Creation (Attachment) of Security Interests Flashcards
What are the BASIC requisites for attachment?
- The parties must have an agreement that the security interest attach;
- Value must be given by the secured party; and
- The debtor must have rights in the collateral
How can the parties’ agreement be evidenced?
- By an authenticated security agreement;
- By creditor’s possession of the collateral;
- By control
Describe an “authenticated security agreement”!
The parties’ security agreement may be evidenced by a record (i.e. written or ESI) authenticated by the debtor that describes the collateral and, if the collateral is timber to be cut, describes the land concerned.
How is a record “authenticated”?
A record is authenticated if it is signed or with the present intent to adopt it, attached to or associated with an electronic sound, symbol, or process.
When is “description of collateral” in an “authenticated security agreement” sufficient?
The description of the collateral in the authenticated security agreement is sufficient if it reasonably identifies the collateral.
- Description may be specific, or may be by category, type, quantity, computational formula, or any other method in which the identity of the collateral is objectively determinable
- HOWEVER, a supergeneric description of collateral (“all the debtor’s assets” or “all the debtor’s personal property”) is NOT sufficient
What type of collateral CANNOT be described by type alone in description of collateral in an authenticated security agreement?
- Commercial tort claims;
- Consumer goods; and
- Consumer securities accounts
- Such collateral must be described more specifically to be covered by the authenticated security agreement (e.g., the description, “the tort claim arising out of the December 13, 2011, explosion of debtor’s factory,” is sufficient, but the description, “all of debtor’s commercial tort claims,” is not sufficient)
Can a security agreement be evidenced by the creditor’s possession of the collateral?
YES!
What are the rights and duties of a secured party in possession of collateral?
When a secured party has possession of the collateral for purposes of attachment or perfection, or upon the debtor’s default, the secured party has the following rights/duties:
- Duty of Reasonable Care: in storing and preserving the collateral;
- Right to Reimbursement for Expenses: reasonable expenses incurred in preservation of the collateral, including cost of insurance;
- Risk of Loss: this is on the debtor to the extent of any insurance coverage deficiency;
- Accounting for Profits: the secured party may hold as additional security any increase in value of or profits from the collateral EXCEPT money; which must be either given to the debtor or applied against the secured obligation;
- Right to Repledge: the secured party may repledge the collateral (e.g., use the collateral as collateral for an obligation under which the secured party is a debtor).
Which categories of collateral allow a security agreement to be evidenced by control?
- Nonconsumer deposit accounts (NDAs);
- Electronic chattel paper (EPs); or
- Investment property (IPs)
What is the method for gaining control of Nonconsumer Deposit Accounts?
The bank in which a NDA is maintained automatically has CONTROL over the NDA.
If the secured party is not such a bank, it may obtain control over a NDA by either:
- Putting the deposit account in the secured party’s name, or
- Agreeing in an authenticated record with the debtor and the bank that the bank will comply with the secured party’s orders regarding the NDA WITHOUT requiring the debtor’s consent.
What is the method for gaining control of electronic chattel paper?
Control of ECP is the functional equivalent of possession of tangible chattel paper. (focus is on a reliable system)
- A party has control over ECP when a system showing the transfer of interests in chattel paper reliably establishes the secured party as the assignee
- Example: where the secured party has the authoritative copy of the records constituting the ECP (e.g., a computer file), that copy identifies the secured party as the assignee of record and any other copy of or amendments to the records are marked as such
What is the method for gaining control over investment property?
Basically, a secured party has control of an item of IP when the secured party has taken whatever steps are necessary to be able to have the investment property sold WITHOUT further action from the OWNER.
Control over socks and bonds (IPs)
Generally, a secured party will have control over a certificated stock or bond IF the secured party takes POSSESSION of the stock or bond.
- If it isn’t in “bearer” form (e.g., states a specific payee), the secured party must ALSO have the specific person indorse the certificate over to him
Control over securities accounts (IPs)
Few people actually physically possess the stocks or bonds they own: INSTEAD they instruct brokers or mutual fund companies to purchase stocks, bonds, or mutual fund shares on their behalf and hold them in a securities account.
- A creditor CAN take a security interest in such an account
- He/she will have control over this securities account if the owner of the account contacts the broker of mutual fund company and instructs the intermediary either that:
- The secured party now has whatever rights in the account that the owner has; or
- That the intermediary is to comply with the secured party’s orders WITHOUT FURTHER CONSENT of the owner
What are the rights and duties of a secured party in control (NDAs, ECPs, and IPs)
A secured party must account for profits of the collateral. She may also repledge the collateral.
