Scope of Security Interest

Question 1

What are Future Advances?

Answer 1

A security agreement may provide that the collateral will serve as security not only for the present obligation, but also for advances the creditor makes to the debtor in the future

Question 2

What is After-Acquired Property and how does it Relate to Secured Transactions?

Answer 2

Without an EXPLICIT After-Acquired Property Clause in the security agreement, the secured party’s security interest ONLY reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.

If the security agreement has an explicit after-acquired property clause, the security interest will attach to the property as soon as the debtor acquires an interest in the collateral.

Question 3

What are the Situations Where a Security Interest will Attach even when there is NO After-Acquired Property Clause?

Answer 3

1) Collateral of a type that’s rapidly depleted and replenished (such as accounts and inventory)

2) Identifiable Proceeds of Collateral

• Proceeds — Proceeds include whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. Proceeds include second generation proceeds.
• Proceeds Must Be Identifiable — Identifiable means that the proceeds can be traced back to the original collateral.
• Commingled Cash Proceeds: You apply the lowest intermediate balance rule. Under that rule, you will look at the bank account starting at the time the proceeds are deposited and ending at the time you are applying the rule. 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).

These are exceptions to the requirement that a security agreement have an after-acquired property clause to entitle the secured party to the after-acquired property.

• The security interest attaches automatically to these two types of collateral

Question 4

Does an After-Acquired Property Clause apply to Consumer Goods claims?

Answer 4

An after-acquired property clause does not apply to consumer goods unless the debtor acquires rights in the goods within 10 days after the creditor gives value.

Question 5

Does an After-Acquired Property Clause apply to Commercial Tort claims?

Answer 5

NO! An after-acquired property clause does not apply to any Commercial Tort claims.

Question 6

Does the Attachment of a Security Interest Apply to a Supporting Obligation (a surety) for that Collateral?

Answer 6

The attachment of a security interest in accounts, chattel paper, documents, general intangibles, instruments, and investment property automatically extends to a supporting obligation ( a surety) for that collateral.