Creation of a Security Interest
Scope § 9-109.
Article 9 applies to “a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.”
i. Security Interest – § 1-201(b)(35) – “an interest in personal property or fixtures which secured payment or performance of an obligation.”
ii. 9-109(a)(1)—Intended as Security Doctrine
1. Article 9 applies to any transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.
a. Ex: a deed in lieu of foreclosure not recorded immediately but held for recordation upon default is not a conveyance, but a security interest in the form of a mortgage (Basile v. Erhal Holding Corp.)
iii. 1-203—Lease Distinguished from Security Interest
1. At times, a document may be titled a “lease” but may actually be intended as a Security Interest. Be sure to establish that although the document is labeled a “lease” it is in fact a Security Interest.
a. Factors that indicate a SI: (i.e. a sale)
i. The lessee cannot terminate the lease
ii. The D receives the collateral for nominal consideration
iii. Original term of the lease is equal to the remaining economic life of the lease (looks like a purchase)
Three Prerequisites to Attachment – § 9-203(b)
a. A Security Agreement
There must be some language in the agreement itself that can be construed to convey a security interest. Intent of the parties is relevant only if there exists some language granting a security interest.
iv. Unless the secured party takes possession or control of the collateral, the debtor must authenticate the agreement, and it must provide a description of the collateral
1. Authenticated by the Debtor
a. To be safe, obtain the signature of all with an interest in the collateral
i. Real Estate Mortgage – Requires notarized signature and witness
2. Description of the Collateral – § 9-108
a. A description of personal or real property is sufficient , whether or not it is specific, if it reasonably identifies what is described
i. A description reasonably identifies the collateral if it identifies by
1. specific listing
3. a type of collateral defined in the UCC
5. computational or allocational formula or procedure
6. any other method, if the identity of the collateral is objectively determinable
ii. A description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” does not reasonably identify the collateral
1. In re Shirel
a. “Catch-all” phrase is inadequate to identify collateral. Third parties must be made aware of the identity of the collateral.
b. After Acquired Property – § 9-204(a)
i. “Now owned or hereafter acquired”
1. Includes collateral that is acquired after the security interest is signed
a. Stoumbos v. Kilimnik
xi. In effect, virtually anything that replaces the economic value of collateral constitutes a proceed.
1. includes proceeds on proceeds
a. Attachment – § 9-203(f)
i. A security interest in collateral attaches automatically to identifiable proceeds as soon as they come into existence even if the security agreement is silent on the matter.
2. Identification – § 9-315(a)(2)
a. “a security interest attaches to any identifiable proceeds of collateral”
i. Lowest Intermediate Balance Rule
1. as debtor spends funds in an account, it spends the proceeds of a security interest last,
2. the amount that constitutes identifiable proceeds is not increased by a later deposit of nonproceed funds.
3. the secured party maintains an interest in purchases to the extent of the amount of proceeds that go toward a purchase.
ii. Oriental Rug Warehouse – Claim by creditor that debtor sold rugs and purchased new inventory with the proceeds. Held that creditor could not trace the proceeds from the original collateral to the newly purchased rugs. Secured party should have required maintenance of separate accounts for deposits of proceeds
1. 315(a): Secured party has burden of establish something constitutes identifiable proceeds from sale or disposition of secured party’s collateral