Creation of Security Interest

Question 1

What must occur before a security interest becomes enforceable?

Answer 1

Attachment

Question 2

What are the three requirements for a security interest to attach?

Answer 2

(1) Secured party gives value to debtor
(2) Debtor has rights in the collateral
(3) Either:
(a) Authenticated written security agreement with description of
collateral
(b) Possession of collateral by secured party pursuant to oral
agreement

Question 3

Must a debtor’s rights in the collateral exist at the item of the security interest?

Answer 3

No

Question 4

What must be included in a written security agreement?

Answer 4

(1) Indication that the creditor has a security interest in the collateral
(2) Debtor’s signature

Question 5

How specifically must the security agreement identify the collateral?

Answer 5

Must only reasonably identify the collateral. Cannot be supergeneric, like “all of debtor’s property”

Question 6

What is the exception to the “reasonably identify” rule?

Answer 6

Consumer goods. They must be specifically identified

Question 7

What is the composite document rule?

Answer 7

A security agreement may be pieced together from multiple documents

Question 8

If the parties have an oral, but not written agreement, what must the secured party do to ensure attachment?

Answer 8

Take physical possession of the property

Question 9

What is a floating lien?

Answer 9

A security interest in collateral in which the debtor will acquire rights in the future and the proceeds from a disposition of collateral

Question 10

If a debtor disposes of collateral, is the secured party entitled to an interest in the proceeds?

Answer 10

Yes. A security interest automatically attaches to the proceeds of collateral

Question 11

What are proceeds?

Answer 11

Whatever the collateral is turned into from a sale, exchange, or other disposition, as long as it is traceable to the collateral

Question 12

What is a future advance clause?

Answer 12

A clause in the security agreement providing that the collateral contemplated in the agreement will secure any future loans or other value provided by the creditor

Question 13

What duties does a secured party in possession of collateral owe?

Answer 13

(1) Duty of reasonable care in the custody and preservation of the collateral
(2) Duty to keep collateral in its possession identifiable
(3) Duty to relinquish possession and control within 10 days of receipt of the debtor’s authenticated demand (assuming there is no outstanding obligation)

Question 14

What rights does a secured party in possession of collateral possess?

Answer 14

(1) Right to charge the debtor for reasonable expenses incurred in the custody of the collateral and secure that debt with the collateral
(2) Right to indemnification for accidental loss or damage
(3) Right to use or operate the collateral to preserve it or its value as permitted by court order or as agreed by the debtor
(4) Right to hold as additional security any proceeds, except money or funds, received from the collateral

Question 15

What rights does a debtor have in a secured transaction?

Answer 15

(1) Right to receive an accounting of the unpaid obligation and a list of the collateral securing it within 14 days of request
(2) Right to receive the secured party’s approval or correction of the debtor’s submitted list of collateral and statement of the amount of unpaid obligations secured by the collateral within 14 days of request
(3) Right to demand that the secured party notify any account debtor that the debtor is released from any further obligation to the secured party