Extent of a Security Agreement
How for Does a Security Interest Go?
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What is the extent of the Security Interest in Collateral?
Under 9-315(a)(2) a security interest continues in any identifiable proceeds from sale or disposition of the collateral (even if proceeds are not mentioned in the security agreement). Proceeds under section 9-102(a)(64) includes whatever is received when collateral or proceeds is sold, leased, licensed, exchanged, collected or otherwise disposed of. This means that if identifiable proceeds are used to purchase new assets, then the security interest may attach to those assets.
What if Proceeds are Commingled with Other Funds?
Issues generally arise when there is a commingling of other funds (such as funds already present in a deposit account) with proceeds. This can create multiple claims of security interests in collateral. Section 9-203(b)(2) allows a secured party to trace any proceeds deposited in an account by a number of methods. The lowest intermediate balance states that withdrawals from a commingled account are made first from non-proceeds. Proceeds are withdrawn once other funds are exhausted. Subsequently deposited funds (after proceeds are deposited) cannot replenish proceeds that are used.
Supporting obligations under section 9-102(a)(77) and 9-203(f) state that any supporting obligation posted to secure a debt is an asset subject to attachment as a security interest. For example, assume that a Seller sells goods to a buyer. The buyer posts a bond, trust, or standby letter of credit as a surety for the debt. If Seller latter grants a security interest in all of its assets to Bank, Bank will have a security interest in the bond, trust, or standby letter of credit.
An after-acquired Property Clause in a security agreement states that a security interest attaches in any property subsequently acquired by the debtor under the debt is paid off. Section 9-204(a) allows for the enforceability of these after-acquired collateral clauses. This is important for lenders who loan money for the debtor to purchase inventory. The after-acquired property clause allows for the sale of inventory and the subsequent repurchase of inventory while preserving the security interest. 9-204(b) states that after-acquired property clauses do not establish a security interest if the after-acquired property is a consumer good (for personal use), unless the consumer good is purchased within 10 days of the secured party providing funds/value to the debtor.
A future advance clause in a security agreement states that any future advances (distributions of a loan) by a lender to a debtor is secured by the collateral described in the original security agreement. Section 9-204(c) makes future advance clauses enforceable if it so provides in the original security agreement. It provides an easy manner for the secured creditor to advance more funds to the debtor. These provisions are important for lines of credit.