Secured Transactions: Lecture One (Part 2) — The Nature and Creation of Security Interests

Law School

This lecture, the first in a series on secured transactions, focuses on the nature and creation of security interests under Article 9 of the U.C.C. It defines a secured transaction as a credit arrangement where a debtor grants a creditor an interest in personal property or fixtures as collateral to secure an obligation. The discussion outlines how Article 9 defines a security interest, identifies the parties involved, categorizes the types of property that can serve as collateral (including goods, intangibles and semi-intangibles), and explains the three essential elements for attachment (creation) of a security interest: value, debtor’s rights in collateral, and a sufficient security agreement. Key concepts like after-acquired property, future advances, and proceeds are also examined, along with common issues in creating security interests and the policy goals of Article 9.

A secured creditor has a property interest in specific collateral that they can proceed against to satisfy the obligation, giving them a significant advantage over unsecured creditors who only have a contractual claim.

Article 9 governs security interests in personal property and fixtures.

The four subdivisions of goods are Consumer goods, Inventory, Equipment, and Farm products.

The three essential elements for attachment are: the secured party must give value, the debtor must have rights in the collateral (or the power to transfer rights), and there must be a security agreement that satisfies the statute of frauds (usually an authenticated record).

The U.C.C. requires the collateral description to be reasonably identifiable.

An after-acquired property clause allows a security interest to cover property acquired by the debtor after the security agreement is executed; it is especially common in inventory and accounts receivable financing.

Future advances refer to securing future loans or advances under the same security agreement; U.C.C. Section 9-204 explicitly authorizes this arrangement.

A secured party's interest generally continues in the proceeds when the collateral is sold or otherwise disposed of, as long as the proceeds are identifiable.

For certain types of collateral like negotiable instruments, the secured party can perfect its interest simply by taking possession of the collateral (a pledge).

One common pitfall is the improper description of collateral in the security agreement; the case of In re Bollinger Corporation was referenced as an illustration of an insufficiently specific description.