The Floating Lien under U.S. Secured Transactions Law and UCC Article 9

1. What is a Floating Lien?

A “floating lien” is a security interest in a shifting pool of collateral – often a business’s inventory or accounts receivable – that covers both current and future assets of the debtor.

In commercial practice, this arrangement is sometimes called a blanket lien when it encumbers virtually all the debtor’s assets​.

Unlike a fixed lien on a specific, unchanging asset, a floating lien moves from one asset to another as the debtor’s collateral changes over time​.

For example, a lender might hold a floating lien on all inventory that a company now owns and will acquire in the future; as the company sells old inventory and acquires new stock, the lien automatically extends to the new inventory.

This mechanism enables businesses to obtain ongoing financing secured by assets that are continuously bought, sold, and replaced, without the need to constantly update or re-negotiate the security agreement.

The concept of the floating lien is primarily governed by Article 9 of the Uniform Commercial Code (UCC), which has been adopted (with minor variations) in every U.S. state. Article 9’s provisions explicitly authorise and regulate floating liens in personal property.

This article provides a brief historical background on floating liens in U.S. law and conducts a statutory analysis of the modern legal framework under UCC Article 9.

Key provisions of Article 9 – including those on after-acquired property, future advances, a debtor’s use of collateral, and rights in proceeds – will be examined to illustrate how modern law embraces the floating lien concept.

The discussion is confined to floating liens in personal property under U.S. law, and does not address the floating charge predominantly used in the UK.

2. Historical Background of the Floating Lien

Floating liens did not always enjoy the broad acceptance they have today. Historically, American courts were wary of security arrangements that allowed a debtor to keep using or selling the collateral without immediately repaying the secured debt.

In the late 19th and early 20th centuries, many jurisdictions considered it fraudulent for a debtor to retain and dispose of collateral free from a creditor’s claims.

For example, earlier Kansas case law held that if a mortgagor (debtor) was allowed to sell inventory and not apply the proceeds to the mortgage debt, the arrangement was void as to creditors​.

This reflected a general distrust of “continuing” or “blanket” liens that could sweep in after-acquired property; such arrangements were seen as potentially leaving nothing for other creditors and enabling debtors to over-encumber themselves​.

A turning point came with the famous Supreme Court decision in Benedict v Ratner, 268 U.S. 353 (1925). In that case, a lender had taken an assignment of a company’s accounts receivable but allowed the company to collect and use the proceeds of those accounts without restriction.

The Supreme Court struck down the arrangement, declaring it void against the borrower’s other creditors on the ground that the borrower retained too much control over the collateral (the accounts and their proceeds).

This “dominion rule” of Benedict v Ratner epitomised the hostility toward floating lien-like arrangements. The decision essentially required that if a creditor wanted a valid lien on receivables, the debtor could not have unfettered use of them or their proceeds​.

Despite these legal obstacles, the commercial need for flexible, revolving security interests continued to grow. Businesses, especially those dealing in inventory and accounts receivable, needed financing arrangements that would cover assets which by nature were constantly turning over.

Creative lawyers and lenders found workaround solutions under pre-UCC law – using devices like trust receipts, factor’s liens, and field warehousing – to approximate the effects of a floating lien, though often at the cost of complexity and uncertainty.

As noted by Professor Grant Gilmore (one of the principal drafters of the UCC), even before Article 9 it was technically possible to encumber all of a debtor’s present and future assets, but doing so was cumbersome, expensive and tricky; only the most expert lawyers could hope to avoid the many hidden pitfalls.

In other words, the floating lien concept existed in embryonic form, but it lacked a clear, unified legal sanction.

The introduction of the Uniform Commercial Code in the 1950s – and in particular Article 9, which deals with secured transactions – revolutionised the floating lien.

Article 9’s drafters consciously validated the floating lien as a legitimate security device, sweeping away the old formalistic restrictions.

The UCC drafters were aware of the earlier prejudice that a blanket lien on all of a debtor’s current and future assets might leave nothing for unsecured creditors or might allow a desperate debtor to mortgage its entire future​.

Nevertheless, they concluded that the commercial benefits of floating liens outweighed these concerns, especially if a transparent notice-filing system could replace the old doctrines of secret liens.

Thus, the original Article 9 (promulgated in 1952 and adopted by states over the next decade) explicitly permitted after-acquired property clauses and future advances, and it abrogated the strict Benedict v Ratner rule. By doing so, Article 9 expressly validated the floating lien on shifting collateral”.

