Lesson 42: Creation of Security Interests

Understanding the building blocks of secured transactions with a dash of humor!

Welcome to Lesson 42 of our Uniform Commercial Code (UCC) instructable series. In this lesson, we will delve into the creation of security interests under Article 9 of the UCC, which governs secured transactions. For a comprehensive guide on UCC, you can check out this book on Amazon.

What is a Security Interest?

A security interest is a legal claim or lien created by an agreement between a debtor and a secured party that grants the secured party rights in personal property (collateral) to secure payment or performance of an obligation.

Creating a Security Interest

The creation of a security interest involves several steps:

  1. Value Must be Given: The secured party must give value to the debtor.
  2. Debtor Must Have Rights in Collateral: The debtor must possess rights in the collateral.
  3. Security Agreement: There must be a security agreement that describes the collateral.

1. Value Must Be Given

The first step in creating a security interest is that the secured party must give value to the debtor. This can include a loan, an extension of credit, or any other consideration.

2. Debtor Must Have Rights in the Collateral

The debtor must have rights in the collateral. This means the debtor must either own the collateral or have some other interest in it that allows them to grant a security interest.

3. Security Agreement

The security agreement is a contract between the debtor and the secured party that grants the secured party a security interest in the collateral. The agreement must include a description of the collateral and be authenticated by the debtor.

Attachment of Security Interest

The process of attachment is the point at which the security interest becomes enforceable against the debtor with respect to the collateral. Attachment occurs when all three of the following conditions are met:

  1. Value has been given.
  2. The debtor has rights in the collateral.
  3. A security agreement has been executed.

Graphic Representation of the Process

Value Given
Debtor's Rights in Collateral
Security Agreement
Attachment of Security Interest

Example of Security Agreement HTML Code

Security Agreement

This Security Agreement is made between [Debtor Name] ("Debtor") and [Secured Party Name] ("Secured Party").

Debtor grants to Secured Party a security interest in the following collateral: [Description of Collateral]. This security interest secures the payment and performance of all obligations of Debtor to Secured Party.

Signed: [Debtor's Signature]

Conclusion

In summary, the creation of a security interest under Article 9 of the UCC involves giving value, ensuring the debtor has rights in the collateral, and executing a security agreement. Once these steps are completed, the security interest is said to attach, making it enforceable against the debtor.

Continue your learning journey by exploring the next lesson on Perfection of Security Interests.