Extensions of Attachment-After-Acquired Property, Future Advances, and Supporting Obligations

Question 1

Is a secured party permitted to obtain a security interest in after-acquired property?

Answer 1

YES!

Question 2

What is the general rule for after-acquired property?

Answer 2

Security interest may 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.

• Such an interest generally may be created ONLY by specifically including in the security agreement an after-acquired property clause!

Question 3

Does a security interest automatically attach to proceeds?

Answer 3

YES! This is an exception to needing to include an “after-acquired property clause.” A security interest automatically attaches to identifiable proceeds of collateral whether or not the security agreement specifically provides so.

• The security agreement need not mention proceeds
• Identifiable=means that the proceeds can be traced back to the og collateral

Question 4

Does a security interest automatically attach to floating liens?

Answer 4

YES! A security interest in an aggregation of individual items that are expected to be disposed of (for example, inventory, accounts, stock, etc) and replaced automatically attaches to the new individual items as they replace individual items that have been disposed of

Question 5

Does a security interest automatically attach to commingled goods?

Answer 5

Kinda. If the proceeds are goods and they are mixed into a mass of the same type of goods, the security interest in the proceeds attaches to the MASS.

• The secured party WILL NOT be able to recover more than the amount of the debt

Question 6

How will the court trace commingled cash proceeds?

Answer 6

By using the lowest intermediate balance rule.

Question 7

What is the lowest intermediate balance rule?

Answer 7

Under this rule, a court will look at the bank account starting at the time the proceeds are deposited and ending at the time the rule is being applied.

• The law deems that the lowest balance during that time period is the secured party’s identifiable proceeds (but the amount cannot exceed the value of the cash proceeds originally deposited).

Question 8

Is an after-acquired property clause effective as to consumer goods or commercial tort claims?

Answer 8

NO!

• An after-acquired property clause is ineffective as to consumer goods other than accessions (goods that are physically attached to other goods) when given as additional security, unless the debtor acquires rights in the goods within 10 days after the creditor gives value
• An after-acquired property clause is ineffective as to commercial tort claims

Question 9

Is a new security agreement needed when a future advance/loan is made to the debtor?

Answer 9

NO! As long as the secured party includes a future advances clause

• The security agreement may cover future advances on present collateral or collateral to be acquired in the future, regardless of whether the secured party is obligated to make such advances
• If the security agreement contains such a “future advance” clause, a new security agreement is NOT needed when a future loan is made

Question 10

What are “supporting obligations”?

Answer 10

They are promises made by third parties to pay or perform (e.g., a surety).

• The attachment of a security interest in accounts, chattel paper, documents, general intangibles, instruments, and investment property AUTOMATICALLY extend to a supporting obligation in that collateral