Written by attorneys · grounded in primary & secondary sources — see below
A person that becomes bound as debtor under Section 9-203(d) by a security agreement previously entered into by another person. The new debtor assumes the original debtor's obligations under the security agreement and succeeds to substantially all of the original debtor's assets. This binding occurs by operation of law or by contract such as a merger or asset acquisition.
Sources & Authorities
How it applies
Common Examples
2
Priority Dispute After Corporate Acquisition
Nightingale Healthcare acquired all assets of Premier Wellness and assumed its loan obligations to Oak Health under the original security agreement. Nightingale then granted Federal Wellness a security interest in the same imaging equipment and filed a financing statement naming Nightingale as debtor. Oak Health never filed against Nightingale and relied solely on its original filing against Premier Wellness. Federal Wellness's interest takes priority over Oak Health's because Oak Health's filing is effective against Nightingale only by operation of the new debtor rules.
Sole Proprietorship Incorporates
Randy Vincent operated Summit Staffing as a sole proprietorship and granted a lender a security interest in business assets. Vincent later incorporated as Summit Staffing of Polk County, Inc., which assumed all obligations of the sole proprietorship and acquired substantially all of its assets. The corporation became bound as a new debtor under the original security agreement. The lender's security interest attached to the corporation's existing and after-acquired property without any new agreement.
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Test Yourself
9
Practice Questions5
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In re Summit Staffing Polk County, Inc.305 B.R. 347 (Bankr. M.D. Fla. 2003)
Common questions
Frequently Asked
3
How does a person become a new debtor?+
A person becomes a new debtor when it becomes bound as debtor under Section 9-203(d) by a security agreement previously entered into by another person. This occurs by operation of law other than Article 9 or by contract when the security agreement becomes effective against the person's property or when the person becomes generally obligated for the other person's obligations and acquires substantially all of its assets.
Supporting sources
What is the priority consequence when a new debtor grants a security interest?+
Under UCC § 9-326(a), a security interest created by a new debtor that is perfected solely by a filing effective only because of Section 9-508 is subordinate to a security interest in the same collateral perfected by another method. The general priority rules of Part 3 determine ranking among conflicting interests perfected by such filings.
Supporting sources
Does the original security agreement remain effective against the new debtor?+
Yes. When a new debtor becomes bound, the original security agreement satisfies the authentication requirement for existing and after-acquired property of the new debtor to the extent described in the agreement. No new security agreement is required for attachment.
Supporting sources
Real PropertyMortgages and foreclosure · Mortgages and deeds of trustNEXTGENFoundational