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How does one establish a security interest in personal property?
A security interest in property begins when personal property is identified as collateral for a loan. This is known as “attachment” or “attaching” the property. Attachment takes place when the following conditions are met:
• Security Agreement – The secured party and the party granting a security interest (debtor) must enter into a written security agreement. The security agreement must be signed by the debtor and contain a reasonable description of the collateral.
• Value Given – The secured party must give or transfer value to the debtor. This generally means that the loaned funds are transferred to the borrower.
• Ownership in Collateral – The debtor must acquire ownership of the collateral. The debtor does not necessarily have to own the collateral at the time of entering into the security agreement. In some cases the debtor will use the value received from the secured party to purchase the collateral. Also, the security agreement may include an “after-acquired collateral” clause. This means that property acquired by the debtor after the loan is made can serve as collateral for the original loan.
⁃ Example: Jack loans Katy money to buy inventory to sell. Every new set of inventory replacing the sold inventory can be made subject to the security agreement.
• Discussion: Why do you think the law requires the above-referenced elements before a security interest attaches? Can you think of situations where any of the above elements are absent, but fairness would indicate that a security interest should attach? How do you feel about the ability of the secured party to acquire an interest in collateral that is later acquired by the debtor? Does it affect your opinion if the “after-acquired property clause” is very broad and includes all assets of the debtor?
• Practice Question: ABC Inc., enters into an agreement with Sasha to purchase equipment that he sells. Sasha agrees to finance the purchase but wants to establish a security interest in the equipment to make certain that ABC pays the full purchase price. What elements must be present for Sasha to establish as security interest?