UCC Article 9-105 Analysis and Commentary: Control of Electronic Chattel Paper
1. Overview of UCC Article 9-105: Control of Electronic Chattel Paper
UCC Article 9-105 is a section of the UCC Article 9 that defines what it means for a secured party to have control of electronic chattel paper.
Article 9 of the UCC governs secured transactions (transactions involving security interests in personal property), and UCC Article 9-105 specifically addresses how electronic chattel paper can be controlled by a secured party.
In essence, because electronic records cannot be physically possessed like tangible documents, this provision establishes a legal standard for control as the functional equivalent of possession
By setting out clear criteria, Article 9-105 ensures that electronic chattel paper can be used as collateral under the same principles of certainty and exclusivity that apply to traditional (tangible) chattel paper.
2. Key Definitions under UCC Article 9-105: Control Of Electronic Chattel Paper
Understanding Article 9-105 requires familiarity with several key terms defined in Article 9 and related UCC provisions:
2.1 Chattel Paper
Chattel paper generally refers to a record or records evidencing both a monetary obligation and either a security interest in specific goods or a lease of specific goods.
In practice, chattel paper typically consists of a promissory note (or other obligation to pay) combined with a security agreement or lease concerning goods (for example, a car loan agreement that includes a security interest in the car).
2.2 Electronic Chattel Paper
Electronic chattel paper is simply chattel paper stored in an electronic medium rather than in tangible form.
In other words, if the chattel paper (the monetary obligation plus interest in goods) is represented by electronic records (such as a digital contract or electronic file) rather than a physical writing, it is electronic chattel paper.
The UCC Article 9-102 (31) defines electronic chattel paper as chattel paper evidenced by information stored in an electronic medium.
2.3 Secured Party
A secured party is the person or entity in whose favour a security interest is created or provided for under a security agreement.
In the context of Article 9-105, the secured party is the creditor or lender that claims a security interest in the electronic chattel paper.
2.4 Record under UCC Article 9-105
The term record in the UCC Article 9-105 means information that is inscribed on a tangible medium or stored in an electronic or other medium, and which is retrievable in perceivable form.
Both tangible and electronic chattel paper consist of one or more “records” (written or electronic documents) that evidence the relevant obligation and interest.
2.5 Authoritative Copy
Although not a separately defined term in the statute, UCC Article 9-105 introduces the concept of an authoritative copy of an electronic record.
The authoritative copy is the unique, identifiable version of the electronic chattel paper that is deemed the controlling record for determining who has rights in the chattel paper. All other copies are distinguished from this authoritative copy.
3. Scope of UCC Article 9-105
UCC Article 9-105 applies specifically to the control of electronic chattel paper. It does not address tangible chattel paper (which is governed by the concept of possession rather than control) or other types of collateral; those are covered by separate provisions (for example, deposit accounts are covered by UCC 9-104, and investment property by UCC Article 9-106).
The scope of UCC Article 9-105 is limited to defining how a secured party can establish control over electronic chattel paper for purposes of the UCC.
In practical terms, Article 9-105 comes into play whenever a secured party takes a security interest in chattel paper that is in electronic form.
By delineating what “control” means in this context, the provision ensures that electronic chattel paper can be used as collateral with legal clarity, just as tangible chattel paper is used.
Notably, Article 9-105’s criteria are technology-neutral: it does not prescribe a particular software or system, but rather sets functional requirements that any system must meet.
This allows the marketplace to develop various systems or platforms for handling electronic chattel paper, as long as they achieve the reliable control outlined in the statute
The article’s rules are part of the uniform law adopted by U.S. states, meaning that the definitions and standards for control of electronic chattel paper are consistent across jurisdictions that have enacted the Revised Article 9.
4. General Rule for Control of Electronic Chattel Paper
Subsection (a) of UCC Article 9-105 provides the general rule defining control. It states that a secured party has control of electronic chattel paper if the system used to evidence the transfer of interests in the chattel paper “reliably establishes the secured party as the person to which the chattel paper was assigned.”
In simpler terms, the secured party is considered to be in control of the electronic chattel paper when the electronic system or registry holding the records unequivocally indicates that the secured party is the current assignee or owner of the rights in that chattel paper.
This general standard is intentionally broad, focusing on the outcome (reliably establishing the secured party as the assignee) rather than mandating a specific technical method.
The core idea is that the electronic chattel paper must be managed in such a way that there is confidence that the secured party’s claim to it is exclusive and reliably recognised.
If the system holding the electronic record can be trusted to show who the rightful holder/assignee is at any given time — and it shows the secured party in that position — then the secured party has control under subsection (a).
