Attachment Flashcards
Attachment
Attaching a security interest means creating a valid security interest in collateral.
R: Attachment is required for the secured party to have a secured interest in the collateral. A Security interest is not enforceable unless it has attached.
R: There are three requirements for attachment, all of which must be present:
1. Value must be given by the secured party to the debtor (even past consideration is ok), and
2. The debtor must have rights in the collateral (for example, ownership, right to possession). (but Don’t need title to C.)
3. There must be a Binding Security Agreement - [Parties must agree to create the security interest as evidenced by]:
a. With a authenticated (signed) security agreement, or
b. creditor taking Possession of the C, or
c. creditor taking Control of certain goods.
[SARV]
Steps legally required to give the secured party a security interest in the collateral that is effective as against the debtor. A creditor is not a secured creditor until attachment.
Attachment method 1: Authenticated/signed security agreement
The security agreement is a written agreement that certain personal property will serve as collateral, usually for a loan.
To be valid:
Agreement must be evidenced by a record (written or ESI) and
Must show intent to create a security interest.
Must be authenticated (signed with any symbol with present intent to authenticate)
(1) the security agreement must: describe the collateral,
AND,…
The other general requirements for Attachment:
(2) the party offering the collateral (usually debtor) must have rights in it (that is, they must own it or have some other legal rights in it), and
(3) the party gaining the security interest (usually a bank or merchant) must give value in exchange for the security interest.
Ex: Creditor gave value (the loan), and Debtor had an interest (ownership) in the collateral.
Description of Collateral in Security Agreement
Description must reasonably identify the C.
For Consumer goods, consumer Securities Accounts, and Commercialt tort claims: Must be specifically described, not by type.
For all others: either broadly by category or type or specifically
No supergeneric descriptions of C such as “all of debtor’s assets/personal property.
And if SI covers timber to be cut, description of the land.
Attachment method 2. Possession
Creditor taking possession of the collateral,
If the party that wants the security interest has actual possession of the collateral, no written security agreement is required for a security interest to attach.
Attachment method 3. Control
Security agreements in a few types of collateral can become attached by control.
Creditor taking control of:
nonconsumer deposit accounts,
electronic chattel paper, and
investment property
After-Acquired Property Clause.
Exceptions?
Permissible. Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement
An after-acquired property clause does not apply to consumer goods unless the debtor acquires rights in the goods within 10 days after the creditor gives value.
In addition, an after-acquired property clause does not apply to any commercial tort claims.
When Security interest attached even without After-Acquired Property Clause?
Even without an after-acquired property clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory.
A security interest will also automatically attach to identifiable proceeds of collateral, even without an after-acquired property clause.
Proceeds
A security interest in collateral automatically attaches to identifiable proceeds of the collateral.
Proceeds Must Be Identifiable - can be traced back to the original collateral.
Proceeds include:
second generation proceeds.
Insurance payable by reason of loss or damage to the collateral, unless it is payable to someone other than the debtor or secured party.
Claims arising out of the loss of, defects in, or damage to collateral.
Cash Proceeds comingled with other cash - identifiable?
(ex - cash proceeds debtor put in bank account of debtor)
Identifiable proceeds can be traced using the lowest intermediate balance rule.
Lowest intermediate balance rule: Lowest balance of bank account between proceeds being deposited and application of the rule, then that lowest balance is the Secured party’s identifiable proceeds. but not exceeding cash proceeds deposited.
