Lien to secure debt of another

     In a typical consensual secured transaction, the person obligated on a debt is the same person who has rights in, and grants a security interest in, the collateral. But this is not always the case. One person who has rights in property, whether real or personal property, may be willing to grant a lien on its property to secure the obligation of another.  Suppose for example that a privately held corporation seeking to expand its small business approaches bank for a loan. The bank is willing to lend to the corporation if secured by equipment of the corporation and if additionally secured by 500 shares of stock in I.B.M. owned by the sole stockholder of the corporation.  If the sole shareholder grants a lien on the I.B.M. stock, only the corporation is liable on the debt, unless the shareholder also executes a personal guarantee of the debt.   Absent such a guarantee, if the corporation defaults in repayment, the lender may foreclose both on the equipment owned by the corporation and on the I.B.M. stock, but may not assert any personal liability of the shareholder.

     Article 9 makes these distinctions clear by its definitions of "debtor" (U.C.C. 9-102(a)(28)), "obligor" (U.C.C. 9-102(a)(59)), and "secondary obligor" (U.C.C. 9-102(a)(71)).    In the example above, the corporation would be both a debtor and an obligor and, absent a guarantee, the sole shareholder would be a debtor.  If the sole shareholder also gave a guarantee, it would be both a debtor and a secondary obligor.  These distinctions become critical when applying other provisions of Article 9.   For example, to decide which state law to apply to determine how to perfect a security interest in collateral U.C.C. 9-301 requires that the secured party determine the location of the debtor and U.C.C. 9-307 tells it how to determine that location.  In the example above both the corporation and the sole shareholder are debtors.  If the corporate debtor is incorporated in the State of California and the shareholder debtor resides in Oregon, the secured party should consult California law to determine how to perfect the security interest in the corporate equipment and should consult Oregon law to determine how to perfect the security interest in the I.B.M. stock.  Or suppose that the corporation defaults in repayment of the loan and the bank first obtains possession of and sells the corporate equipment.  Suppose further that the sale of the equipment does not net sufficient proceeds to satisfy the obligation and the bank therefore obtains possession of and sells the I.B.M. stock.  If the proceeds of the sale of the I.B.M. stock are more than sufficient to satisfy the remaining obligation, the bank must remit the surplus proceeds to the shareholder debtor, but if the proceeds of the sale are insufficient to satisfy the remaining obligation, the bank may pursue only the obligor for the deficiency.  See U.C.C. 9-615(d).  The sole shareholder will be a secondary obligor, and hence an obligor liable for a deficiency, only if it guaranteed payment of the obligation. 

     One finds the same concepts in real property secured transactions without comparable statutory definitions.