security interests and agreements

Question 1

what are secured transactions

Answer 1

• transactions based on credit
• debtor receives something from another party (creditor) without paying immediately
• debtor gives creditor rights to a piece of the debtor’s property as collateral (i.e., a security interest)

Question 2

creditor’s rights in the collateral

Answer 2

allows creditor to take/sell property if debtor fails to pay the creditor

Question 3

how is this arrangement memorialized?

Answer 3

• security agreement
• agreement must describe collateral; party offering collateral must have rights in it (they must own it); and party gaining security interest (usually bank) must give value in exchange for the security interest

If a bank gives a loan to a borrower, the loan is value

Question 4

attaching security interest to the collateral

Answer 4

• just means creating a valid security interest in the collateral
• once a security interest attaches, the creditor has right to take collateral IF DEBTOR defaults

Question 5

two other ways for security interest to attach to collateral

Answer 5

• possession
• control

example: if the party that wants the security interest has actual possession of the collateral, no written agreement is required for a security interst to attach (if you borrow 200 from friend and you agree to let your friend take your lawn mower until you can pay the money back, your friend’s secuirty interest attached to the collateral and no need for written agreement)

if a business has a deposit account at a bank, and bank loans business some money, bank has control over the collateral b/c collateral is an account at that bank

Question 6

perfecting security interests

Answer 6

• the process by which creditor secures her rights in the collateral AS IT RELATES to THIRD PARTIES
• creditor must perfect her SI to have priority in the collateral over 3rd parties
• e.g., if business defaults on loan, the bank will be first in line to auction off the collateral and recover balance of the loan

Question 7

perfection

Answer 7

process of giving public notice of the security interest to the world

Question 8

classifying collateral

Answer 8

important in determining how it is secured and perfected

Question 9

tangible goods

Answer 9

• farming products (e.g., crops)
• consumer goods
• inventory – goods held for sale/lease
• equipment – tangible items that don’t fit above

Question 10

intangibles

Answer 10

• instruments (checks, promisorry notes)
• deposit accounts - bank accounts

Question 11

creation and attachment of security interests

Answer 11

• SIs are created by contract (security agreement)
• security agreements are usually in writing – signed by debtor and include a description of collateral
• once SI attaches, the creditor is SECURED (creditor has right to take collateral if debtor doesn’t pay)

Question 12

requirements for attachment of SI

Answer 12

1. valid security agreement: may be shown by (1) authenticated security agreement or (2) oral security agreement plus creditor’s possession of collateral
2. value: creditor must give value to create a SI (creditor loans debtor money or delivers equipment in exchange for SI)
3. rights in collateral: debtor must have rights in property he offers as collateral

Question 13

security agreement provisions
after-acquired property clauses

Answer 13

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

Question 14

security agreement provisions
future advances

Answer 14

• security agreements may contemplate future loans/advances from creditor to debtor based on debtor’s present collateral/collateral acquired in future
• new security agreement is NOT needed

Question 15

example of future advances

Answer 15

L loans 2k to D secured by inventory in D’s business

security agreement provides for FUTURE ADVANCES (D may get additional loans in the future from L)