Process by which a security interest is created and becomes enforceable against the debtor so the creditor can repossess the collateral if the debtor defaults (e.g., does not pay).
1. Creditor gave Value 2. Contract – The Security Agreement 3. Debtor has Rights in the Collateral Elements may occur in any order but no attachment until all three satisfied.
Creditor must “deserve” the right to repossess, for example: CR loans money to DR. CR gives DR goods on credit.
The contract between the debtor and creditor in which the debtor gives the creditor a security interest in the collateral. Methods of proving the security agreement (Statute of Frauds):
1. Oral Only if collateral is in the creditor’s possession. “Pledge” Creditor has duty to take reasonable care of the collateral.
2. Authenticated Record a. Evidence of Record ▪ Written, or ▪ Electronic ▪ Signed physically or electronically. ▪ Problem 282, p. 804
2. Authenticated Record b. Description of collateral – reasonable identification ▪ Exact (serial number) test rejected. ▪ Description by type allowed except for consumer goods and commercial tort claims. ▪ Super generic descriptions not allowed.
2. Authenticated Record Normally, security agreements are long, detailed contracts. Especially important are actions constituting default. Follow this link to read an assortment of real security agreements:
3. Control Method for deposit accounts, electronic chattel paper, and investment property. Creditor has the right to sell or cash in the collateral without further action from the debtor. Analogous to possession for these intangibles.
Ownership Identification to the contract Permission Problem 295, p. 820
Using new property acquisitions as collateral for old loan Very common with inventory – the floating lien. Consumer good limitation – property acquired within 10 days of creditor giving value. Commercial tort claim limitation – ineffective
Collateral will serve as collateral for future loans. A “line of credit” arrangement.