Security Interests Flashcards
(6 cards)
Attached Interests
Secondbank and Thirdbank have enforceable and attached security interests in the machine, but Firstbank does not. Article 9 of the UCC governs these transactions because they involve the loan of money in exchange for a security interest in collateral. Under Article 9, in order for a creditor to have an enforceable security interest against the debtor in a debtor’s collateral, the creditor must attach that interest. A security interest is attached to collateral when the following three elements are accomplished: (1) a written or electronic security agreement covering the collateral, possession of the collateral, or control over the collateral; (2) the creditor gives the debtor value; and (3) the debtor has rights in the collateral. There are certain specifications for a security agreement. First, it must identify the debtor and the creditor. Next, it must be signed or authenticated by the debtor. Finally, it must sufficiently identify the collateral by using ordinary language or the terms to describe collateral found in Article 9. A super generic term such as “all assets” is not sufficient for a valid security agreement. If all of these elements are met, the creditor has an attached interest in the collateral.
Application
Firstbank does not have an attached interest in the key-manufacturing machine. Although Firstbank gave value to KeyCo, and KeyCo has rights to control the key-manufacturing machine, Firstbank does not have a valid security agreement with KeyCo, nor does it have possession or control over the collateral. The security agreement is not valid because it does not sufficiently describe the collateral. Rather, it generically describes the covered collateral as
“all assets.” This does not suffice under Article 9, and Firstbank does not have an enforceable security interest in the machine against KeyCo.
Secondbank does have an attached interest because the written security agreement was signed by both parties and covered “all of KeyCo’s equipment.” Equipment is defined under Article 9 as assets a business uses but does not sell or lease. The collateral is sufficiently described in the security agreement, and the machine would fall into the category of equipment. Further, Secondbank
gave value in the loan, and KeyCo has rights in the collateral. Therefore, Secondbank has an enforceable and attached security interest in the machine.
For all of the same reasons, Thirdbank has an attached security interest in the machine. Thirdbank’s security agreement sufficiently describes the collateral as equipment, it is signed, Thirdbank gave value, and KeyCo has rights in the collateral.
Perfected Interests
Thirdbank has a perfected security interest, but Firstbank and Secondbank do not. When an interest is perfected, it is enforceable against third parties. A security interest in equipment is perfected when the creditor obtains possession of the collateral, or an appropriate financing statement is filed with the secretary of state. A financing statement must include the names of the debtor and the creditor and identify the collateral. Unlike a security agreement, the financing statement need not specifically describe the collateral and generic terms can be used. If a security interest has not attached, it is not perfected until the time that it has validly attached.
Application
Firstbank does not have a perfected interest because it does not have an attached interest. That being said, Firstbank did file an appropriate financing statement listing KeyCo as the debtor and indicating the collateral as “all of KeyCo’s assets.” This generic description is appropriate here, but the filing alone does not achieve perfection without attachment. Secondbank does not have a perfected security interest because it never filed a financing statement and does not have possession of the collateral.
Thirdbank does have a perfected security interest as of Aug. 1, when it properly filed a financing statement. As previously stated, Thirdbank’s interest is attached. And, Thirdbank filed a financing statement listing KeyCo as the debtor and indicating the collateral as “all of KeyCo’s equipment.” This suffices to perfect Thirdbank’s interest.
Order of Priority
The order of priority, from highest priority to lowest, is: Thirdbank, Supplier, Secondbank, Firstbank. Among secured parties, the order of priority determines who has a superior right to the collateral. A perfected security interest will have priority over an unperfected security interest. Between two unperfected security interests, the first to attach prevails. Whether any secured party knows of the interest of another party is irrelevant. Between a perfected security interest and a judgment lien holder, the secured party prevails if it was perfected before the judgment lien holder obtained the lien. If the lien holder obtained the lien before the secured party’s interest was perfected, the lien holder prevails. A lien holder will prevail over an unperfected secured party.
Application
Here, Firstbank and Secondbank’s interests are unperfected. Secondbank’s interest prevails because its interest is attached, and Firstbank’s interest is not. As between Secondbank and Thirdbank’s interests, Thirdbank prevails because its interest is perfected. It is irrelevant that Thirdbank knew of the interests of Firstbank and Secondbank – it was up to Firstbank and Secondbank to perfect
their interests. Regarding Thirdbank and Supplier, Thirdbank’s interest was perfected on Aug. 1, and Supplier obtained his lien on Oct. 1. Therefore, Thirdbank’s interest has priority. Because both Firstbank and Secondbank’s interests are unperfected, Supplier prevails over their interests.
