Prior Uniform Statutory Provision: None.

Purposes:

1. Subsection (1) states three basic prerequisites to the existence of a security interest: agreement, value, and collateral. When these three coexist a security interest may, in the terminology adopted in this Article, attach. Perfection of a security interest will in many cases depend on the additional step of filing a financing statement (see Section 9-302); Section 9-301 states who will take priority over a security interest which has attached but which has not been perfected. The second sentence of the subsection states a rule of construction under which the security interest, unless postponed by explicit agreement, attaches automatically when the three stated events have occurred.

2. Subsections (1) and (3) read together make clear that a security interest arising by virtue of an after-acquired property clause has equal status with a security interest in collateral in which the debtor has rights at the time value is given under the security agreement. (To this general rule subsection (4) states two exceptions.) That is to say: the security interest in after-acquired property is not merely an "equitable" interest; no further action by the secured party - such as the taking of a supplemental agreement covering the new collateral - is required. This does not however mean that the interest is proof against subordination or defeat Section 9-108 should be consulted on when a security interest in after-acquired collateral is not security for antecedent debt, and Section 9-312(3) and (4) on when such a security interest may be subordinated to a conflicting purchase money security interest in the same collateral.

3. This Article accepts the principle of a "continuing general lien" which is stated in Section 45 of the New York Personal Property Law and other similar statutes applicable to "factor's lien". It rejects the doctrine - of which the judicial attitude toward after-acquired property interests was one expression - that there is reason to invalidate as a matter of law what has been variously called the floating charge, the free-handed mortgage and the lien on a shifting stock. This Article validates a security interest in the debtor's existing and future assets, even though (see Section 9-205) the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral. (See further, however, Section 9-306 on Proceeds and Comment thereto.)

The widespread nineteenth century prejudice against the floating charge was based on a feeling, often inarticulate in the opinions, that a commercial borrower should not be allowed to encumber all his assets present and future, and that for the protection not only of the borrower but of his other creditors a cushion of free assets should be preserved. That inarticulate premise has much to recommend it. This Article decisively rejects it not on the ground that it was wrong in policy but on the ground that it has not been effective. In the past fifty years there has been a multiplication of security devices designed to avoid the policy field warehousing, trust receipts, "factor's lien" acts and so on. The cushion of free assets has not been preserved. In almost every state it is now possible for the borrower to give a lien on everything he has or will have. There have no doubt been sufficient economic reasons for the change. This Article, in expressly validating the floating charge, merely recognizes an existing state of things. The substantive rules of law set forth in the balance of the Article are designed to achieve the protection of the debtor and the equitable resolution of the conflicting claims of creditors which the old rules no longer give.

4. Subsection (2) states the time at which debtor has rights in collateral in specified cases. A security agreement may be executed and value given before the debtor acquires rights the security interest will then attach under subsection (1), as to after-acquired property, when he does. Subsection (2) states when that is in several controversial cases. Notice that the vexed question of assignment of future accounts is treated like any other case of after-acquired property no periodic list of accounts is required by this Act. Where less than all accounts are assigned such a list may of course be necessary to permit identification of the particular accounts assigned.

5. Subsection (3) has been already referred to in connection with after-acquired property. It also serves to validate the so- called "cross-security" clause under which collateral acquired at any time may secure advances whenever made.

6. Subsection (4)(a) follows many state statutes which invalidate long-term security arrangements designed to cover future crops. Under existing statutes varying time limits are stated, the most frequent being one year, the period adopted by this section. The "except" clause permits a security interest in future crops in favor of a real estate lessor, mortgagee, conditional vendor or other encumbrancer during the continuance of his interest in the realty - this provision, again, is in accord with many existing statutes. Note that the real estate transaction involved must be one of lease or purchase or improvement of the land. Section 9-312(2) should be consulted on the subordination of such an interest to a later interest arising from a current crop production loan.

7. Subsection (4)(b) limits the operation of the after- acquired property clause against consumers. No such interest can be claimed as additional security in consumer goods (defined in Section 9-109), except accessions (see Section 9-314), acquired more than ten days after the giving of value.

8. Under subsection (5) collateral may secure future as well as present advances when the security agreement so provides. At common law and under chattel mortgage statutes there seems to have been a vaguely articulated prejudice against future advance agreements comparable to the prejudice against after-acquired property interests. Although only a very few jurisdictions went to the length of invalidating interests claimed by virtue of future advances, judicial limitations severely restricted the usefulness of such arrangements. A common limitation was that an interest claimed in collateral existing at the time the security transaction was entered into for advances made thereafter was good only to the extent that the original security agreement specified the amount of such later advances and even the times at which they should be made. In line with the policy of this Article toward after-acquired property interests this subsection validates the future advance interest, provided only that the obligation be covered by the security agreement. This is a special case of the more general provision of subsection (3).

As in the case of interests in after-acquired collateral, a security interest based on future advances may be subordinated to conflicting interests in the same collateral. See Section 9-312(3) and (4).

Cross References:

Point 1: Sections 9-301 and 9-302.

Point 2: Sections 9-108 and 9-312.

Point 3: Sections 9-205 and 9-306.

Point 4: Sections 9-110 and 9-203(1)(b).

Point 6: Section 9-312(2).

Point 7: Sections 9-109 and 9-314.

Point 8: Section 9-312(3) and (4).

Definitional Cross References:

"Account". Section 9-106.

"Agreement". Section 1-201.

"Collateral". Section 9-105.

"Consumer goods". Section 9-109.

"Contract". Section 1-201.

"Contract right". Section 9-106.

"Debtor". Section 9-105.

"Purchase". Section 1-201.

"Rights". Section 1-201.

"Secured party". Section 9-105.

"Security agreement". Section 9-105.

"Security interest". Section 1-201.

"Value". Section 1-201.