Attachment, Scope of Security Interest, & Perfection

Question 1

Three Elements for Attachment

Answer 1

1. Security Agreement
2. Value Exchanged
3. Debtor has rights in the collateral

The moment the last of these three occurs (order does NOT matter), attachment happens, and creditor has security interest and rights of secured creditor under Article 9.

Question 2

Security Agreement - Writing Elements

Answer 2

• Unless collateral is in the possession/control of the secured party pursuant to an agreement, a written security agreement is required.
  
  • iow: in oder to have a valid oral security agreement (aka a pledge), collateral must be in hands/control of creditor
• WRITING MUST INCLUDE 3 ELEMENTS
  
  • record (written or electronic) must show intent to create a security interest (no magic words required.
  • must be “authenticated” by the debtor. - any symbol made with present intent to authenticate works.
  • must contain a desciption of the collateral (if sec. int. in timber, describe land)
    
    • description must be sufficient to “reasonably identify”

Question 3

What langauge “reasonably identifies” collateral?

Answer 3

1. ordinary language - “the refrigerator”
2. art. 9 category - “chattel paper”
3. BUT NOT super-generic language, “all of debtors property”

Question 4

Exchange of Value

Requirement for Attachment

Answer 4

• Value definition is very liberal - any consideration sufficient to support a simple contract is enough
  
  • even PAST CONSIDERATION WILL SUFFICE
• Debtor always gives value by promising to repay the loan

Question 5

Debtor’s Rights in Collateral

Requirement for Attachment

Answer 5

The debtor must have rights in collateral because debtor cannot grant a contingent property interest in property that it does not own.

Question 6

Scope of Security Interest Once Attached

Answer 6

1. Debt secured may include future advances
2. After-acquried Property generally NOT included
   
   • BUT Explit or Implied A-AP Clauses
     
     • EXCEPT consumer goods after 10 days
3. **Proceeds **Included
4. **Supporting obligations **for collateral also attached

Question 7

When is After-Acquired Property Attached?

Answer 7

General Rule: without an explicit after-acquired property (A-AP) 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

• BUT may include explicit A-AP clause
• Even when there is no explicit clause, courts may imply A-AP clause when the collateral is of type rapidly depleted and replenshed (e.g. inventory or accounts).
  
  • Exception to A-AP Clause’s Operation: security interest does not attach under A-AP clause to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value.

Question 8

“Proceeds” included in attachment

Answer 8

• proceeds = whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds
• Unless otherwise agreed, a security interest automatically gives the secured party a right to identifiable proceeds
  
  • it is the CREDITOR’s burden to prove that an item is proceeds of collateral
• When Proceeds are Comingled with non-proceeds cash, apply the Lowest Intermediate Balance Test
  
  • identifiable proceeds are the lowest balance of the account between the time proceeds are deposited and the time the test is applied. But identifiable proceeds cannot exceed value of cash proceeds originally deposited.

Question 9

Methods of Perfection

(5)

Answer 9

Generally, requires Attachment + one of these methods - except automatic perfection does not require attachment.

1. Automatic Perfection (PMSI in consumer goods)
2. Possession of Collateral by Secured Party
3. Perfection by “Control”
   
   • investment property
   • nonconsumer deposit accounts
   • electronic chattel paper
4. Notation of lien on Certificate of Title
5. Filing a Financing Statement

Question 10

Automatic Perfection

for PMSI in consumer goods

Answer 10

RULE: Purchase Money Security interest in consumer goods is automatically perfected upon attachment.

e.g. D borrows money from S loan co. to buy new dining room set for home, D uses money borrowed for that purpose, and S obtains security interest in the dining room set - attachment/perfection occur at same moment.

Question 11

Possession of Collateral by Secured Party

Method of Perfection

Answer 11

• Secured party may perfect sec. interest in most types of collateral by taking possession of it.
• Perfected from the moment of possession (does NOT relate back to attachment)
• BUT perfection continues only so long as possession retained
• NOT POSSIBLE FOR Collateral that can’t be possessed
  
  • e.g. general intangibles; accounts

Question 12

Perfection by “Control”

(available for what three categories of collateral?)

Answer 12

Available for security interests in:

• investment property
  
  • secured party has control of investment property when takes steps necessary to be able to have investment sold w/o further action from owner.
• electronic chattel paper
  
  • ​control when system showing transfer of interests in chattel paper reliably est. the secured party as the assignee.
• nonconsumer deposit accounts (ONLY method of perfection available) can “control” by
  
  • 1) Bank in which nonconsumer deposit acct is maintained has control
  • 2) putting deposit account in secured party’s name
  • 3) authenticated agreement b/w debtor, bank at which maintained, and secured party that bank will follow the secured party’s orders w/o further consent from debtor

Question 13

Perfection by Notation of Lien

on Certificate of Title

Answer 13

• The ONLY WAY to perfect security interest in an automobile is for the secured party to note its lien on the certificate of title. (this is done through gov’t agency - not just writing it in)
  
  • Note - Automatic Perfection for PMSI in Consumer Goods doesn’t work here.
• EXCEPTION:
  
  • ​if debtor holds car as INVENTORY (debtor is a dealer), then a secured party MUST perfect by filing a financing statement against inventory - no way their creditor could note lien on every title.

