Attachment Flashcards
OVERVIEW
What is attachment?
Creation of an enforceable security interest (against the debtor)
OVERVIEW
Time of attachment
When the last of the three requirements occurs
can occur in any order
OVERVIEW
Can an agreement postpone the time of attachment?
Yes.
(§ 9–203. Attachment and Enforceability of Security Interest. . . . (a) A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.)
ATTACHMENT REQUIREMENTS
3 elements of attachment
- Value has been given
- The debtor has rights in the collateral
- EITHER
a. The debtor has authenticated a security agreement that provides a description of the collateral OR
b. The collateral is in the possession of the secured party pursuant to the debtor’s security agreement
VALUE // ATTACHMENT REQUIREMENTS
Definition
When rights are acquired
1. in return for
binding commitment to extend credit/immediate extension of credit
as security for, or in satisfaction (total or partial) of a preexisting claim OR
2. In return for any consideration sufficient to support a simple contract
(defined in Article 1, not article 9)
VALUE // ATTACHMENT REQUIREMENTS
Is past consideration sufficient to satisfy the value requirement?
Yes
VALUE // ATTACHMENT REQUIREMENTS
Is an illusory promise sufficient to satisfy the value requirement?
No
DEBTOR’S RIGHTS IN THE COLLATERAL // ATTACHMENT REQUIREMENTS
Where do issues with rights in the collateral arise?
Debtors that are business entities
DEBTOR’S RIGHTS IN THE COLLATERAL // ATTACHMENT REQUIREMENTS
Can a corporation grant a security interest in assets belonging to one of its wholly-owned subsidiaries?
No, because corporate law treats a corporation as a separate legal entity.
AUTHENTICATION/WRITING // ATTACHMENT REQUIREMENTS
3 components
- Authentication
- Security agreement
- Description of collateral
AUTHENTICATION // AUTHENTICATION/WRITING
Definition
- Writing (or record)
- Signed by the debtor (or signature alternatives)
SECURITY AGREEMENT // AUTHENTICATION/WRITING
Definition
Must have the “words of grant”
AKA magic words
AKA must be a contract that grants a security interest
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
Sufficiency of description
Sufficient, whether or not it’s specific, if it REASONABLY IDENTIFIES what is describes
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
Reasonable identification standard
- General, overarching standard
- Flexible to allow courts discretion in individual cases
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
Examples of reasonable identification
Specified examples of collateral descriptions that will suffice
- Specific listing
- Category
- UCC collateral definition
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
Specific listing
listing each item of collateral
e.g. “150 Model X Whirpool Washing Machines, 25 Gold L Dryers”
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
Category
any kind of factual, categorical classification
e.g. “all dryers, all washing machines”
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
UCC collateral definition
Type of collateral defined in the UCC
(e.g. “all inventory”)
EXCEPTION = secured party cannot use “consumer goods” in secured transaction with consumer for consumer purposes (b/c undesirable from public policy standpoint)
DESCRIPTION OF COLLATERAL // AUTHENTICATION/WRITING
Super-generic description
- Prohibited by UCC
- Security agreement must be more specific than simply saying “all assets” or “all property”
ALTERNATIVES // AUTHENTICATION/WRITING
3 exceptions to written, authenticated security agreement
- Possession (with pledge)
- Delivery
- Control
ALTERNATIVES TO // AUTHENTICATION/WRITING
Possession (with pledge) exception
The third element of attachment can instead be satisfied when
1. debtor agrees to grant a security interest in collateral and
2. Transfers possession of the collateral into the hands of a secured party
AKA if possession is transferred into the hands of secured party, security agreement can be oral instead of in writing and signed
ALTERNATIVES TO // AUTHENTICATION/WRITING
Control exception
- Security agreement can be evidenced by the control over certain collateral
- Only applies to
1. deposit accounts
2. electronic chattel paper
3. investment property
4. electronic documents
ALTERNATIVES TO // AUTHENTICATION/WRITING
Delivery exception
- Security agreement can be evidenced by the delivery by the debtor
- Only applies to certain certificated securities AKA stock securities in paper form)
SCOPE OF SECURITY INTEREST
When security interest attaches, what might it encompass?
- Future advances
- After-acquired property
- Identifiable proceeds
SCOPE OF SECURITY INTEREST
Future advance clause
- Future advance clause = collateral debtor granted creditor security interest in will serve as collateral for this loan but also future loans
- AKA don’t need a new security agreement when a future advance is made
- Very commonly used
SCOPE OF SECURITY INTEREST
After-acquired property clause
- Want to obtain security interest not only in that collateral owned at the time but to acquire all of that collateral you may obtain in the future
- Example = “now owned or later acquired”
AFTER-ACQUIRED PROPERTY // SCOPE OF SECURITY INTEREST
general rule
if contract does not expressly include an after-acquired property clause, then creditor only has interest in property owned at the time interest attaches
AFTER-ACQUIRED PROPERTY // SCOPE OF SECURITY INTEREST
exception
- courts will imply after-acquired property clause into agreement when the collateral is of the type that is rapidly depleted and then replenished
- Applies to
1. Inventory
2. accounts
AFTER-ACQUIRED PROPERTY // SCOPE OF SECURITY INTEREST
2 limitations on after-acquired property clause
- Commercial tort claims
2. Consumer goods
AFTER-ACQUIRED PROPERTY // SCOPE OF SECURITY INTEREST
Limitation re: commercial tort claims
After-acquired property clauses don’t not apply to commercial tort claims
(Commercial tort claims can only become collateral for loan if in existence at the time the security agreement is executed and authenticated)
AFTER-ACQUIRED PROPERTY // SCOPE OF SECURITY INTEREST
Limitation re: consumer goods
Can only be the subject of an after-acquired property clause to the extent that the debtor acquires the consumer goods within 10 days after the secured party gives the value for attachment
SCOPE OF SECURITY INTEREST
Identifiable proceeds
= whatever is received upon the 1. sale, 2. exchange, 3. collection, 4. other disposition, or 5. proceeds of collateral
PROCEEDS // SCOPE OF SECURITY INTEREST
Rule
unless otherwise agreed, a security interest gives secured creditor a right to identifiable proceeds of collateral
PROCEEDS // SCOPE OF SECURITY INTEREST
Key takeaways
Does not need to be stated in agreement at all
Only identifiable proceeds
= creditor must prove proceeds came from its original collateral
PROCEEDS // SCOPE OF SECURITY INTEREST
Lowest intermediate balance test
- Use = allows courts to designate a portion of commingled bank account as identifiable
- Effect = can’t claim more proceeds than originally deposited in bank account
- Calculation =
1. Look at the balance in commingled bank account, take the lowest amount in account
2. starting at time proceeds get deposited
3. ending at the time the test is applied
4. to tell you what portion of commingled bank account is identifiable
