Attachment Flashcards
What is attachment?
An arrangement linking a debt to a particular piece of collateral
What does it mean for a security interest to have “attached” to collateral?
The security interest is enforceable against the debtor
What are the conditions for a security interest to be enforceable against a debtor?
- 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
True or False: The secured party must give value for the security interest.
True
Can value be given by providing the same consideration needed for a contract?
Yes
Can value be a binding commitment to extend credit?
Yes
Can a security agreement provide that collateral secures future advances?
Yes
What does a security interest attach to?
Only the rights that the debtor has in the collateral (e.g. leasehold, joint tenancy, full ownership)
Can thieves grant security interests in stolen good?
No, they have no rights in the collateral
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?
Yes
For after-acquired property, when does a security interest attach?
When the debtor obtains rights in the collateral
If a debtor has sold an account, does the debtor still retain “rights” in the account for attachment purposes?
Yes, until the purchaser perfects the security interest
If a consignor retains title to the consigned goods, does the consignee have rights in the consigned goods?
No, unless the consignment is covered by Article 9
With an agreement between a debtor and secured party that prohibits the transfer of the debtor’s rights, what happens after a transfer?
The secured party has rights against the debtor for the transfer
Note: the transfer does still take effect
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?
It might make the transfer a default
Note: It does not prevent the transfer from taking effect
What is required for a security agreement?
- A record
- A description of the collateral, and
- Authentication by the debtor
Mnemonic: security agreements are RAD
What is required for a security agreement to be in a record?
Must be in a tangible medium OR a medium that can be retrieved in a perceivable form
What is required for a security agreement’s description of collateral?
Must reasonably identify the collateral
What is required for authentication of a security agreement?
The debtor must sign or execute with the present intent to adopt or accept the record
What kind of collateral can be attached by possession?
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
What kind of collateral can be attached by control?
Collateral that typically has no physical existence (e.g. electronic chattel paper, investment property, deposit accounts)
What is after-acquired property?
Property acquired by the debtor after the security interest attaches
In general, if a security agreement leaves out after-acquired language, is after-acquired property included?
No
When might courts interpret a security agreement to implicitly include after-acquired property?
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
A security interest _____________ attaches to identifiable proceeds.
automatically
What are proceeds?
Whatever results when collateral is sold, leased, licensed, exchanged, or otherwise disposed of
What are the duties of the secured party?
- 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
What are the rights of the secured party?
- Right to charge for reasonable expenses
- Right to use or operate collateral for preserving it
- Right to hold proceeds, except money or funds
Who bears the risk of loss of or damage to the collateral?
The debtor
Can parties include a term in a security agreement that prohibits or otherwise restricts assignment?
No, such a term will be ineffective
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?
- Authenticated by the debtor (assignor) or secured party (assignee)
- Reasonably identifies the rights assigned
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?
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)
What does PMSI stand for?
Purchase-money security interest
What types of collateral can qualify as a PMSI?
- Goods (including fixtures)
- Software
What are the two components of a PMSI?
- The value given allows the debtor to acquire the goods or software, and
- The goods or software acquired secure the loan
What kind of PMSI is a consignor’s security interest in consigned goods?
A PMSI in inventory
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?
- The inventory at its own price, and
- The price of the other inventory
For non-consumer-goods transactions, can a security interest be a PMSI to some extent and a non-PMSI to some extent?
Yes, under the “dual status” rule
Under the “dual status” rule, who has the burden of establishing to the extent to which a security interest is a PMSI?
The secured party claiming a PMSI
Is there a “dual status” rule for consumer-goods transactions?
No, courts can either apply the rule or conclude there is no PMSI
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?
- In accordance with the parties’ reasonable agreement;
- If there is no reasonable agreement, in accordance with the obligor’s manifestation at or before the time payment is made; or
- If none of the above, then:
- First to unsecured obligations
- Then to obligations secured by a PMSI in the order in which the obligations were incurred
When does a PMSI in software exist?
- 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
What are accessions?
Goods that are physically united with other goods so that the identity of the original goods is not lost
If collateral becomes an accession, what happens to the security interest?
It continues in the accession (not lost)
What are commingled goods?
Goods that are physically united with other goods to the point that their identity is lost in a product or mass
If collateral becomes commingled, what happens to the security interest?
It attaches to the larger product or mass that results
