You are the chief executive officer of Money Games Inc.(MGI), which has begun to market Borrow & Spend, a video game set in the world of finance. To buy ads, MGI borrows $50,000 from First Savings Bank. On MGI's behalf, you sign a note for the loan and offer its accounts receivable as collateral. You sign a security agreement that describes the collateral. The bank does not file a financing statement.
Has the banks security interest attached?
If so, when?
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The bank's security interest has attached, but it has not perfected its security interest. Typically in a closing for a secured loan, the borrower executes and delivers the note and security agreement and then the bank authorizes the release of the funds to the borrower. When the funds are released, the bank's security interest has attached because it has an executed security agreement describing the collateral and has given something of value for the secured interest (the loan).
While the bank has a secured claim on the borrowers accounts receivable if there is a default on the loan, it has not perfected its security interest until it files the financing statement in the proper jurisdiction which would be the jurisdiction of incorporation of the corporation. Until it perfects its security interest, its claim against the accounts receivable will be subordinate to claims of other secured creditors who have perfected their security interest and it may lose priority to other creditors who perfected ahead of it.
The bank's security interest has attached, but it has not perfected its security interest. Typically in a closing for a secured loan, the borrower executes and delivers the note and security agreement and then the bank authorizes the release of the funds to the borrower. When the funds are released, the bank's security interest has attached because it has an executed security agreement describing the collateral and has given something of value for the secured interest (the loan).
While the bank has a secured claim on the borrowers accounts receivable if there is a default on the loan, it has not perfected its security interest until it files the financing statement in the proper jurisdiction which would be the jurisdiction of incorporation of the corporation. Until it perfects its security interest, its claim against the accounts receivable will be subordinate to claims of other secured creditors who have perfected their security interest and it may lose priority to other creditors who perfected ahead of it.
In order to determine whether the bank's security interest has attached, we need to understand the criteria for attachment under the Uniform Commercial Code (UCC), which is a set of laws that governs commercial transactions in the United States.
First, let's define what attachment means in the context of a security interest. Attachment is the legal process by which a security interest becomes enforceable against the debtor and any third parties. It establishes the bank's right to take possession of the collateral in the event of default by the debtor.
Under the UCC, three requirements must be met for a security interest to attach:
1. Value has been given: This means that the bank has provided something of value, in this case, a loan of $50,000 to MGI to buy ads.
2. Debtor has rights in the collateral: MGI must have ownership or possessory rights over the collateral offered as security. In this case, the accounts receivable of MGI are offered as collateral in the loan agreement.
3. Security interest has been created: A security agreement must have been signed between MGI (the debtor) and the First Savings Bank (the creditor). The security agreement should specifically describe the collateral being used to secure the loan.
Now, considering the given information, the security interest of the bank has attached. This means that the bank has the legal right to take possession of the accounts receivable of MGI as collateral because all three requirements for attachment have been met.
However, it is important to note that the bank's security interest is only enforceable against MGI and not against third parties. This is because the bank did not file a financing statement, which is another requirement under the UCC to protect the bank's security interest against third parties.