Creating a Security Interest

Question 1

Two Steps to Creating a Security Interest

Answer 1

Unless there is possession, the following is req.:

1) A written security agreement or possession of the collateral by the secured party with the intent to secure a debt
2) Attachment of the security interest to the collateral

Question 2

Things that a Security Agreement Must Include

Answer 2

• Authentication
• Granting Clause
• Description of the Collateral

Question 3

Authentication

Answer 3

The security interest must be in writing and be authenticated by debtor. Authentication means either signing a written document or executing or otherwise adopting a symbol, or encrypting or similarly processing a record in whole or in part.

Question 4

Granting Clause

Answer 4

Clause that states that the agreement is creating a security interest (can be in a different document)

Question 5

Description of the Collateral

Answer 5

A description is sufficient if it reasonably identifies what is described. A description of collateral by UCC type is sufficient unless the collateral is consumer goods and the transaction is a consumer transaction.

Question 6

Possession (Pledges)

Answer 6

Where the secured party has possession, all that is needed is an agreement, which can be oral, that the secured party is to have security interest. Such security interests are frequently referred to as pledges.

Question 7

Purchase-Money Security Interest (PMSI)

Answer 7

When a debtor incurs a purchase-money obligation if the obligation is incurred:

• as all or part of the price of the collateral (as when a seller finances the purchase); or
• for value given to enable the debtor to acquire rights in or the use of the collateral, if the value is in fact so used (as when a third party, such as a bank, finances the purchase).

Question 8

PMSI: Actual Purchase Req.

Answer 8

The debtor must use the purchase money to acquire the collateral in order to create PMSI (therefore, if debtor uses creditors money for something else, they do not have a PMSI).

Question 9

Attachment: When Does a Security Interest Attach?

Answer 9

When:

• the secured party gives value; and
• the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
• the debtor has authenticated a security agreement that sufficiently describes the collateral

Question 10

What About Collateral Obtained After a Security Agreement is Created?

Answer 10

A security interest will attach to after-acquired collateral if the agreement specifically says it includes after-acquired collateral (after-acquired property clause)

Question 11

Exceptions to the After-Acquired Property Clause Req.

Answer 11

Include:

-a security agreement specifying an interest in inventory or accounts receivable will create an interest in after-acquired collateral

Question 12

Proceeds in Collateral

Answer 12

A security interest in collateral automatically extends to identifiable proceeds of the collateral

Question 13

What Happens to the Security Interest When the Collateral is Transferred?

Answer 13

A secured party’s security interest in collateral will continue regardless of a sale, lease, or other disposition of the collateral unless:

-the secured party authorized disposition of the property free of the security interest.