UCC Article 9-208 Analysis and Commentary: Additional Duties of Secured Party Having Control of Collateral
1. Introduction
UCC Article 9-208 outlines specific obligations of a secured party when it has control of certain types of collateral and the underlying secured obligation has been satisfied.
This section ensures that once a secured debt is paid off, the secured party promptly relinquishes control over the collateral, restoring the debtor’s full rights.
UCC 9-208 is technical and precise, addressing various forms of collateral such as deposit accounts, electronic chattel paper, investment property, and letter-of-credit rights.
2. Applicability: No Outstanding Secured Obligation (Subsection (a))
Subsection (a) defines when UCC 9-208 applies. It states that the section’s duties become relevant only in cases where “there is no outstanding secured obligation and the secured party is not committed to make advances, incur obligations, or otherwise give value.”
In simpler terms, this means the debtor’s obligation to the secured party has been fully satisfied, and the secured party has no further commitment to extend credit or value under the security agreement.
If any part of the secured debt remains unpaid, or if the secured party is still obligated to extend further funds or value, UCC 9-208 does not yet apply.
The duties outlined in this section are therefore only triggered after the secured transaction has effectively concluded with nothing owed and nothing more to be advanced.
By limiting its application to the scenario of no outstanding obligation, subsection (a) ensures that the duties to relinquish control of collateral do not interfere with an ongoing secured relationship.
Only when the secured party’s interest in the collateral is no longer needed for any current or future obligation does UCC 9-208 impose the requirement to take the actions described in the following subsections.
3. Debtor’s Demand and Ten-Day Response Period
Under Subsection (b), the duties of the secured party are triggered by a formal request from the debtor. The statute specifies that “within 10 days after receiving an authenticated demand by the debtor,” the secured party must take certain actions to release control of the collateral.
An “authenticated demand” refers to a signed or otherwise verified request from the debtor in a record that meets the UCC’s standards for authentication.
Essentially, the debtor must send a proper demand, and upon receipt, the clock starts running for the secured party’s response.
The ten-day period is a strict timeline in which the secured party must comply with the enumerated duties. This is a relatively short window, underscoring the statute’s intent that the secured party act promptly to remove any lingering control over the collateral once the debt is resolved.
Each specific duty listed in UCC 9-208(b) corresponds to a particular type of collateral over which a secured party might have control. We will examine each in turn.
4. Duties Regarding Deposit Accounts
One of the key collateral types addressed by UCC 9-208 is deposit accounts (such as bank accounts used as collateral in a secured transaction). Article 9 provides that a secured party can obtain control of a deposit account as a method of perfecting its security interest.
According to UCC Article 9-104, there are a few ways a secured party can have control of a deposit account.
UCC 9-208(b) deals with two of those scenarios (it notably does not explicitly address the scenario where the secured party is itself the bank maintaining the account under UCC 9-104(a)(1), focusing instead on the other methods of control):
4.1 Control via Agreement with the Bank (UCC Article 9-104(a)(2))
In this scenario, the debtor, secured party, and the bank have entered into a control agreement in which the bank agrees to follow the secured party’s instructions regarding the funds in the account.
Under UCC 9-208(b)(1), if the secured party had control of a deposit account pursuant to such an agreement, the secured party must, within ten days of the debtor’s authenticated demand, send an authenticated statement to the bank informing it that the bank is released from any further obligation to comply with instructions originated by the secured party.
In effect, this duty terminates the control agreement: the bank is formally notified that it no longer needs to honor the secured party’s directives concerning the account.
This frees the bank to deal with the account solely as directed by the debtor (or as otherwise entitled) going forward, since the secured party’s interest has concluded.
4.2 Control by Becoming the Account Holder (UCC Article 9-104(a)(3))
In this scenario, the secured party obtained control by becoming the customer on the deposit account.
Under UCC 9-208(b)(2), if the secured party obtained control of the deposit account by becoming the account holder, it must (within ten days of the debtor’s demand) return all funds to the debtor.
The secured party has two options: either pay the debtor the full balance on deposit or transfer the balance into an account in the debtor’s name.
In either case, the debtor regains full control of the funds, and the secured party no longer holds any of the money or title to the account.
