach follows intuitively from the idea that "you can't alienate what you don't own." Those who allow a debtor unrestrained use and possession of their property, by means either of a lease, bailment, or some other arrangement, would be well advised to file a precautionary financing statement under Article 9.
 
Professor Livingston writes: To have a security interest enforceable against the debtor's assets, a creditor must satisfy the requirements for attachment under section 9-203(b) of the Uniform Commercial Code. Until the security interest attaches, it is not enforceable against the debtor or third parties. The requirements for attachment consist of the secured party’s giving value to the debtor, the debtor's having rights or the power to transfer rights in the collateral, and in most cases, the debtors authenticating of a security agreement that describes the collateral. Both "security agreement" and "value" are defined elsewhere in the Code, but the drafters left "rights in the collateral" undefined.

In its simplest sense, the requirement that the debtor have rights in the collateral before the security interest can attach follows intuitively from the idea that "you can't alienate what you don't own." Just as the common law recognized that a thief could not pass good title to stolen property even to a bona fide purchaser for value, a thief should not be able to give a valid security interest in a stolen chattel. The thief has no title, leasehold, license, or other contractual or property interest that will support the conveyance of a security interest to a lender.

A corollary to this first premise is that, in general, one cannot convey to another greater rights in property than one has. For example, if Lessee leases equipment from Lessor, Lessee normally has the right to exclusive use of the equipment during the term of the leasehold, provided that the conditions of the lease, including the payment of rent, are satisfied. If Lessee in turn gives a security interest in the leased equipment to Secured Party, Secured Party’s rights in the equipment can be no greater than Lessee's. In other words, Secured Party's rights are derived from Lessee's. If Secured Party forecloses on its security interest, it steps into Lessee's shoes and assumes Lessee's rights and obligations under the lease--e.g., the right to use the equipment during the term of the lease and the obligation to pay rent. Once the lease ends, however, Secured Party’s rights should end as well.
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