Attachment and Scope of the Security Interest

Question 1

What is required for a valid attachment of a security interest in the collateral?

Answer 1

Authenticated security agreement

• required unless the collateral is in the possession or control of the secured party
• generally necessary
• Requirements:

1. evidenced by a record
2. must show an intent to create a security interest (no magic words)–logical conclusion that the parties intended to create a security interest
3. authenticated by debtor–signed or marked electroncially with the present intent to identify the authenticating person and adopt the agreement
4. description of the collateral (if timber, description of the real property)–reasonably identify the collateral

• NOTE: generic descriptions are generally sufficient; supergeneric descriptions are generally not (“all assets/ all personal property”)

The secured party** must have **given value

• pre-existing debt will suffice

Debtor** must have **rights in the collateral

• ownership interest; or
• right to obtain possession; or
• where a third party authorized the debtor to put up the goods as collateral

Question 2

What is the scope of the security interest in the collateral?

Answer 2

Debt secured may include future advances

• accomplished by including a “future advance clause”
• look primarily to the intent of the parties to determine the scope of the clause–1) sophisticated parties, broad language ok; 2) unsophisticated parties, argue that must be in the same class of obligation as the primary obligation
• NOTE: UCC comments reject the “same class test”

Property secured may include after-acquired property

• “after-acquired property clause”
• implied with inventory and accounts
• Exception: security interest does not attach under an after-acquired property clause to consumer goods unless debtor acquires them within 10 days after the secured party gives value
• Exception: after-acquired property clause is ineffective as to commercial tort claims

Property secured generally includes proceeds

• proceeds: whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds (second generation proceeds)
• insurance: proceeds unless payable to someone other than the debtor or secured party claiming it
• unless otherwise agreed, a security agreement gives the secured party a right to proceeds
• as long as the proceeds are identifiable, security interest attaches (tracing)
• last out theory–last dollars in the account are proceed dollars
• attachment of a security interest in collateral also is an attachment of a security interest in a supporting obligation for that collateral (e.g., sureties to accounts)