SCOPE OF THE SECURITY INTEREST

Question 1

FUTURE ADVANCES

Answer 1

• A security agreement may provide that the collateral will serve as security for the present obligation, & for future advances creditor makes to debtor

Question 2

AFTER-ACQUIRED PROPERTY

Answer 2

• W/o an explicit after-acquired property clause in the
  security agreement, secured party’s security interest only reaches collateral that debtor had rights in at the time debtor signed the security agreement.
• If the security agreement has an explicit after acquired property clause, security interest will attach to property as soon as debtor acquires an interest in the collateral

Question 3

Exceptions

Answer 3

• Even w/o an after-acquired property clause, a security interest will attach automatically to collateral of a type that’s rapidly depleted & replenished, such as accounts & inventory.
• A security interest will also automatically attach to identifiable proceeds of collateral, even w/o an after-acquired property clause (as discussed further below)

Question 4

Consumer Goods and Commercial Tort Claims

Answer 4

• An after-acquired property clause does not apply to consumer goods unless debtor acquires rights in the
  goods within 10 days after creditor gives value.
• In addition, an after-acquired property clause does not apply to any commercial tort claims.

Question 5

PROCEEDS

Answer 5

• As mentioned, a security interest in collateral automatically attaches to identifiable proceeds of the collateral.
• Proceeds include whatever is received upon sale, exchange, collection, or other disposition of collateral /proceeds.
• Proceeds include second generation proceeds.
• Insurance payable by reason of loss/damage to the collateral is a proceed, unless it is payable to someone other than the debtor/secured party
• Claims arising out of the loss of, defects in, or damage to collateral also are proceeds.

Question 6

Proceeds Must Be “Identifiable”

Answer 6

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

Question 7

Commingled Cash Proceeds—Lowest
Intermediate Balance Rule Applies

Answer 7

• In the case of commingled cash proceeds (ex. in
  a bank account), the identifiable proceeds can be traced using the lowest intermediate balance rule.
• Under that rule, you will look at the bank account starting at the time the proceeds are deposited & 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).

Question 8

SUPPORTING OBLIGATIONS

Answer 8

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

Question 9

Example

Answer 9

Sarah grants Finance Company a security interest in her accounts receivable. One of these accounts has a surety. The surety promised Sarah that the surety would pay the account if the account debtor did not. Finance Company’s security interest automatically attaches to this supporting obligation.