The result was a modern legal framework that embraced the floating lien, provided that creditors complied with the UCC’s requirements for attachment and perfection to give notice to third parties.

It is worth noting that even after Article 9’s widespread adoption, the floating lien concept faced one more challenge in the context of federal bankruptcy law (an issue beyond the scope of this article).

In the mid-20th century, there was debate over whether a floating lien on after-acquired property could be defeated by the bankruptcy trustee or treated as a voidable preference to the extent new collateral came into the estate shortly before bankruptcy.

Eventually, the 1978 Bankruptcy Reform Act clarified this by generally honouring pre-bankruptcy floating liens (with certain limitations), thus aligning bankruptcy policy with the UCC’s approach.

Today, the floating lien is firmly entrenched in U.S. secured transactions law, and it serves as a fundamental tool for asset-based lending to businesses.

3. After-Acquired Property (UCC Article 9-204)

UCC Article 9-204 expressly validates the use of after-acquired property clauses in security agreements. This means a security agreement may provide that the security interest attaches not only to the collateral the debtor presently owns, but also to collateral that the debtor will acquire in the future​.

In effect, a lender can obtain a lien that automatically attaches to new assets as soon as the debtor acquires an interest in them, without any need to execute new agreements or take new actions for each item.

This feature is fundamental to a floating lien, allowing the collateral base to expand and shift over time as the debtor’s property changes.

The general rule is not without limits. UCC 9-204(b) imposes two notable exceptions: an after-acquired property clause will not attach to consumer goods (except in very narrow circumstances) if they are acquired more than 10 days after the secured party gives value, and it will not cover commercial tort claims​.

These exceptions reflect policy judgments – preventing over-broad liens on personal consumer items and recognising that tort claims (being contingent and personal in nature) should not be encumbered before they arise.

The rule is clear that an after-acquired property clause covering ordinary consumer goods (e.g. household items) is ineffective if the goods are acquired beyond the 10-day window​. Likewise, a security interest in a tort claim can only attach to claims that have already come into existence and must describe the claim with specificity; a blanket “all tort claims” description will not suffice​.

By authorising after-acquired collateral clauses (apart from these limited exclusions), Article 9 embraces what earlier law would have called a “continuing” or “general” lien on a class of assets​.

The secured party’s interest in the collateral automatically floats to include each new item of property the debtor acquires in the designated category (e.g. all “inventory” or all “equipment”).

In contrast to the pre-Code era – when any lien on after-acquired property was considered merely an equitable interest or required additional steps to become effective – the UCC treats it as a fully enforceable security interest from the outset​.

4. Future Advances and Cross-Collateralization and the Floating Lien

In addition to after-acquired collateral, UCC Article 9-204 also allows a security agreement to secure future advances – that is, debts or obligations that may arise in the future​.

The parties can agree that the collateral (including after-acquired collateral) will stand as security for any subsequent loans or extensions of credit made by the secured party to the debtor. This enables a floating lien to secure a revolving line of credit or series of transactions without the need to amend the security agreement each time a new advance is made.

Article 9 thereby validates so-called “dragnet” or cross-collateral clauses, under which collateral acquired at any time secures obligations whenever incurred​

For example, a single blanket security agreement might stipulate that all of the debtor’s present and future assets secure both an initial loan and any future loans from the same creditor.

The UCC’s policy is to give maximum effect to such agreements: the parties are free to agree that any obligation (present or future) will be secured, and determining the scope of obligations secured is simply a matter of construing the parties’ agreement​.

Revised Article 9 explicitly rejects earlier case law that attempted to impose limiting tests on future advance clauses (such as requiring the future loan to be of the same type or class as the original debt).​

In short, as long as the security agreement says so, collateral can secure debts incurred at any time.

Importantly, the notice-filing system under Article 9 is designed to accommodate future advances without additional bureaucracy.

A filed financing statement that describes the collateral (for example, “all assets” or “all inventory”) is effective to perfect a security interest in after-acquired property and to cover future advances, even if it does not explicitly mention them​.

Third parties searching the records are thus on notice that the debtor’s collateral may be subject to a floating lien securing present and future obligations, which achieves transparency without requiring the secured creditor to re-file or amend the public notice for each new advance.

