Scope of the Security Interest (Attachment)

Question 1

First Bank loans Hilda $20,000 on the date of the transaction, March 5. On May 10, First Bank lends Hilda an additional $5000. No new security agreement is signed. What is the amount of debt secured?

Answer 1

All $25K because of the future advance clause

Because: Debt secured may include future advances

Question 2

Assume that Hilda buys new inventory six months after her agreement with First Bank, using money supplied by Second Bank. Is the new inventory subject to First Bank’s security interest?

Answer 2

Yes - Because of the after acquired property clause

Because: Property secured may include after-acquired property

Question 3

What is the general rule for the scope of a security agreement (attachment) for lack of an after acquired property clause?

Answer 3

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

Question 4

What are the exceptions to the general rule for the scope of a security agreement (attachment) for lack of an after acquired property clause?

Answer 4

1. Even when there is not an explicit after-acquired property clause, the courts will often imply an after-acquired property clause when the collateral is of a type that is rapidly depleted and replenished (e.g., inventory or accounts). The courts assume that the parties must have meant to cover after-acquired property, or the security interest will reach nothing.
2. A security interest does not attach under an after-acquired property clause to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value
3. An after-acquired property clause is ineffective as to commercial tort claims

Question 5

What are proceeds?

Answer 5

Includes whatever (literally) is received upon the sale, exchange, collection, or other disposition of collateral or proceeds. If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party claiming it. In addition, any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral (up to the value of the collateral). Unless otherwise agreed, a security agreement automatically gives the secured party a right to identifiable proceeds

Question 6

First Bank has a security interest in Hilda’s inventory. Hilda sells some inventory on credit. Does First Bank’s security interest reach the accounts resulting from such sales?

Answer 6

Yes, if identifiable (probably invoices)

People owe her money for inventory sold, so she has accounts, those would also be proceeds

Question 7

Hilda sells some inventory for $3000, which cash is deposited in Hilda’s bank account. Does First Bank’s security interest reach this money?

Answer 7

Yes, but only if the proceeds are still identifiable (meaning that the secured party can prove that all of the monies in Hilda’s bank account are proceeds).

Question 8

How can you determine proceeds in a co-mingled bank account?

Answer 8

Apply the “lowest intermediate balance” test
Look at the balance in a commingled bank account starting at the time the proceeds are deposited and ending at the time you are applying the test. The law deems that the lowest balance during that time period is the secured party’s identifiable proceeds (but it cannot exceed the value of the cash proceeds originally deposited).

Question 9

For the “lowest intermediate balance” test, what if Hilda’s bank account had a $1000 balance (all non-proceeds) just before the $3000 from the inventory sale was deposited? The account balance never dropped below $4000. How much of the bank account is the secured party=s identifiable proceeds?

Answer 9

$3000

Question 10

For the “lowest intermediate balance” test, what if Hilda’s bank account had a $1000 balance (all non-proceeds) just before the $3000 from the inventory sale was deposited? The account balance then dipped to $1000, increased to $7000, dropped to $50, increased to $2000, and dipped again to $750. How much of the bank account is the secured party=s identifiable proceeds?

Answer 10

$50

Question 11

Sarah grants Finance Company a security interest in her accounts receivable. One of these accounts has a surety, who promised Sarah that she would pay the account if the account debtor did not. Does the security interest attach?

Answer 11

Finance Company’s security interest automatically attaches to this supporting obligation - The attachment of a security interest in collateral also is an attachment of a security interest in a supporting obligation for that collateral