Creation of Security Interest (Attachment)

Question 1

How are Rights Against the Debtor Established?

Answer 1

A creditor can establish rights against the debtor by Attachment. A security interest is not enforceable unless it has attached.

Question 2

What are the Main Requirements for Attachment?

Answer 2

1. The parties must agree to create the security interest (they must enter into a security agreement)
2. Value must be given by the secured party AND
3. The debtor must have rights (for example, ownership) in the collateral

Question 3

What are some of the ways that a Security Agreement can be Evidenced (Shown)?

Answer 3

A security agreement can be evidenced in several ways:

1. The creditor taking possession of the collateral
2. An authenticated security agreement
3. The creditor taking control of nonconsumer deposit accounts, electronic chattel paper, and investment property

Question 4

What Does it Mean for a Security Agreement to be Authenticated?

Answer 4

The agreement must be authenticated by the debtor. This usually means that it is signed by the debtor. Any symbol, including an electronic symbol, that is made with the present intent to authenticate the record will work (for example, an “X,” or a smiley face).

Question 5

What are the Description of Collateral Requirements for a Security Agreements?

Answer 5

The agreement must contain a description of the collateral that reasonably identifies the collateral.

Two Main Rules

1) Description by Category or Type — Collateral can be described broadly by category or type (“all of the debtor’s equipment”) or specifically (by serial number or by saying “the debtor’s television” if the debtor has only 1 television).

• EXCEPTION — Consumer goods, consumer securities accounts, and commercial tort claims cannot be described by type alone; a more specific description is needed.

2) No Supergeneric Descriptions: Supergeneric description of collateral such as “all of the debtor’s assets” or “all of the debtor’s personal property” is NOT a sufficient description.

Question 6

What Kind of Rights Must the Debtor have in the Collateral?

Answer 6

The debtor must also have rights in the collateral to create the security interest. A limited right in collateral (right to possession) is sufficient. Don’t confuse this with having title. Under Article 9, title to goods matters only for consignments.

Question 7

What are the Rights and Duties of Secured Party in Possession or Control?

Answer 7

The secured party in possession must use reasonable care in storing and preserving the collateral, but is entitled to reimbursement for reasonable expenses in caring for the collateral.

• Risk of loss of property in the secured party’s possession is on the debtor to the extent of any insurance deficiency.
• The secured party in possession or control may hold any increase in value of, or profits from, the collateral (except money) as additional security, but money so received must be given to the debtor or applied against the secured obligation. The secured party in possession or control may also pledge the collateral.