5. Debtor’s Right to Dispose of Collateral (UCC Article 9-205) and the Floating Lien

A hallmark of the floating lien is the debtor’s freedom to deal with the collateral in the ordinary course of business. UCC Article 9-205 addresses this by declaring that a security interest is not invalid or fraudulent against creditors simply because the debtor has the right or ability to use, commingle, or dispose of the collateral (and any proceeds), or to collect or compromise accounts, and because the secured party may even allow the debtor to do so without requiring that proceeds be turned over or new collateral be given​.

This provision effectively abolishes the old Benedict v Ratner principle: a lender can now allow a borrower to retain control and use of collateral (such as inventory and receivables) without forfeiting the security interest​.

In short, the debtor’s liberty to sell or use collateral no longer renders the lien per se void as it once did.

The rationale for UCC Article 9-205 is rooted in commercial reality. In an inventory or receivables financing arrangement, the debtor’s business would grind to a halt if every sale or collection had to be immediately applied to the debt or segregated for the creditor.

The drafters recognised that giving the debtor latitude to turn inventory into cash (and to use that cash in operations) is essential​. They counterbalanced the risk by relying on the UCC’s public notice (filing) system to protect other creditors, rather than the old rule of automatically voiding such arrangements​.

Nothing in Article 9 prevents the secured party and debtor from agreeing to whatever covenants they deem appropriate for monitoring the collateral; but those are business decisions, not legal requirements​.

Many lenders do choose to impose such restrictions (for example, requiring the debtor to deposit all collections into a secured account, or periodic reporting of inventory), but under the UCC the absence of such policing does not undermine the lien.

It should also be noted that UCC 9-205 does not waive the necessity of adhering to whatever method of perfection is required for the type of collateral in question.

If a security interest’s perfection depends on the secured party’s possession of the collateral (as with a pledge of tangible collateral or negotiable instruments), UCC 9-205 does not authorise the secured party to relinquish possession to the debtor without consequences​.

In other words, a creditor with a possessory lien cannot secretly allow the debtor to hold the goods and still claim to be perfected. The common law rules for perfection of pledges are not relaxed by this section.​

The main thrust of UCC 9-205 is to validate floating liens perfected by filing (or other non-possessory means) despite the debtor’s ongoing use of collateral.

This reflects a shift from the old idea that such latitude made a lien fraudulent, to a modern rule that such liens are legitimate so long as proper notice has been given to the world.

6. Continuation of Lien in Proceeds (UCC Article 9-315)

A floating lien is also facilitated by the UCC’s rules on proceeds. Under UCC Article 9-315(a)(1), when collateral is sold, leased, exchanged, or otherwise disposed of by the debtor, the security interest continues in that collateral notwithstanding the disposition, unless the secured party authorised the disposition free of the security interest​.

This means that, except for authorised sales (or sales that are protected by other provisions of law), the lien attaches to the collateral even after it changes hands.

Moreover, UCC 9-315(a)(2) provides that the security interest automatically attaches to any identifiable proceeds of the collateral​.

“Proceeds” generally include whatever is acquired upon the disposition of the original collateral. For example, if inventory subject to a security interest is sold for cash, the cash (or the deposit account in which it is deposited) is identifiable proceeds to which the security interest now attaches; if the inventory is sold on credit, the resulting account receivable is proceeds and likewise subject to the lien.

This automatic attachment to proceeds is crucial: it allows the secured creditor’s claim to follow the value of the collateral as that value is transformed from one form to another.

The combined effect of these rules is that a secured party’s interest will normally carry through a sale by the debtor – it either remains with the original collateral (unless the buyer is protected under a specific rule) or shifts to the proceeds that the debtor receives.

As a practical illustration, consider a manufacturer with a floating lien on its raw materials and finished goods. When the manufacturer sells a finished product to a customer, Article 9’s buyer-protection rule (discussed next) ensures that the buyer takes the product free of the lender’s lien.

However, the lender’s lien is not extinguished; it continues in the receivable or cash generated by the sale. If the manufacturer then uses that cash to buy new raw materials, the lien will typically extend to the new inventory as well – either as proceeds of the original collateral or by virtue of the after-acquired property clause.

In this way, the floating lien “rolls over” continually, attaching to whatever replaces the disposed-of collateral. UCC 9-315’s proceeds provision is thus a critical component of the floating lien concept, enabling the secured party to maintain coverage as the debtor’s assets turn over in commerce.

7. Buyers in the Ordinary Course of Business (UCC Article 9-320)

One important limit on a secured party’s rights arises when the debtor sells goods to a buyer in the ordinary course of business.

