University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

138

Pages:

2
Author:

bratrochanter

The text discusses several aspects of security interests under the Uniform Commercial Code (UCC), focusing on attachment, after-acquired property, proceeds, future advances, and perfection. Key Concepts in Secured Transactions 1. Attachment of Security Interests: o Attachment is the process that makes a security interest legally enforceable against a debtor. For attachment to occur: 1. The debtor must agree to grant a security interest to the creditor. 2. The debtor must have rights in the collateral. 3. The creditor must provide value, such as a loan or extension of credit. 2. After-Acquired Property: o A security agreement may cover property that the debtor acquires after the agreement is made. This “after-acquired property” is automatically included in the security interest once the debtor obtains rights in it. For example, if a security interest covers “all restaurant equipment now owned or hereafter acquired,” any new equipment the debtor acquires later will also be included. o However, for consumer goods, the security interest only attaches if acquired within 10 days after the creditor provides value. 3. Proceeds: o The UCC automatically extends a security interest to proceeds obtained from the sale or other disposition of the original collateral. For instance, if a car dealership sells a vehicle that was secured under a bank’s interest, the security interest automatically extends to the sale proceeds, ensuring the creditor’s ongoing claim. 4. Future Advances: o A security agreement may also cover future loans or credit extensions to the debtor, known as “future advances.” For example, if a bank initially provides only a portion of a larger credit line, subsequent advances are protected under the same security interest without requiring a new agreement. Perfecting a Security Interest Perfection protects a secured party’s interest against claims from other creditors or purchasers:  Methods of Perfection: 1. Filing a Financing Statement: Most common method, involves filing a public record with the secretary of state or local agency to provide notice to others. The statement includes details like debtor and creditor names and a description of the collateral. 2. Possession or Control of Collateral: For some collateral types, such as instruments or cash, perfection can occur through possession by the secured party. 3. Automatic Perfection: In some cases, such as purchase money security interests (PMSIs) in consumer goods, perfection occurs automatically upon attachment. Priority and Practical Applications   Purchase Money Security Interests (PMSIs): PMSIs, which arise when the creditor finances the debtor’s acquisition of specific goods and retains a security interest in them, often have priority over other creditors, even those with prior claims on after-acquired property. Public Filing Importance: Filing a financing statement provides constructive notice, safeguarding the creditor’s priority claim in cases where the collateral might be sold or subjected to claims by other parties. Without proper filing, the creditor risks losing priority to other creditors or buyers. These concepts ensure that creditors have enforceable rights in a debtor’s property while protecting the priority of their claims in secured transactions.