By addressing these two methods of control over deposit accounts – UCC Article 9-304, UCC Article 9-208(b)(1) and (b)(2) ensure that whether control was achieved via an agreement or by the secured party actually holding the account, the end of the secured obligation will result in the debtor regaining uninhibited access to the account funds.
5. Duties Regarding Electronic Chattel Paper
Electronic chattel paper is chattel paper stored in an electronic medium. Under Article 9, a secured party has control of electronic chattel paper (as defined in UCC Article 9-105) when the record is managed such that a single authoritative copy exists and the secured party is designated as the assignee of that copy with power to control it.
According to UCC 9-208(b)(3), if a secured party (other than a buyer) has control of electronic chattel paper, it must perform three actions within the ten-day period to relinquish control upon the debtor’s demand:
- Communicate the authoritative copy of the electronic chattel paper to the debtor or to a custodian designated by the debtor, thereby handing over possession/control of the record to the debtor’s side.
- If the debtor’s designated custodian is the same party that had been holding the authoritative copy for the secured party, send an authenticated record to that custodian releasing it from any further obligation to follow the secured party’s instructions and instructing it to follow the debtor’s instructions instead.
- Take appropriate action to enable the debtor (or its custodian) to make copies of or revisions to the authoritative copy, including changing any identified assignee on the record, without the secured party’s consent.
By completing these steps, the secured party removes itself entirely from control of the electronic chattel paper, allowing the debtor to manage and transfer that electronic record freely going forward.
6. Duties Regarding Investment Property under UCC 9-208
Investment property under Article 9 refers to certain financial assets (such as securities accounts and commodity contracts).
A common method for a secured party to achieve control of investment property is through an agreement with a securities intermediary or commodity intermediary in which the intermediary agrees to comply with the secured party’s instructions regarding the asset (pursuant to UCC 8-106, UCC 9-106 and UCC 9-305).
UCC 9-208(b)(4) applies when a secured party has control of investment property through an agreement with a securities intermediary or commodity intermediary (as described in UCC 8-106(d)(2) or UCC 9-106(b)).
In this case, the secured party must send an authenticated record to the intermediary releasing it from any further obligation to comply with the secured party’s entitlement orders or directions concerning the account.
This notification means the intermediary will no longer honor instructions from the secured party and will revert to taking instructions solely from the debtor (the account holder). Once this release is delivered within the ten-day window, the account effectively returns to the debtor’s sole control.
This duty is analogous to the deposit account control agreement scenario—both involve formally informing a third-party institution that the secured party’s authority over the collateral has ended.
7. Duties Regarding Letter-of-Credit Rights under UCC 9-208
A letter-of-credit right refers to a beneficiary’s right to payment or performance under a letter of credit. Under UCC Article 9, control of a letter-of-credit right (as defined in UCC Article 9-107) is achieved when the issuer or nominated person consents to an assignment of proceeds of the letter of credit to the secured party.
When there is no longer any outstanding secured obligation and the debtor requests it, UCC 9-208(b)(5) provides that if a secured party has control of a letter-of-credit right, it must send an authenticated release to each person who has an obligation to pay or deliver proceeds of the letter of credit to the secured party.
In other words, the secured party notifies the letter-of-credit issuer or any nominated paying agent that they are released from any further obligation to pay or deliver the letter-of-credit proceeds to the secured party.
After this notice, those parties will no longer treat the secured party as the payee under the letter of credit.
The right to payment under the letter of credit reverts fully to the debtor (the original beneficiary), since the secured party’s claim to the proceeds has been terminated.
8. Conclusion
In summary, UCC Article 9-208 provides a precise roadmap for a secured party to relinquish control of collateral once the secured obligation is fulfilled.
It enumerates specific actions for each type of collateral under the secured party’s control—such as sending notices of release or transferring funds or records—all with the aim of promptly restoring the debtor’s full rights.
In essence, when the debt is paid and the debtor makes an authenticated demand, the secured party must swiftly remove itself from controlling the collateral.
This ensures the debtor regains unfettered dominion over the property and that the secured transaction is formally and conclusively wrapped up in accordance with the statute.