UCC Article 9-320(a) provides that a buyer in ordinary course of business takes the goods free of any security interest created by the seller, even if that security interest is perfected and even if the buyer knows of its existence​.

This rule typically protects customers who purchase goods from a business engaged in selling those goods in the ordinary course (for example, buying inventory from a retailer or purchasing equipment from a dealer).

The buyer in the ordinary course of business rule ensures that everyday commercial transactions are not encumbered by secret liens. A person buying a product from a merchant does not need to investigate the merchant’s financing arrangements to be confident of obtaining clear title.

By operation of law, the buyer in ordinary course cuts off the seller’s secured lender’s interest in the sold item. Thus, in the previous example, when the manufacturer sells its finished product to a customer, the customer (as a buyer in ordinary course) takes the product free of the manufacturer’s floating lien.

The secured creditor’s remedy is to look to the proceeds of the sale, not the product in the customer’s hands.

UCC 9-320 is crucial in this respect – it allows businesses to sell inventory to their customers free and clear of any blanket liens, thereby preserving the liquidity of commerce and the debtor’s ability to generate revenue.

The floating lien lender’s protection, in turn, is the automatic attachment of the lien to the proceeds of those inventory sales (per UCC 9-315), rather than to the goods themselves once they enter the hands of buyers.

8. Purchase-Money Security Interests (PMSIs) and the Floating Lien

Another key feature of Article 9’s priority scheme is the special priority afforded to purchase-money security interests (PMSIs).

A Purchase Money Security Interest arises when a creditor extends credit that is used to acquire an asset, and the creditor takes a security interest in that asset to secure the purchase price or acquisition loan.

Common examples include a supplier selling goods to the debtor on credit (retaining a security interest in the goods sold), or a lender financing the debtor’s purchase of new equipment (taking a security interest in the purchased equipment).

Article 9 incentivises such transactions by giving the PMSI creditor priority over earlier floating liens in the same collateral, as long as certain conditions are met.

Without a PMSI priority rule, an earlier blanket lien could discourage others from extending credit for new acquisitions by the debtor​.

For instance, if a debtor’s inventory is already subject to a bank’s floating lien, any supplier might fear that its own interest in goods sold on credit to the debtor would be junior to the bank’s interest, making it risky to sell on credit.

The UCC addresses this concern by allowing a properly perfected PMSI to take super-priority over a prior perfected security interest in the same goods.

In general, a PMSI in equipment will trump an earlier-filed security interest if the PMSI is perfected (usually by filing a financing statement) within 20 days after the debtor receives the equipment.

In the case of inventory, which turns over quickly, the PMSI holder must not only perfect before the debtor receives possession of the inventory, but also give an authenticated advance notice to the holder of the conflicting security interest (the floating lien) stating that a PMSI is expected in that inventory​.

If these requirements are met, the PMSI in the new inventory will have priority over the earlier floating lien in those items.

The PMSI priority is a narrow but important exception that balances the interests of existing and new creditors. It ensures that debtors can acquire new assets (stocking inventory or purchasing equipment) using secured credit, notwithstanding an existing blanket lien.

The floating lien creditor is not left unprotected – it remains secured in the debtor’s other assets and in any collateral where a PMSI creditor fails to perfect or give notice properly – but it must yield in the specific assets subject to a PMSI that complies with Article 9’s conditions.

By carving out this special priority, Article 9 encourages the flow of fresh credit for asset acquisition, which ultimately benefits the debtor’s business (by enabling growth) and can increase the pool of assets available to all creditors (by allowing the debtor to continue operations and generate revenue even when a blanket lien exists).

9. Conclusion

The evolution of floating liens from a mistrusted concept to a bedrock of modern secured lending demonstrates the adaptability of commercial law.

UCC Article 9 provides a comprehensive framework that legitimises floating liens and makes them effective and predictable, thereby facilitating asset-based financing for businesses.

Through provisions that authorise after-acquired property clauses, secure future advances, permit the debtor’s ongoing use of collateral, and extend security interests to proceeds, Article 9 ensures that a secured creditor can maintain a continuous claim on a dynamic pool of assets.

Crucially, this law is balanced by protections for others – from the notice function of the filing system (alerting potential creditors to the floating lien) to priority exceptions for buyers in the ordinary course and purchase-money lenders – so that the recognition of floating liens does not unduly stifle commerce or access to new credit.