Value
To secure an obligation, value must be given. Typically, this is consideration that would be sufficient to form a contract. Although there are many ways value can be provided, the most common is the obligation (loan) from the creditor to the debtor. However, Article 9 does not define who exactly needs to provide the value, and there are instances where the creditor has a secured interest in one’s collateral who is not the borrower.
Future Advances
A future advance is when the lender provides an additional loan to the borrower, without the need to draft a new security agreement for each additional loan. For example, a lender who initially secures a 200,000 loan can draft into the original agreement that every “future advance” of 50,000 becomes attached. The language must be clear though, and typically includes, “all obligations now owed or hereafter owed by the debtor to the lender.”
Once upon a time, the courts required any future advances to be related to the original loan that secured the debt. This was designed to protect debtors from additional loans being secured to the same collateral. However, over time, the courts have softened this requirement to where the future advances can apply to any unrelated loans a borrower may receive from the lender. See Comment #5 in 9-204.
Additionally, the security agreement can contain both a future advances clause and an after-acquired clause. Thus, any additional loan to secure any additional collateral from the same lender would be binding under the original security agreement. This is called “cross-collateralization.”
Debtor’s Rights in the Collateral
The final requirement for an attachment to occur is that the obligor has rights in the collateral to provide a security to the creditor. Most of the time, this will be governed by Property law or Contract law outside the realm of Article 9. The principle is fairly basic: 1) determine if the obligor has rights to the purported property. If they do, the security interest can attach. If they don’t, the security does not attach. “You can’t sell what you don’t have.”
Special Attachment Rules: Automatic Attachment
Thus far we have seen a few situations where a collateral is automatically attached to a security agreement without any further description (i.e., proceeds, product or mass of commingled goods). Other automatic attachments can be found in 9-203(f-i). A few of these include:
- Certain investment property, specifically securities or commodities accounts.
- A line of credit (e.g., mortgage (not covered by Article 9) has a promissory note. The promissory note is then used to secure a loan. The creditor accepting the promissory note as interest now automatically has those same rights to the mortgage).
- A guarantee on an account.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
