Creation (Attachment) of a Security Interest Flashcards
What does attachment establish?
Attachment cements the creditor’s rights against the debtor. Attachment is therefore required for the security interest to be enforceable.
What are the three requirements for attachment?
(1) There must be a security agreement (agreement between the parties to create the interest).
(2) Value must be given by the secured party.
(3) The debtor must have rights in the collateral.
These can occur in any order, but attachment only occurs when all three have been satisfied and perfection can only occur when they coexist.
How may the security agreement requirement for attachment be evidenced?
By an authenticated written security agreement, by possession accompanied by an oral agreement (pledge) in some cases, and by control in some cases.
When is possession sufficient to satisfy the agreement prong of attachment?
If the collateral is in the possession of the secured party pursuant to an oral security agreement (an arrangement called a pledge), then this meets the security agreement requirement.
When may a security agreement be evidenced by control?
A security agreement may be exercised by control if the collateral is (1) a nonconsumer deposit account, (2) electronic chattel paper, or (3) investment property.
How is control exercised over nonconsumer deposit accounts?
(1) If the secured party is the bank in which the nonconsumer deposit account is maintained, they will automatically have control.
(2) If the secured party is not that bank, it may obtain control by either (a) putting the deposit account in the secured party’s name or (b) agreeing in an authenticated record with the debtor and the bank that the bank will comply with the secured party’s orders with regard to the account without requiring the debtor’s consent.
How is control exercised over electronic chattel paper?
Control of electronic chattel paper occurs when a system showing the transfer of interests in the chattel paper reliably establishes the secured party as the assignee (e.g., when the secured party has an authoritative copy of the records constituting the electronic chattel paper which identifies the secured party as the assignee of record).
How is control exercised over an investment property?
A secured party has control of an item of investment property when they have taken the steps necessary to be able to have it sold without further action from the owner.
For a certificated stock or bond, the secured party generally has control when they have possession. If not in bearer form, the stock/bond holder must indorse the certificate to the secured party.
For a securities account (e.g., with a broker or mutual fund), a secured party will have control where the owner instructs the securities intermediary that the security holder has the same rights as the owner or that they must comply with the secured party’s orders without further consent of the owner.
What is the required form of a written security agreement?
A record authenticated by the debtor that evinces an intent to create a security interest, describes the collateral (and if it covers timber to be cut, a description of the land concerned).
Is a financing statement necessary for attachment?
No.
What are the rights and duties of secured party in possession?
(1) Duty of reasonable care in storing and preserving the collateral
(2) Right to reimbursement from the debtor for reasonable expenses incurred in preservation
(3) The risk of accidental loss or damage remains with the debtor to the extent of insurance deficiency.
(4) Right to hold an increase in value or profits from the collateral except for money, which must be given to the debtor or applied toward the secured obligation (accounting for profits).
(5) Right to repledge the collateral (may use it as collateral in
When does a security interest attach to after-acquired property?
A valid security agreement may create a security interest in property to be acquired in the future that will attach to the property as soon as the debtor acquires an interest in the property.
Absent an explicit after-acquired property clause, what is the scope/extent of the security interest?
The interest may generally only be created by specifically including it in the security agreement.
Does secured property usually include proceeds?
Yes, proceeds include whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds (second generation proceeds are proceeds). Unless stated otherwise, a security interest automatically gives the secured party the right to identifiable proceeds. Proceeds are either non cash proceeds or cash proceeds (money, checks, deposit accounts, etc).
How are proceeds identifiable within commingled cash?
Apply the lowest intermediate balance test. Look at the balance of the commingled bank account at the time of the deposit through the time of application of the test. The lowest balance during that period, up to the value of the originally deposited cash proceeds, is the secured party’s identifiable proceeds.
