FORMATION OF SECURITY INTEREST (ATTACHMENT) – § 9-203, § 9-204
A. Generally –SI attaches when it is enforceable against D’s collateral; Enforceable against collateral when, and not until, three requirements below are met. 9-203(a)
§ Usually, value being given is the last element to be fulfilled
§ Does not really change the relationship between the debtor and creditor. It does change relationship between creditor and other creditors.
B. Three Requirements of Attachment under 9-203(b)
1. CR must give value (1-201(44)); includes giving the D money or allowing D to have access to a line of credit;
§ definition of value includes past consideration, therefore unsecured debt can become secured at any time during the creditor debtor relationship if a SA is signed later 1-201(44)
§ This element usually only important in reference to the time that creditor gave value (when did the SI attach?)
2. D must have rights to collateral or power to transfer rights in collateral; and
§ debtor can only grant the interest that he has (i.e. leasehold)
§ if debtor does not own the collateral at the time, the agreement becomes binding at the time he subsequently comes into possession.
3. A SA must exist.
(a) Debtor must have authenticated an agreement which provides a description of collateral 9-203(b)(3)(A)
§ Authenticate = to “sign”, or execute a symbol or process a record, with the intent to identify the person and adopt a record 9-102(a)(7) (i.e. email correspondance)
§ Parties need not use the language “I grant a security interest”
§ Courts are divided as to whether the description can be filled in later after the signature 9-203(b)(3)(A)
o Majority—No fill in the blank
o Minority—okay as long as comports with statute / time to fill in the blank is not an issue
§ Description of Collateral
(a) Sufficient if it reasonably identifies what is described. 9-108(a)
(b) Examples of reas. identification. 9-108(b)
· Category = all furniture
· Types of Collateral = Accounts, Chattel Paper, Documents, Instruments, General Intangibles, Goods (Consumer Goods, Equipment, Farm Products, Inventory) (See Old 9-102 for the list)
(c) “All D’s assets/personal property” does NOT reas. identify for SA purposes (although it is acceptable for FS purposes (9-504) because a financing statement gives notice and priority, not a contract like the SA) 9-108(c)
(d) Can’t describe coll. by type when it’s a commercial tort claim or consumer transaction, consumer goods, etc .. . 9-108(e) BUT description is sufficient if it satisfies 9-108(a) and contains descriptive component beyond the “type” alone. ALL equipment, or ALL farm products is sufficient. ALL crops is NOT specific enough, it is rather a category.
(e) 9-108 is not intended to be an exclusive list. The use of the word “example” in 9-108(b) shows that the test really is: “is it a reasonable identification of the collateral”.
§ After-Acquired Property
(a) A SA may provide for a security interest in AA collateral 9-204(a)
(b) It is a rebuttable presumption, based on the nature of overturning assets, that a SI in inventory and accounts receivable includes AA Inv. and A/R. (Filtercorp and 9-204(a))
· CR wouldn’t enter into SA for inv. and A/R when these coll. don’t continue to exist. They assume that there’s a “floating lien” on the collateral, reasonably allowing them to assume that “all Inv. and A/R” includes present and AA goods.
· The real issue is the construction and the interpretation of the contract.
(c) 9-108, Cmt. 3 says that whether the description of the collateral is sufficient enough to infer an AA clause is a K interpretation matter
(d) Drafting Strategy: You want an interest in equipment: “Equipment and any after acquired equip, replacements and substitutions”
(e) The EXCEPTION is 9-204(b) ® AA Consumer Goods must be acquired by D w/in 10 days after secured party gives value. Otherwise, SA is unenforceable as to AA consumer goods. UCC and federal rules that regulate lending also regulate after-acquired consumer goods. If you see after-acquired consumer goods, a red flag goes up. Federal law will trump UCC if applicable.
(f) There is no need for financing statements to include references to after-acquired property. 9-204, Cmt. 7; 9-502(a)(3); 9-504. FS is treated completely different than SA.
o Strategy: When describing collateral, be broad if you are the creditor, be narrow if you are the debtor
§ Composite Document Rule–Some courts look at any and all documents and correspondence in the transaction as a whole to determine whether there was intent to create a security agreement. Documents show objective portion; parol evidence allowed for subjective portion.
§ Majority—require some internal consistency between documents
§ Minority—require reference to the other documents
EXCEPTIONS to non-authenticated security agreement which still fall under the statute in subsections (B)-(D)
(b) *CR must have possession of collateral (oral agreement in which authentication not required);*
(c) Collateral is a certificated (8-301) security and has been delivered to CR, or
(d) CR has control of the collateral that is a deposit acct, electronic chattel paper, etc . . .
C. Proceeds – . “Proceeds” includes anything exchanged for the collateral, what is collected on collateral, and rights arising out of collateral. Very broad and simply put means “anything replaced for collateral”. 9-102(a)(64). “Collateral” includes Proceeds 9-102(a)(12)(A)
(a) 9-203(f) – Attachment of SI in collateral gives Sec. CR rights to proceeds automatically provided by 9-315(a)(2) (any identifiable proceeds)
· “Identifiable” is not defined by the code. The closest definition is that of 9-315(b)’s commingled proceeds identifiable.
· Cash is hard to identify b/c it’s deposited into accts w/ other cash. Chattel Paper and Trade-in are identifiable.
(b) 9-315(a)(2) – SI attaches to any identifiable proceeds of collateral
(c) The security agreement does not need to specifically refer to the proceeds of the collateral and is covered as long as it is (1) proceeds (9-203(f)); and (2) identifiable (9-315(a(2)).
(d) Sale of
as opposed to a property right. There is not a great deal of case law dealing with the enforceability of security interests in government licenses, not uniformity in the decisions handed down from state to state.
o Copyrights, Patents and Other Intellectual Property
§ Intellectual property such as copyrights, trademarks and patents are considered “general intangibles” within the purview of the UCC. To have a valid lien in a patent, the lender must sometimes register an assignment of a security interest form with the U.S. Patent Office
o Personal Guarantee — A personal guarantee allows creditor to proceed against an individual as if it were the borrower, if the borrower cannot repay the loan. These can be secured by personal property.
PERFORMANCE AND BREACH
o Default Generally — “debtor’s failure to pay the debt when due or to otherwise perform the agreement between creditor and debtor” 9-601(a). State law remedies are not available until default. Look to the agreement and supplemental state law to determine exactly when default occurs.
o Payment Schedules:
§ Single Payment – payable on the day due or extensions are given at the creditor’s prerogative. Also, can be formed to be called “on demand” at any time.
§ Installment – most transactions
§ Line of Credit – debtor writes checks on the bank account which affords a maximum line of credit. When the debtor gets paid, he forwards payment to the bank to pay down the line. Good because debtor only pays interest on $ it needs at the time (peak months etc.)
o Acceleration – Normally, if there is a breach by a single payment, creditor can only sue for that periodic payment. However, a creditor can put an acceleration clause into the agreement that contracts around the rule of divisibility (then future payments are immediately due and payable). The effect of acceleration is usually to cut off the debtor’s common law right to redeem.
§ Insecurity Clause – This allows for acceleration BEFORE default “only if creditor has good faith belief that the prospect of payment or performance is impaired” (debtor has burden) 1-309.
o Cure – Not in UCC, but some state statutes govern debtor’s right to cure. Normally, after acceleration, cure is only possible if debtor pays entire accelerated debt (except in some home mortgage cases)
Waiver / Modification — if there is a breach of terms and the creditor does not act on these breaches, debtor could have reliance argument (usually included