Creation and Scope of Security Interests

Question 1

Priority vs. Security Interest

Answer 1

1. Priority vs. Security Interest – UCC §9-203(b) - Not required to file a financing statement in the public records to have a security interest.
   
   1. However, such filing is required in order to preserve the secured creditor’s priority in relation to the collateral.

Question 2

Formalities for Article 9 Security Interest

1. General Rule
2. Attachment Requirements

Answer 2

Formalities for Article 9 Security Interest

1. General Rule - a security interest is enforceable when it attaches to the collateral.
2. Attachment Requirements
   
   1. Authenticated Agreement - signed security agreement with
      
      1. description of collateral; or
      2. creditor in possession of collateral
   2. Value - value must be given
   3. Rights - Debtor has rights in the collateral

Question 3

Formalities for Article 9 Security Interest - Definitions

1. Authenticated Record
2. Authenticate
3. Record
4. Secuirty Agreement

Answer 3

Formalities for Article 9 Security Interest - Definitions

1. Authenticated Record - a signed writing manifesting intent to create security interest.
2. Authenticate - to sign or to attach to or logically associate with a record a sound symbol or process with present intent to adopt or accept
3. Record - info inscribed on tangible medium or other medium in which the info is retrievable (e.g., electronic form)
4. Secuirty Agreement - an agreement that creates or provides for a security interest.

Question 4

Formalities for Article 9 Security Interest - Composite Document Rule

Answer 4

1. Composite Document Rule – there need not be a separate document labeled ‘security agreement,’ but that all relevant loan documents may be examined to determine whether a security agreement exists.”
   
   1. Majority of states follow.
   2. Though variation among states as to which documents they will consider.

Question 5

Formalities for Article 9 Security Interest - Order of Assembly

1. Majority
2. Minority Rule

Answer 5

1. Order of Assembly – In a common scenario, the debtor signs a security agreement that does not contain a description of collateral. Without identifying the collateral, the agreement is not enforceable. However, the debtor will often authorize the secured creditor to fill in the missing information later. The courts are split on the effect of such an act.
   
   1. Majority – order which the security agreement is assembled does not matter.
   2. Minority – secured creditor that has unexecuted (i.e. incomplete) security agreement (re info left blank) can’t create a valid security agreement later, even if so authorized.

Question 6

Effect of Lost or Stolen Security Agreement

Answer 6

1. Lost or Stolen Security Agreement - That a security agreement is lost, destroyed, or stolen does not divest the secured party of its interest.
   
   1. can be enforced through witness testimony.

Question 7

Formalities for Article 9 Security Interest - Value Has Benn Given

Answer 7

1. UCC 1-204 – a person gives “value” for rights if the person acquires them:
   
   1. As security for a pre-existing claim; or
   2. In return for any consideration sufficient to support a simple contract.

Question 8

Formalities for Article 9 Security Interest - Debtor Has Rights in the Collateral

1. General Rule
2. Limitations
   
   1. Limited Property Interests
   2. Transers under Voidable Title to BFP

Answer 8

1. General Rule - UCC 1-201(b)(29) – “Purchase” means taking by … sale, lease, mortgage … lien, security interest … or any other voluntary transaction creating an interest in property.
2. Limitations -
   
   1. Limited Property Interests - UCC 2-403(1) – a purchaser of goods acquires all title which his transferor had or had power to transfer. (e.g., lessee can only create security interest in leasehold)
   2. Transfer under Voidable Title to BFP - A person with voidable title has power to transfer a good title to a good faith purchaser for value.

Question 9

Sufficiency of Description of Collateral in Security Agreement

1. General Rule
2. Scope and Limitations
   
   1. supergeneric descriptions
   2. safe harbor descriptions
   3. insufficient descriptions by type
   4. After-Acquired Property

Answer 9

Sufficiency of Description of Collateral in Security Agreement

1. General Rule - UCC 9-108(a) - a description of property is sufficient if it reasonably identifies what is described.
2. Scope and Limitations
   
   1. no supergeneric descriptions (e.g., all debtor’s assets)
   2. Safe Harbor Descriptions
      
      1. specific listing (e.g., vehicle ID number)
      2. Category (e.g. furniture, appliances)
      3. Type (e.g., accounts, inventory, etc)
      4. quantity, formula or any other objective method
   3. Insufficient Descriptions by type
      
      1. commercial tort claims
      2. in consumer transactions, consumer goods
   4. After-Acquired Property - a security agreement may create a security interest in after acquired property, except for:
      
      1. consumer goods that the debtor acquires more than 10 days after creditor gives value.
      2. commercial tort claims.

