Establishing a Security Interest
With a Security Agreement or Without
Written by Jason Gordon
Updated at December 22nd, 2020
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What is a Security Agreement?
A security agreement is the contract that establishes a creditors security interest in the collateral of the debtor.
Generally, to establish a security interest the security agreement must expressly indicate the intention to create a security interest and be authenticated under 9-203(b)(3)(A).
Section 9-203(b)(3)(A) requires that the debtor sign the agreement and specifically identify the collateral. The description must be sufficient to reasonably identify the collateral.
Section 9-108(a). This generally means that stating the type of collateral covered by the agreement and in the possession of the debtor is sufficient. Section 9-108(b)(3).
Per the UCC, simply identifying the collateral as a commercial tort claim, consumer transaction, consumer goods, a securities, account, or commodity account is insufficient. Jurisdictions differ as to the extent to which a super-generic description (all property) is sufficient. Generally it requires more specificity, such as all inventory of the debtor.
Jurisdictions also differ on whether a super-generic description of collateral includes after-acquired collateral (collateral acquired after the security agreement is executed).
Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY
How to Establish a Security Interests without a Written Security Agreement?
In some cases an agreement to provide the creditor a security interest in specific collateral is enforceable in the absence of a written security agreement. This may be the case when the creditor has possession or control of the collateral. That is, if the creditor has possession or control of the collateral, there is sufficient evidence of intent to establish a security agreement in the absence of a writing.
Possessory security interests are covered under 9-203(b)(3)(B), which allows for a security interest in goods, negotiable instruments, documents of title, and chattel paper.
- Note: Possessory security interests are not allowed in intangibles, accounts, or certificated securities.
Control security interests are covered under 9-203(b)(3)(D), which includes deposit accounts, electronic chattel paper, investment property, and letters of credit. Control is generally established through contractual relationship.
