Attachment

Question 1

What is attachment?

Answer 1

An arrangement linking a debt to a particular piece of collateral

Question 2

What does it mean for a security interest to have “attached” to collateral?

Answer 2

The security interest is enforceable against the debtor

Question 3

What are the conditions for a security interest to be enforceable against a debtor?

Answer 3

• Value has been given by the secured party
• The debtor has rights in the collateral
• There is a security agreement where:
  
  • The agreement is authenticated and describes the collateral, or
  • The secured party has possession or control of the collateral pursuant to an oral or unauthenticated security agreement

UNLESS there is an agreement to postpone the time of attachment

Mnemonic: Violet Roses Smell Amazing

Question 4

True or False: The secured party must give value for the security interest.

Answer 4

True

Question 5

Can value be given by providing the same consideration needed for a contract?

Answer 5

Yes

Question 6

Can value be a binding commitment to extend credit?

Answer 6

Yes

Question 7

Can a security agreement provide that collateral secures future advances?

Answer 7

Yes

Question 8

What does a security interest attach to?

Answer 8

Only the rights that the debtor has in the collateral (e.g. leasehold, joint tenancy, full ownership)

Question 9

Can thieves grant security interests in stolen good?

Answer 9

No, they have no rights in the collateral

Question 10

If a debtor has voidable title but could transfer full title to a good-faith purchaser for value, can the debtor create an enforceable security interest?

Answer 10

Yes

Question 11

For after-acquired property, when does a security interest attach?

Answer 11

When the debtor obtains rights in the collateral

Question 12

If a debtor has sold an account, does the debtor still retain “rights” in the account for attachment purposes?

Answer 12

Yes, until the purchaser perfects the security interest

Question 13

If a consignor retains title to the consigned goods, does the consignee have rights in the consigned goods?

Answer 13

No, unless the consignment is covered by Article 9

Question 14

With an agreement between a debtor and secured party that prohibits the transfer of the debtor’s rights, what happens after a transfer?

Answer 14

The secured party has rights against the debtor for the transfer

Note: the transfer does still take effect

Question 15

With an agreement between a debtor and secured party that makes a transfer of the debtor’s rights a default, what happens after a transfer?

Answer 15

It might make the transfer a default

Note: It does not prevent the transfer from taking effect

Question 16

What is required for a security agreement?

Answer 16

• A record
• A description of the collateral, and
• Authentication by the debtor

Mnemonic: security agreements are RAD

Question 17

What is required for a security agreement to be in a record?

Answer 17

Must be in a tangible medium OR a medium that can be retrieved in a perceivable form

Question 18

What is required for a security agreement’s description of collateral?

Answer 18

Must reasonably identify the collateral

Question 19

What is required for authentication of a security agreement?

Answer 19

The debtor must sign or execute with the present intent to adopt or accept the record

Question 20

What kind of collateral can be attached by possession?

Answer 20

Tangible (e.g. goods) or quasi-intangible (e.g. chattel paper) collateral

Tip: If you can hold it in your hands, you can attach by possession

Question 21

What kind of collateral can be attached by control?

Answer 21

Collateral that typically has no physical existence (e.g. electronic chattel paper, investment property, deposit accounts)

Question 22

What is after-acquired property?

Answer 22

Property acquired by the debtor after the security interest attaches

Question 23

In general, if a security agreement leaves out after-acquired language, is after-acquired property included?

Answer 23

No

Question 24

When might courts interpret a security agreement to implicitly include after-acquired property?

Answer 24

If it describes inventory or accounts, there is a rebuttable presumption that the description includes after-acquired inventory or accounts.

Note: Courts are split, but this is the majority approach

Question 25

A security interest \_\_\_\_\_\_\_\_\_\_\_\_\_ attaches to identifiable proceeds.

Answer 25

automatically

Question 26

What are proceeds?

Answer 26

Whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of

Question 27

What are the duties of the secured party?

Answer 27

* Duty of reasonable care of the collateral * Duty to keep collateral identifiable * Duty to relinquish possession or control of collateral once the obligation has been satisfied

Question 28

What are the rights of the secured party?

Answer 28

* Right to charge for reasonable expenses * Right to use or operate collateral for preserving it * Right to hold proceeds, except money or funds

Question 29

Who bears the risk of loss of or damage to the collateral?

Answer 29

The debtor

Question 30

Can parties include a term in a security agreement that prohibits or otherwise restricts assignment?

Answer 30

No, such a term will be ineffective

Question 31

If a debtor assigns the right to receive payment, then the secured party may notify an account debtor to make payments to the secured party. What is required for the notification?

Answer 31

* Authenticated by the debtor (assignor) or secured party (assignee) * Reasonably identifies the rights assigned

Question 32

Upon receipt of a notification that a debtor (assignor) has assigned the right to payment to a secured party (assignee), how can an account debtor discharge their obligation?

Answer 32

Only by paying the secured party (assignee) The account debtor can also raise claims and defenses that arise from the transaction with the debtor (assignor)

Question 33

What does PMSI stand for?

Answer 33

Purchase-money security interest

Question 34

What types of collateral can qualify as a PMSI?

Answer 34

* Goods (including fixtures) * Software

Question 35

What are the two components of a PMSI?

Answer 35

1. The value given allows the debtor to **acquire** the goods or software, and 1. The goods or software acquired **secure** the loan

Question 36

What kind of PMSI is a consignor's security interest in consigned goods?

Answer 36

A PMSI in inventory

Question 37

If inventory subject to a PMSI secures not only its own price or enabling loan but also the price or enabling loan of another purchase-money inventory, what does the security interest cover?

Answer 37

* The inventory at its own price, and * The price of the other inventory

Question 38

For non-consumer-goods transactions, can a security interest be a PMSI to some extent and a non-PMSI to some extent?

Answer 38

Yes, under the "dual status" rule

Question 39

Under the "dual status" rule, who has the burden of establishing to the extent to which a security interest is a PMSI?

Answer 39

The secured party claiming a PMSI

Question 40

Is there a "dual status" rule for consumer-goods transactions?

Answer 40

No, courts can either apply the rule or conclude there is no PMSI

Question 41

When the extent to which a security interest is a PMSI depends on the application of a payment of a particular obligation, how must the payment be applied?

Answer 41

1. In accordance with the parties' reasonable agreement; 1. If there is no reasonable agreement, in accordance with the obligor's manifestation at or before the time payment is made; or 1. If none of the above, then: 1. First to unsecured obligations 1. Then to obligations secured by a PMSI in the order in which the obligations were incurred

Question 42

When does a PMSI in software exist?

Answer 42

* The debtor acquired the interest in software in an integrated transaction where the debtor also acquired an interest in goods; * The debtor acquired that interest in software for the principal purpose of using the software in the goods; * The security interest in the software must also secure an obligation for the goods; AND * The secured party must hold a PMSI in the goods

Question 43

What are accessions?

Answer 43

Goods that are physically united with other goods so that the identity of the original goods is not lost

Question 44

If collateral becomes an accession, what happens to the security interest?

Answer 44

It continues in the accession (not lost)

Question 45

What are commingled goods?

Answer 45

Goods that are physically united with other goods to the point that their identity is lost in a product or mass

Question 46

If collateral becomes commingled, what happens to the security interest?

Answer 46

It attaches to the larger product or mass that results