CREATION OF SECURITY INTEREST (ATTACHMENT)

Question 1

CREATION OF SECURITY
INTEREST (ATTACHMENT)

Answer 1

• Article 9 concerns the secured party’s rights against both debtor & 3rd parties.
• Rights against debtor are established by attachment; rights against 3rd parties are established by perfection.

Question 2

REQUISITES FOR ATTACHMENT

Answer 2

• A security interest is not enforceable unless it has attached.
• 3 requirements for attachment, which must coexist:
  (1) Parties must agree to create the security interest
  (must enter into a security agreement), as evidenced by (a) creditor taking possession of the collateral, (b) an authenticated security agreement, or (c) creditor taking control of nonconsumer deposit accounts, electronic chattel paper, & investment property
  (Module 4: methods of obtaining control), and
  (2) Value must be given by secured party, and
  (3) Debtor must have rights (ex. ownership) in the collateral

Question 3

Form of the Authenticated Security Agreement
a. Evidenced by a Record

Answer 3

• Agreement must be evidenced by a record (written/ESI) & must show an intent to create a security interest.

Question 4

Form of the Authenticated Security Agreement: Agreement Must Be Authenticated

Answer 4

• Agreement must be authenticated by debtor.
• This usually means that it is signed by debtor.
• Any symbol, including an electronic symbol, that is made w/ present intent to authenticate the record will work (ex. “X,” or a smiley face).

Question 5

Form of the Authenticated Security Agreement: Description of Collateral

Answer 5

• Agreement must contain a description of the collateral (& if security interest covers timber to be cut, a description of land concerned).
• The description must reasonably identify the collateral.
• Collateral can be described broadly by category/type (ex. “all debtor’s equipment”) or specifically (ex. by serial number/by saying “debtor’s television” if debtor has only 1 television).
• Exception: Consumer goods, consumer securities
  accounts, & commercial tort claims cannot be described by type alone; a more specific description is needed.

No Supergeneric Descriptions
- However, a supergeneric description of collateral such as “all of debtor’s assets” or “all debtor’s personal property” is not a sufficient description.

Question 6

Value Must Be Given

Answer 6

• Secured party needs to give value to create the security interest.
• Any consideration sufficient to support a simple K is value.
• Even past consideration will suffice as value, if security interest is intended as security for the past consideration.

Question 7

Debtor Must Have Rights in the Collateral

Answer 7

• Debtor must also have rights in the collateral to create the security interest.
• However, don’t confuse having rights in collateral w/ having title to collateral.
• Article 9: title to goods only matters for consignments.
• For attachment, a limited right in collateral (ex. right to possession) is sufficient.

Question 8

Rights and Duties of Secured Party in
Possession or Control

Answer 8

• Secured party in possession must use reasonable care in storing & 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 debtor to the extent of any insurance deficiency.
• The secured party in possession/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 debtor/applied against the secured obligation.
• The secured party in possession/control may also pledge the collateral.

Question 9

Tip

Answer 9

The most important things to remember about attachment are: (1) all 3 requirements for attachment must be present—they can occur in any order, but there is no attachment until the last of the three occurs; & (2) there must be an authenticated security agreement/creditor must take possession/control of the collateral.