Question 14

Perfection by

Filing a Financing Statement

Answer 14

• The financing statement meant to provide NOTICE
• Notice need only indicate that someone MAY have a S.I. in the collateral - it’s ok if further inquiry needed to find exact situation
• Requirements
  
  1. Debtor’s Name (srsly misleading error will invalidate)
  2. Description of Collateral (reasonably identifies)
  3. Secured Party’s Name (error ok, but could give rise estoppel in favor of conflicting claim on the collateral)
  4. Real Property for certain FSs (when realty interests - timber, fixtures, minerals - are the collateral, must describe realty and indicate that FS to be filed in property records)
  5. Debtor Must Authorize (signature not nec’y, signing a security agrmt is automatic authorization for FS)
• Filing Security Agrmt fine, as long as includes all the above elements.

Question 15

Debtor’s Name

Requirement for Financing Statement (FS)

Answer 15

• Debtor’s name serves as basis to index FS
• If debtor is individual, give individual’s name
  
  • Use name on unexpired drivers license issued by state where FS to be filed
  • If Debtor does NOT have such a license, use “individual name” - name by which debtor is known in the community.
  • DON’T use Trade Name
• If debtor is an org, give org’s name

Question 16

Error in Debtor’s Name on FS

Answer 16

• As long as the error is not seriously misleading, the FS will be effective.
  
  • Seriously Misleading = if a search under the debtor’s name using the filing office’s standard search logic does not turn up the FS, the name is seriously misleading and FS invalid.
• BUT secured creditor is NOT responsible for errors by the filing office.

Question 17

Effect of Debtor’s Name Change

on validity of FS

Answer 17

If debtor changes name so that filed FS becomes seriously misleading, FS is effective to perfect security interest in collateral acquired by debtor before or within 4 months after the change.

It is NOT effective to perfect a security interest in collateral acquired by debtor more than 4 months after name change.

Question 18

Description of Collateral Required

for Valid Financing Statement

Answer 18

• Any description that “reasonably identifies” the collateral works
• same type of language as is exceptable in security agreement - ordinary language or category of collateral
• BUT ALSO sufficient to use “supergeneric language,” like “all personal property” in FS (not okay in security agreement).

Question 19

Where to File a Financing Statement

Answer 19

• General Rule: FS should be filed with Secretary of State (unless state’s Art. 9 statute provides otherwise)
• Real Estate Related Collateral
  
  • including nat’l resources from real property and fixtures
  • Should be filed in the real estate records of the county where real property is located.
• Multiple State Transactions - Different Rules!

Question 20

Where to File FS for Multi-State Transactions

Answer 20

• General Rule: file in a state where the debtor is located
  
  • individual = principal presidence
  • Registered Org (corp., partner’p) = where organized
  • Unregistered Org = place of business; if multiple, = chief executive office
• If Debtor or Collateral MOVES after filing:
  
  • Debtor Moves - secured party will be unperfected 4 months after move, unless files FS in new jdx
  • Collateral Moves (is sold to new debtor)- secured party has 1 year to refile in new jdx before becoming unperfected.

Question 21

Duration of Effective FS

Answer 21

• FS effective for 5 years from date of filing.
• To extend for an additional 5 years, file a **continuation statement within the last 6 months of the original FS’s life - **i.e. between 4.5 and 5 years.
• Termination by demand for termination statement/consumer goods rule

Question 22

Termination of FS

Answer 22

• When debtor has no outstanding obligation, the secured party upon demand from debtor, must provide debtor with termination statement (TS) within 20 days.
• IF FS COVERS CONSUMER GOODS
  
  • secured party must file FS w/in 1 month after obligation satisfied (or w/in 20 days of receiving authenticated demand)
• Failure to comply with these rules = liability for $500 + any loss caused to debtor

Question 23

Perfection as to Proceeds

Answer 23

• If a secured party has a perfected security interest in collateral, a secured party automatically has perfected security interst in proceeds the debtor receives in exchange for that collateral for 20 days.
• **To retain perfection beyond 20 days **must take new action to perfect UNLESS:
  
  • proceeds are identifiable cash proceeds OR
  • SAME OFFICE RULE: (1) Security in in the original collateral was perfected by filing a FS, (2) a S.I. in the type of collateral constituting proceeds would be filed in the same place as the FS for original collateral, and (3) the proceeds were not purchased with cash proceeds of the collateral

Question 24

Effect on FS of Change in Use of Collateral

Answer 24

If debtor changes its use of the collateral (e.g. equipment to inventory), the filed FS remains effective even if no longer correctly describes collateral. Secured creditor has not duty to monitor collateral or amend FS even if knows description is srsly misleading.