Scope of the Security Interest

Question 1

(A). Debt secured may include:

Answer 1

future advances

Question 2

(B). Property secured may include:

Answer 2

after-acquired property

Question 3

General Rule re after acquired property:

Answer 3

Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.

Question 4

Exception to the general rule:

Answer 4

Even when there is not an explicit after-acquired property clause, the courts will often imply an after-acquired property clause when the collateral is of a type that is rapidly depleted and replenished (inventory or accounts).

The courts assume that the parties must have meant to cover after-acquired property, or the security interest will reach nothing.

Question 5

Another exception:

Answer 5

A security interest does not attach under an after-acquired property clause to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value.

Question 6

An after-acquired property clause is ineffective as to:

Answer 6

commercial tort claims.

Question 7

(C). Property secured generally includes:

Answer 7

proceeds.

Question 8

What are proceeds?

Answer 8

Includes whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.

If collateral is insured and money is received from the insurance company on account of loss or damage to the collateral, the money is a proceed of the collateral (up to the value of the collateral) unless it is payable to someone other than the debtor or the secured party claiming it.

In addition, any claims arising out of the loss of, defects in, or damage to collateral are proceeds of the collateral (up to the value of the collateral).

Question 9

Unless otherwise agreed, a security interest automatically gives the secured party:

Answer 9

a right to identifiable proceeds.