4.1 Specific Requirements for Establishing Control
Subsection (b) of UCC Article 9-105 sets out a series of specific criteria that, if all satisfied, provide a safe harbour for meeting the general standard of control in subsection (a).
In other words, these are the conditions under which a secured party definitively has control of the electronic chattel paper.
The UCC requires that the electronic records comprising the chattel paper be created, stored, and assigned in such a manner that the following conditions are met:
- Single Authoritative Copy: There exists a single authoritative copy of the electronic record(s) that is unique, identifiable, and (with certain narrow exceptions) unalterable. This means there is one primary version of the electronic chattel paper that is distinguished from all others and cannot be changed inadvertently.
- Secured Party Identified as Assignee: The authoritative copy identifies the secured party as the assignee (the person to whom the chattel paper is currently assigned). In other words, the record itself shows that it is pledged to or held by the secured party.
- Maintained by the Secured Party or Custodian: The authoritative copy is communicated to and maintained by the secured party (or its designated custodian). This ensures the secured party has control over the location and access of the primary record.
- Exclusive Power to Modify Assignee: Any copies or revisions of the authoritative record that would add or change an identified assignee can be made only with the secured party’s participation or consent. This requirement guarantees that the secured party’s interest cannot be transferred or altered without its agreement, preventing unauthorised changes of who is shown as assignee.
- Distinguishable Copies: Every copy of the authoritative copy (and any copy of such a copy) is readily identifiable as a non-authoritative copy. This means it is clear which version is the controlling copy and which are just duplicates, so there is no confusion over who has control.
- Identifiable Revisions: Any revision of the authoritative copy is readily identifiable as authorised or unauthorised. Thus, if someone attempts to alter the main record, the system will flag whether the change was made with proper authority, preserving the integrity of the collateral.
If a system for managing electronic chattel paper meets all of the above criteria, then under subsection (b) it definitively satisfies the general rule in subsection (a) for control.
These detailed requirements ensure that the secured party’s claim to the electronic chattel paper is secure: only one digital original exists, it names the secured party, and no one can change that fact or create a conflicting “original” without the secured party’s involvement.
Essentially, this framework replicates the certainty of holding a physical original document by creating the concept of a unique authoritative electronic record.
It is important to note that the statute’s wording (“a system satisfies subsection (a) if…”) indicates that this list is a sufficient condition for control. In other words, if these conditions are met, the secured party unquestionably has control.
The UCC drafters left open the possibility that other robust systems might also achieve the reliable establishment of the secured party as assignee (fulfilling subsection (a) even if not exactly in this format), but the six-point test in subsection (b) serves as a clear safe harbour.
This approach provides flexibility for modern technologies while giving parties a concrete standard to rely on.
4.2 Implications of Having Control under Article 9-105
Obtaining control of electronic chattel paper under UCC Article 9-105 carries several important legal implications within Article 9’s framework:
4.2.1 Enforceability (Attachment)
Control can satisfy the requirement of an authenticated security agreement for the security interest to attach in the electronic chattel paper.
In other words, a secured party’s control of the electronic record can serve as the functional equivalent of the debtor signing a security agreement, making the security interest enforceable against the debtor once value is given and the debtor has rights in the collateral.
4.2.2 Perfection of Security Interest
Control is a recognised method of perfecting a security interest in electronic chattel paper. Under UCC Article 9-105, a security interest in electronic chattel paper may be perfected by obtaining control of the electronic record, as an alternative to perfection by filing a financing statement.
This means that once the secured party has control (as defined by Article 9-105), its interest in the chattel paper is perfected and effective against third parties.
4.2.3 Priority in Collateral
Having control can confer priority advantages. Article 9 provides that a secured party with control of electronic chattel paper may obtain a special, non-temporal priority over other security interests in the same collateral.
This is analogous to the priority given to a holder of tangible chattel paper who takes possession in good faith. For example, UCC Article 9-105 gives a secured party who obtains control of electronic chattel paper and meets certain conditions priority over an earlier-filed security interest lacking control.
In practical effect, control under Article 9-105 is treated as the functional equivalent of possession of tangible chattel paper for priority purposes.
5. Conclusion
By clearly defining control, UCC Article 9-105 facilitates the use of electronic chattel paper in secured lending and other commercial financing arrangements without sacrificing the legal protections traditionally afforded by possession of paper documents.
A secured party who complies with this section can be confident that its interest in the electronic collateral will be recognised and protected under the law to the same extent as if it held an original paper document.
