Attachment & Perfection

Question 1

Attachment

Answer 1

A security interest that is enforceable against the debtor has “attached” to the collateral. Three conditions must be met:
1. Value has been given by the secured party
2. The debtor has rights in the collateral
3. The debtor has authenticated a security agreement that describes the collateral, or the party has possession or control of the collateral pursuant to a security interest

Question 2

Ways Value is Given (for Attachment)

Answer 2

1. By providing consideration sufficient to support a simple contract
2. By extending credit, either immediately or under a binding commitment to do so,
3. By, as a buyer, accepting delivery under a preexisting contract, thereby converting a contingent obligation into a fixed obligation, or
4. In satisfaction of, or as security for, part or all of a preexisting claim

i.e., a bank provides a loan to a business - this is value given

Question 3

Debtor’s Rights in Collateral (Attachment)

Answer 3

For a security interest to attach to the collateral, the debtor generally must have rights in the collateral

A security interest attaches only to the rights that the debtor has. Limited rights in collateral are sufficient for a security interest to attach

Question 4

After-Acquired Collateral

Answer 4

A security interest may apply not only to the collateral that the debtor owns at the time the security is granted, but also to collateral that the debtor acquires in the future

i.e., “all inventory now owned or hereafter acquired”

Exception: After-Acquired Collateral clause not effective if the collateral is consumer goods, unless the debtor acquires them within 10 days after the secured party gives value

Question 5

Proceeds from Collateral

Answer 5

A security interest in collateral automatically attaches to identifiable proceeds from the sale, exchange, or other disposition of the collateral.

I.e., a secured party acquires a security interest in a debtor’s inventory. The debtor sells items of inventory in exchange for checks. The secured party’s security interest will attach to the checks if they are identifiable as proceeds

Question 6

Accessions

Answer 6

Goods that are physically united with other goods in such a manner that the identity of the original goods is lost

A security interest created in collateral that becomes an accession is not lost due to the collateral becoming an accession

i.e., memory installed in a computer, tires installed on a car

Question 7

Security Agreement Requirements

Answer 7

1. In a record (such as a writing or typed document
2. Contain a description of the collateral (such as “all the debtor’s equipment), and
3. Be authenticated (typically signed) by the debtor

Question 8

Purchase Money Security Interest

Answer 8

Gives lenders an interest in goods that have been purchased with funds borrowed from them or purchased on credit from them.

Exists only with respect to two types of collateral:
1. Goods (including fixtures)
2. Software

PMSI in goods exists when:
A secured party gave value (e.g., a loan) to the debtor and the debtor uses the loan to acquire rights in or use of the collateral,
OR
A secured party sells the collateral to the debtor, and the debtor enters an agreement requiring it to pay the secured party all or part of the purchase price (i.e., a sale of goods on credit)

Question 9

Perfection of a Security Interest

Answer 9

A security interest is perfected upon attachment of that interest AND compliance with one of the methods of perfection

Perfection of a security interest is generally necessary for the secured party to have rights in the collateral that are superior to any rights claimed by third parties.

Question 10

Methods of Perfection

Answer 10

1. Filing of a financing statement
2. Possession of the collateral
3. Control over the collateral
4. Automatic perfection (temporary or permanent)
5. Statute (statute that governs perfection of a security interest)

Question 11

Finance Statement

Answer 11

Primary purpose: to give interested parties notice of the existence of the security interest.

Effective on the date of filing & effective for five years (may be continued for another five years by filing a continuation statement 6 months prior to the expiration of the statement)

Must contain:
1. The debtor’s name
2. The name of the secured party (or a representative of the secured party), and
3. The collateral covered by the financing statement

Question 12

Error in the Debtor’s Name (Financing Statement)

Answer 12

A financing statement that fails to accurately contain the debtor’s name may be “seriously misleading” and therefore not effective to perfect the security interest

Exception: when a standard search of the filing office records under debtor’s correct name would disclose the financing statement (i.e., an incorrect middle initial or naming debtor as “beagle roofing” instead of “beagle contracting”)

Question 13

Control Over Collateral

Answer 13

A secured party may perfect a security interest in:
i. investment property
ii. deposit accounts
iii. letter-of-credit rights
iv. electronic chattel paper, or
v. electronic documents
Through taking control of the collateral

The security interest remains perfected only while the secured party retains control

Question 14

Deposit Account

Answer 14

A security interest in a deposit account can be perfected ONLY BY control

A secured party has control if:
1. The secured party is the bank with which the deposit account is maintained
2. The bank, secured party, and debtor agreed in writing to follow the instructions of the secured party; or
3. The secured party becomes the bank’s customer with respect to the deposit account

Question 15

Automatic Perfection

Answer 15

A PMSI in Consumer Goods is automatically perfected upon attachment

Secured party does not need to file a financing statement or have possession to perfect a PMSI in consumer goods

Note: A PMSI in other types of goods (inventory, equipment) or in automobiles is not automatically perfected

Question 16

Proceeds of Sale of Collateral

Answer 16

If a security interest in collateral is perfected, and then the collateral is sold for cash proceeds (or checks or deposit account), the secured party will have a perfected security interest in the proceeds

Question 17

Timing of Perfection

Answer 17

A security interest is perfected upon:
i. attachment of that interest, and
ii. compliance with one of the methods of perfection (such as financing statement)

Typically, the security interest attaches and is then perfected.

However, it is possible for the secured party to take steps toward perfecting the security interest prior to attachment (such as filing a financing statement first). It would then be perfected upon attachment.

A security interest that is perfected by one method and later perfected by another method without a lapse in perfection is continuously perfected despite the change in method.

Question 18

Date of Perfection

Answer 18

The date on which the security interest first became perfected