Security Interests/Agreements

Question 1

what is a security interest

Answer 1

Security interest (“SI”) = right given to creditor in debtor’s property
- Right allows creditor to take or sell property if the debtor fails to fulfill the credit obligation (i.e., debtor doesn’t pay creditor)
- Arrangement memorialized in a security agreement

Question 2

what is attachment

Answer 2

process by which collateral is used to secure the creditor’s interest against the debtor
Effect — once a SI attaches, creditor has a right to take the collateral if debtor defaults

Question 3

what is perfection

Answer 3

process by which creditor secures her rights in the collateral as it relates to third parties
- Arises where third parties also have an interest in the same piece of collateral
- Creditor must perfect her SI to have a greater interest in the collateral over third parties

Question 4

what are the different types of tangible collateral

Answer 4

FICE

Farm products — items used/produced in farming (e.g., crops)
Inventory — goods kept for sale or lease
Consumer goods — items used for personal, family, or household purposes
Equipment — catchall for tangible items that do not fit above (e.g., factory machinery)

Question 5

what are the different types of intangible collateral

Answer 5

I Don’t Care About Dumb Garbage

Instruments
Documents
Chattel Paper
Accounts Receivable
Deposit Accounts
General Intangibles

Question 6

what is an instrument

Answer 6

writings representing the right to be paid money (e.g., promissory notes, checks, etc.)

Question 7

what is a document

Answer 7

writings representing the right to receive goods (e.g., bills of lading, warehouse receipts, etc.)

Question 8

what is chattel paper

Answer 8

record evidencing both an obligation to pay and SI in goods or a lease of goods (e.g., a promissory note and security agreement)

Question 9

what are accounts receivable

Answer 9

a right to payment not evidenced by an instrument or chattel (i.e., accounts receivable)
E.g., money owed to a dentist after seeing a patient
Does not include deposit accounts, investment property, or commercial tort claims

Question 10

what is a deposit account

Answer 10

a bank account

Question 11

what are general intangibles

Answer 11

catch-all, things like IP, patent rights, etc.

Question 12

what is a security agreement

Answer 12

SIs are created by contract (security agreement), and security agreements are typically in writing, signed by the debtor and include a description of the collateral

Once a SI attaches, it is secured, meaning creditor has a right to take the collateral if debtor defaults (i.e., fails to pay)

Question 13

what are the requirements for attachment (i.e, creating a security interest)

Answer 13

1) creating a security agreement
2) value given by creditor
3) debtor has rights in the collateral

Question 14

what are the components of a written security agreement to satisfy the first element of attachment

Answer 14

three elements:
- a record showing the intent to create a security interest
- authenticated (signed) by the debtor
- reasonably identifies the collateral

Question 15

what constitues “value given” to satisfy the second element of attachment

Answer 15

secured party (i.e., creditor) must give value to create a SI
- E.g., creditor loans debtor money or delivers equipment in exchange for SI
- Almost any consideration is sufficient as is pre-existing debt

Question 16

what are debtor’s rights in collateral to satisfy the third element of attachment

Answer 16

debtor must have rights in property he offers as collateral
Ownership or possessory interest is usually sufficient

Question 17

what is an after-acquired property clause in a security agreement

Answer 17

extends the SI to property acquired by the debtor after signing the security agreement

Not needed for proceeds (i.e., things received in exchange for collateral) or SIs in inventory
- note: separate process needed for proceeds (i.e, temporary perfection)

Question 18

what is a future advance clause in a security agreement

Answer 18

provision that says collateral used in current sec agreement will serves as security not only for this present obligation, but also for advances the creditor makes to debtor in the future
- In such cases, a new security agreement is not required
- E.g., L loans $2000 to D secured by inventory in D’s business; security agreement provides for future advances; if D gets loans in the future from L, they are secured by the original collateral

Question 19

what are proceeds

Answer 19

whatever is received upon the sale/exchange/any disposition of the collateral
- the security interest automatically attaches so long as the proceeds are identifiable (can be traced back)