
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: July 10, 2025
Counsel
212-286-0747 dbrecher@sh-law.comUsing chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement of these documents.
The term “chattel” refers to movable personal property. Common examples include vehicles, equipment, and computers. Chattel property can also include intangible property, such as leases, financial assets, trademarks, copyrights, and patents.
In basic terms, what is chattel paper? It’s a legal record evidencing both a monetary obligation and a security interest in specific goods. For instance, when you purchase a car, these documents record a buyer’s obligation to pay for the vehicle over time. They also record the corresponding seller’s interest to keep certain rights to the car until the buyer completes the payment.
These security documents can play a key role in commercial loans. They allow sellers/lenders to finance sales of personal property while mitigating their risk. By retaining a security interest in the goods, lenders/sellers have a clear and enforceable way to recover the debt if the buyer defaults. In the event of a default, the lender can seize the collateral outlined in the documentation. They can then sell it to recover the outstanding debt. For buyers, these financing tools can also be advantageous. They facilitate access to financing that may not otherwise be available. Commercial real estate law principles often apply to similar financing arrangements involving secured transactions.
Monetary Obligation: The first component outlines the terms of the loan, lease, or other financial arrangement. This typically includes the principal amount, interest rate, repayment schedule, and other relevant details.
Security Interest or Lease: The second part of the document establishes the lender’s or lessor’s security interest. This interest applies to the underlying personal property asset. Provisions typically describe the chattel, the terms of the security agreement or lease. They also describe the rights and obligations of the parties involved.
Transactions involving these security instruments are governed by Article 9 of the Uniform Commercial Code (UCC) and any applicable state laws. As currently defined in UCC §9-102(a)(11), chattel paper means a “record or records that evidence both a monetary obligation and a security interest in specific goods.” This includes specific goods and software used in the goods. It also includes specific goods and license of software used in the goods, a lease of specific goods. It includes a lease of specific goods and license of software used in the goods.
Commercial debts are frequently bought and sold, and these instruments are no exception. When the documents are transferred, the new holder acquires the rights to enforce the underlying obligation. This includes the ability to seize the collateral in the event of default.
These instruments are typically transferred to third parties through assignment. The assignee receives the right to collect payments under the monetary obligation. They also receive the right to enforce the security interest in the specific goods outlined in the documentation. By subsequently perfecting their interest, lenders can establish their priority over other claimants. This is particularly important in the event of a dispute or bankruptcy. Understanding bankruptcy trends can help businesses navigate priority issues and creditor rights in commercial financing arrangements. Tangible documents are often delivered to the assignee. However, they may also be left in the hands of the assignor for collection. In such cases, the UCC allows the assignee to perfect its security interest by filing. Alternatively, the assignee may perfect by taking possession/control.
While these documents were initially only in physical form, electronic versions are increasingly common in today’s high-tech world. Electronic chattel paper is a record or legal document evidencing a security interest in personal property. It is stored or transmitted electronically rather than in physical form. It is often preferred over traditional versions because it streamlines the process. This process includes creating, transferring, and tracking security interests. Breach of contract enforcement becomes important when parties fail to meet their obligations under these security agreements.
Amendments to the UCC specifically address the use of these papers in electronic form. Pursuant to UCC § 9-105, a secured party has control of electronic versions under specific conditions. This occurs if a system employed for evidencing the transfer of interests reliably establishes the secured party. The system must establish them as the person to which the documents were assigned.
A system satisfies the above if the record or records comprising the documentation are created, stored, and assigned in such a manner that:
A single authoritative copy of the record or records exists which is unique, identifiable and unalterable. This applies except as otherwise provided in paragraphs (4), (5), and (6).
The authoritative copy identifies the secured party as the assignee of the record or records.
The authoritative copy is communicated to and maintained by the secured party or its designated custodian.
Copies or amendments that add or change an identified assignee of the authoritative copy can be made only with the consent of the secured party.
Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy. This copy is not the authoritative copy.
Any amendment of the authoritative copy is readily identifiable as authorized or unauthorized.
Scarinci Hollenbeck routinely helps businesses and lenders navigate secured transactions, including those involving chattel paper. Whether drafting financing documents or enforcing a security interest, our financing attorneys are dedicated to delivering practical legal services. We provide cost effective legal services of the highest quality. Understanding what is chattel paper and its applications can help protect your business interests in complex financial transactions.
Contact Scarinci Hollenbeck today to discuss your financing and secured transaction needs with our experienced legal team.
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