Secured Transactions - Attachment of the Security Interest

Question 1

What is an attachment?

Answer 1

Attachment is essentially how a security interest is created. Once a security interest attaches, it becomes enforceable.

Question 2

A valid attachment requires that:

Answer 2

1. There is a valid security agreement memorializing the security interest;
2. The debtor possesses rights in collateral;

AND

3. The creditor extends value to the debtor (almost any consideration will suffice).

Question 3

Generally, the debtor must authenticate the security agreement by…

Answer 3

… providing the creditor with a reasonable description of the collateral in writing. Signature, thumbprint, initials, mechanical reproductions, etc., are all adequate proof of authentication so long as the debtor possessed the intent to authenticate the writing.

Question 4

The debtor must have rights in collateral beyond…

Answer 4

mere possession; however the debtor need not possess good title to the property (e.g., the debtor may be a lessee of the property).

Question 5

What is a consignment?

Answer 5

A consignment is a transaction in which a person delivers goods to a merchant for the purpose of sale

Question 6

req’s for consignment?

Answer 6

1. The merchant deals in goods of that kind under a name other than the name of the person making delivery;
   Is NOT an auctioneer; AND
   Is NOT generally known by its creditors to be substantially engaged in selling the goods of others.
2. The aggregate value of the goods is $1,000 or more at the time of each delivery;
3. The goods are NOT consumer goods immediately before delivery;

AND

4. The transaction does NOT create a security interest that secures an obligation.

Question 7

Who is a merchant for purposes of a consignment?

Answer 7

Deals in goods of that kind under a name other than the name of the person making delivery;
Is NOT an auctioneer; AND
Is NOT generally known by its creditors to be substantially engaged in selling the goods of others.

Question 8

Article 9 provides that in order to determine the rights of a consignee’s creditor

Answer 8

…, the consignee (the debtor) has rights and title to the goods identical to those of the consignor. Under a consignment, the consignee possesses the full ownership interest of the consignor in the goods, such that as the security interest of the consignee’s creditor will attach to them.

Question 9

What is a future advance?

Answer 9

A security agreement may provide that collateral secures future advances, whether or not the advances are mandatory, so long as the security agreement explicitly includes a future advances clause.

Question 10

What is the after-acquired property clause?

Answer 10

After-acquired property clauses may be included in security agreements and are generally enforceable allowing the after-acquired property to be secured in favor of the secured party (does not apply to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value).

For Example: S loans D $10,000 secured by D’s diamond ring with a security agreement that includes an after-acquired property clause. Here, S will possess a security interest in the diamond ring and the property that D acquires after the parties enter into the security agreement.

Question 11

What is the default rule for default?

Answer 11

Default. The parties may specifically define what constitutes a default. If left undefined, non-payment generally constitutes a default.

Question 12

May the parties provide for an acceleration of paymenets?

Answer 12

Yes. The parties may provide for the acceleration of payments upon the happening of a specified event (e.g., full balance becomes due if payment is 7 days late).

Question 13

May the parties make covenants concerning the collateral?

Answer 13

Yes. The parties may covenant certain things to each other regarding the collateral (e.g., the secured party may require the debtor to maintain insurance covering the collateral property).

Question 14

A security agreement will NOT be invalid because…

Answer 14

… the debtor possesses a right to use or dispose of the property serving as collateral.

Question 15

A secured party must…

Answer 15

…use reasonable care in the custody and preservation of collateral
in the secured party’s possession.

Question 16

Accessions.

Answer 16

An accession is collateral that does NOT lose its identity when physically united with other goods (e.g., a jet engine serving as collateral does not lose its identity when it is installed into a jet). A security interest may be created in the property that does not lose its identity and continues in the accession collateral.

Question 17

Commingled Goods.

Answer 17

A commingled good is collateral that loses its identity when physically united with other goods (e.g., 100 pounds of flour serving as collateral loses its identity when physically united with other ingredients to form cake products). If collateral becomes commingled with other goods, a security interest attaches to the product that results.