Often times, parties go to a creditor with the intent to use the money provided to secure collateral that has not yet been acquired. For instance, going to a bank to get a loan so you can purchase inventory for a shop, but you want to secure the loan with the inventory as collateral.
Article 9 authorizes the use of after-acquired property clauses. 9-204(a). The key to a successful clause is language. A party should state clearly state that they are securing future property as collateral. For instance, the description of “all of Party A’s current and after-acquired equipment” would satisfy the description.
When the clause is lacking, it is assumed that after-acquired property with high turnover rates will be secured as collateral. However, this is not a chance that an attorney should be willing to take. As such, if you want the future items to be covered, you need to add in the clause.
Finally, there are some items that the clause will not cover. Specifically, consumer goods and household items, and after-acquired commercial tort claims are not covered except in special circumstances. 9-204(b).
Sometimes, there is a presumption that the collateral includes after-acquired property (especially if the collateral is in inventory or accounts). If a party wants to rebut this presumption: there are a few factors that may help:
- The obligation has a short term
- the Language of the agreement
- Trade usage is the contrary for this type of property.
As a bit of background a security interest will always exist in the collateral. The idea with proceeds is that a creditor still has an interest when the original collateral is no longer available.
Unlike after-acquired property, proceeds from the collateral are always automatically assumed to be included as secured. Proceeds are defined in § 1-201(a)(64). Although there are some limitations, proceeds is simply a way of tracking the value of the collateral after it has changed in nature. For instance, a farmer and a bank may list the farmers singular harvester tractor as collateral. If the farmer then sales that tractor, then the money received are the proceeds and is secured as collateral. Likewise, if the farmer exchanged the harvester tractor for a bailing tractor, then the bailing tractor becomes secured as collateral.
Two essential rules:
- If the proceeds move outside of the scope of Article 9 (e.g., personal transferring to real property), proceeds may not trace.
- Can’t trace unidentifiable proceeds. See 9-315(b). Commingled goods are identifiable if they are goods as defined in 9-336. If they are not goods, then the items must be traded.
When attempting to trace proceeds creditors like the use of the lowest intermediate balance rule. The rule says that the identifiable proceeds is the lessor of either 1) the amount of deposited proceeds or 2) lowest account balance since the proceeds were demosited.
Takeaway: Always describe what you want in the security agreement, not just an automatic coverage of proceeds
Commingled Goods and Accessions
Commingled goods (9-336) are goods that are combined and then are unidentifiable as some product or mass. (e.g. flour is no longer identifiable as flour once used to bake a cake; adding corn to more corn).
There can be no security interest in the original goods after commingling. However, a security interest arises in the resulting product or mass.
Accession (See 9-335 and 9-102(a)(1)) are goods fixed to another good where they are still identifiable. (e.g. an engine in a car is attached to the car but still identifiable as an engine). No automatic attachment here.
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