ST: Scope of SI Flashcards
In the Hilda hypothetical, FB 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?
ALL $25,000 because of future advance clause.
RULE: Debt secured may include future advances.
Assume that Hilda buys new inventory six months after her agreement with FB, using money supplied by SB. Is the new inventory subject to FB’s SI?
Yes because of the after-acquired property clause (A-AP).
Rule: Property secured may include A-AP
A-AP GR:
Without an explicit A-AP clause in the SA, the SP’s SI ONLY REACHES COLLATERAL that the debtor had rights in AT THE TIME debtor signed the SA.
Exception: courts will often imply an a-al clause when the collateral is of a type that is rapidly depleted and replenished (eg. inventory or accounts).
A security interest does not attach under an a-al clause to consumer goods unless the debtor acquires rights in them within 10 days after SP gives value.
An a-ap clause is INEFFECTIVE as to commercial tort claims.
Property secured generally includes proceeds. What constitutes proceeds?
Proceeds includes WHATEVER is received UPON sale, exchange, collection, or other disposition of collateral or proceeds.
Unless otherwise agreed, a SI automatically gives the SP a right to identifiable proceeds.
First Bank has a SI in Hilda’s inventory. Hilda sells some inventory on credit. Does FB’s SI reach the accounts resulting from such sales?
YES, if identifiable.
Hilda sells some inventory for $3000, which cash is deposited in Hilda’s bank account. Does FB’s SI reach this money?
Yes, if the proceeds are still identifiable. Problem is that cash proceeds are frequently with cash non-proceeds so they become co-mingled.
What can you do with co-mingled cash proceeds?
TO determine which part of a commingled mass of cash is identifiable, apply the LOWEST INTERMEDIATE BALANCE TEST. Look at the balance in 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 SP’s identifiable proceeds.
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 SP’s identifiable proceeds?
$3000.
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 against to $750. How much of the bank account is the SP’s identifiable proceeds?
$50. – Lowest IB.
Sarah grants Finance Company a SI 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. Will FC’s SI attach to this account?
FC’s SI automatically attaches to this supporting obligation.
RULE: The attachment of SI in collateral also is an attachment of a SI in a supporting obligation for that collateral.