Question 10

Attachment of Future Collateral

1. Types of Future Collateral
2. Future Collateral in Bankruptcy

Answer 10

1. Types of Future Collateral Include
   
   1. Value-Tracing Concepts -
      
      1. Proceeds
      2. Products
      3. Rents
      4. Offspring
   2. Non-Value Tracing Concepts
      
      1. after-acquired property
      2. replacements
      3. additions
      4. substitutions
2. Future Collateral in Bankruptcy
   
   1. No Non-Value Tracing Concepts - after-acquired property, replacements, subsitutions, additions are not identifiable in property acquired during bankruptcy.
      
      1. only pre-bankruptcy allowed.
   2. Value-Tracing Property Allowed- proceeds, products, offspring, rents, and profits may be identified in property acquired during bankruptcy.

Question 11

Relation Back

1. General Rule
2. Effect on After-Acquired Property and Future Advances
   
   1. Exceptions

Answer 11

1. General Rule– attachment based on a security agreement relates back to the date of the filing of the financing statement covering the collateral secured.
2. Effect - security agreements that include after-acquired property and future advances can relate back to a financing statement that existed before the collateral was ever in the hands of the debtor.
   
   1. Exceptions - doesn’t apply to commercial tort claims or consumer goods.

Question 12

Proceeds and Continuation Theory

1. General Rule
2. Multiplification of Collateral
3. Definition of Proceeds
4. Limitations

Answer 12

Proceeds and Continuation Theory

1. General Rule - UCC 9-315(a) – (1) A security interest … continues in collateral notwithstanding … disposition unless the secured party authorized the disposition free of the security interest … and (2) a security interest attaches to any identifiable proceeds.
2. Multiplifcation - even though creditor is only supposed to have value up to value of collateral, they are technicaly secured for more through the collateral and the proceeds.
3. Definition of Proceeds -
   
   1. whatever is acquired from disposition of the collateral
   2. whatever is collected on account of the collateral
   3. rights arising out of collateral
   4. claims arising out of loss or damage to collateral
   5. insurance proceeds from loss on the collateral
4. Limitations - Proceeds Must Remain Identifiable
   
   1. If Goods - identifiable proceeds
   2. If Not Goods - only proceeds to extent identifiable through tracing (e.g., lowest intermediate balance rule)

Question 13

Property That Cannot Be Collateral

Answer 13

1. Property of a Personal Nature - generally, non-possessory, Non-PMSI interests in property that is highly personal in nature will not be enforced. (e.g., false teeth, artificial limbs, clothing)
   
   1. Exceptions -
      
      1. Possessory Security Interests
      2. Purchase Money Security Interests
2. Future Income of Individuals- Federal Trade Comission, Federal Bankruptcy law, and most states prohibit lenders from taking security interests in future wages or earnings
   
   1. exception - employee could simply direct employer to make deduction of funds from paycheck and pay to creditor directly.
3. Pension Rights - ERISA compliant pensions can’t be leveraged.

Question 14

Valuable Nonproperty as Collateral

1. General Issue
2. Defining Nonproperty

Answer 14

Valuable Nonproperty as Collateral

1. General Issue - Article 9 applies only to transactions “intended to create a security interest in personal property.” If the subject of the transaction is not recognized as “property” for this purpose, the debtor and creditor cannot create a security interest in it.
2. Getting Around Non-Property Issue - Can get around restrictions on security interests by making a security interest in the proceeds from the sale of the collateral rather than the property itself.
   
   1. Example - Can’t take a security interest in a license or franchise the FCC has deemed nonpoperty, but can take an interest in the proceeds from the sale of such a license or franchise.