#9 - Interpreting Security Agreements; Collateral Descriptions; After-Acquired Property Flashcards
Collateral Descriptions in Security Agreements
These are the specific rules for describing the collateral in a security agreement (which is necessary for attachment to succeed). NOT same as for financing statements.
Rule: You need a description of collateral in the security agreement to have valid attachment. The general rule in 9-108 is that a description of collateral is legit if it reasonably identifies what you’re talking about. It’s a low standard that leaves flexibility and includes safe harbors
UCC 9-108, 9-203, and 9-204
9-203(b)(3)(A): requires description for attachment purposes
9-108(a): description sufficient if “reasonably identifies” the collateral
9-108(b): permits specific listing, category, UCC category, quantity, formula, any description that makes collateral “objectively determinable”
NO OMNIBUS/SUPERGENERIC DESCRIPTIONS: under 9-108(c), can’t say “all assets” or “the debtor’s stuff”. That’s too generic because it encompasses all collateral descriptions. You can, however, say “the debtor’s inventory” and use those UCC categories.
Policy Behind Avoiding Omnibus Descriptions: the idea is that debtors should realize the gravity of all the stuff they are giving up security interests in, so if the creditor has to spell it out a bit more specifically, maybe the significance of the loss will stick in the debtor’s mind.
9-108(e): No “commercial tort claims” or “consumer goods”. You could still take a security interest in them, but can’t grant a blank security interest in all consumer goods or all tort claims. Must describe your particular car or fridge or toaster etc.
9-204: makes it okay to grant sec ints in after-acquired property and dragnet clauses (future advances of money to be secured by the same collateral)
Dragnet Clause
Secures any and all debt that you owe even for future advances later on as applied to the previous collateral item.
In other words: collateral given to secure one loan from a lender to a borrower also secures other obligations of the borrower to the same lender.
Describing After-Acquired Property
After-Acquired Property = A type of property acquired after the security agreement has already been made. Via 9-204, the security agreement can include these and still have security interests attach despite the fact they are acquired later on by the debtor.
Majority: security agreement does not need to include after-acquired property language for accounts (accounts receivable) and inventory. Stoumbos v. Kilimnik.
Example: security interest in “all inventory” incorporates after-acquired inventory too.
The problem here was that if you forgot to include the words “after acquired” you would just get secured in the current accounts receivable which turns over too fast to be helpful so no one would ever really do that, and therefore never intended it. So it’s kind of a presumption that the creditor meant to include AAP for inventory or accounts receivable.
For anything that ISN’T accounts receivable or inventory, you NEED language for “after acquired” property. Like for equipment and after-acquired equipment.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Goods” (44)
Goods (44) = tangible personal property. This is a broader umbrella term including: inventory (48), farm products (34), consumer goods (23), and equipment (33)
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Inventory” (48)
Inventory (48) = the stuff you find for sale at a store. Could also be stuff that’s leased, like a car at a car dealer. Either way, whether it’s sold or leased, it’s still inventory of the car dealer because they routinely deal in that type of good, thus making it inventory for that debtor’s purposes.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Farm Products” (34)
Farm Products (34) = Mostly crops and livestock.
These are also goods (tangible personal property) other than timber in which the debtor is engaged in farming (farm products only held by farmers). This includes crops (growing, grown, or to be grown) including those produced in trees, vines, bushes, aquatic goods in aquaculture operations, includes livestock born or unborn, includes supplies used or produced in farming operations.
Could get more granular than farm products: “only crops” or “only livestock”.
Farm product supplies includes fertilizers.
These things only count as farm products in the hands of debtor FARMERS. FARMERS ONLY
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Consumer Goods” (23)
Consumer Goods (23) = Tangible personal property for personal, family, or household uses. That’s basically every single thing you own.
Your laptop, car, clothes, shoes; all are consumer goods. The tangible personal property for household use, all consumer good. You can’t really do a lot of borrowing with your consumer goods because there is a federal rule that prevents you from granting a security interest over many of your consumer goods, excluding things like cars (which is why that’s pretty much the only thing we engage in secured transactions with as people) outside of your house.
Remember, for Target, the scented candle is inventory, but for you, it’s a consumer good.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Equipment” (33)
Equipment (33) = Think of it as tangible personal property you use in the everyday course and scope of your business. Goods other than inventory, farm products, or consumer goods. It’s basically a catchall for stuff other than those things.
2 Oddities Among Goods Descriptions
2 instances where Art 9 lets you collateralize something that technically is considered real estate but art 9 pretends its personal property:
1) crops while still in ground and
2) standing timber.
Crops while in the ground technically still real estate but Art 9 lets us collateralize them
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Instruments” (47)
Instrument (47) = means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement
Example: Checks and promissory notes are both instruments.
The term does not include (i) investment property, (ii) letters of credit, (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card, or (iv) writings that evidence chattel paper.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Chattel Paper” (11)
Chattel Paper (11) = Very rare. It’s a document that evidences a monetary obligation to pay money. But narrower than that.
Combination of two things:
(1) document/record that evidences a monetary obligation.
(2) document/record that evidence a security interest in a particular good.
Security agreements count. A promissory note and security agreement together are “chattel paper”. Leases can also be chattel paper.
Commonly seen with car dealerships where the dealer gave a security interest in its inventory to a supplier, but once that car is sold, and the consumer gives a security interest in that car to the dealership (in the form of security agreement and promissory note) those 2 docs together become “chattel paper” in the hands of the supplier who now has a security interest in that combo of promissory note + security interest. This is called “piggybacking”.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Investment Property” (49)
Investment property (49) = stocks, bonds, interests in companies, and commodities.
Includes SECURITIES, whether certificated or uncertificated, including securities ACCOUNTS and COMMODITY contracts and commodity accounts.
The form that the investment property takes is relevant later on with perfection issues.
Remember, an investment is not personal property because it is intangible.
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Documents” (30)
Documents (30) = These are narrow. It’s really DOCUMENTS OF TITLE. What are these? “Warehouse Receipts” (involved in farming) and “Bills of Lading” (involved in shipping, basically the deed to the goods while in transit).
UCC Art 9 Collateral Descriptions defined at UCC 9-102(a): “Accounts” (2)
Accounts (2) = accounts receivable. The right to demand payment of a monetary obligation not evidence by a document (because that would make it a promissory note, which is an instrument (or potentially also chattel paper).
The account receivable is created in connection with a sale or lease of good or provision of services.
