Scope of Security Interest

Question 1

Future Advances

Answer 1

A security agreement can provide that the collateral will serve as security for present obligations and for any advances the creditor makes to the debtor in the future.

Question 2

After Acquired Property

Answer 2

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

Failure to explicitly state this clause will mean that the secured party’s interest can only reach collateral that the debtor had rights in at the time the debtor signed the security agreement.

Question 3

Exception to no After Acquired Property Clause

Answer 3

A security interest will automatically attach to accounts and inventory and identifiable proceeds of collateral even without an after-acquired property clause).

Policy: Inventory should be expected to quickly deplete, similar to the accounts receivable, we want people to pay back… and with proceeds we don’t want people “washing” their money to hide it basically.

Question 4

What are proceeds?

Answer 4

Proceeds are WHATEVER is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.

Additionally, insurance proceeds payable by reason of loss or damage to the collateral is a proceed (unless payable to someone other than the debtor), and claims arising out of the loss of, defect in, or damage to collateral are also proceeds.

Question 5

What is the identifiable requirement for proceeds

Answer 5

Identifiable means that the proceeds can be traced back to the original collateral.

Example: Secured Interest in a tractor. Farmer sells tractor for 10,000. 10,000 is now proceeds. Farmer exchanges that 10,000 for 10 pigs. All 10 pigs are now proceeds.

NOTE: watch out for cash that goes into deposit accounts. Like water, it would be hard to distinguish whose cash is whose.

Question 6

Commingled Cash Proceeds - Lowest Intermediate Balance Rule Applies

Answer 6

This applies when cash is commingled with cash proceeds (placing proceeds into my bank account).

Under the Intermediate Balance Rule: You look at the bank statements between the date the proceeds were deposited and the date you are applying the rule. The lowest amount placed in the bank will be all that the creditor is entitled to.

Policy: Creditors do not like this rule.

Question 7

Supporting Obligations

Answer 7

The attachment of a security interest in:

1. Accounts
2. Chattel Papers
3. Documents,
4. general intangibles,
   5, instruments, and
5. Investment property

will automatically extend to supporting obligation. (Think of a surety or guarantor, the security obligation will attach the surety as well because it supports the underlying collateral).