Security agreement
Encyclopedia
A security agreement, in the law of the United States
, is a contract
that governs the relationship between the parties to a kind of financial transaction known as a secured transaction
. In a secured transaction, the Grantor (typically a borrower but possibly a guarantor or surety
) assigns, grants and pledges to the grantee (typically the lender) a security interest
in personal property
which is referred to as the collateral
. Examples of typical collateral are shares of stock
, livestock
, and vehicles. A security agreement is not used to transfer any interest in real property
(land/real estate), only personal property. The document used by lenders to obtain a lien on real property is a mortgage or deed of trust
.
The security agreement sets out the various rights the grantee will have with respect to the collateral, which are in addition to all other rights which the lender may have by law, such as those rights contained in Article 9 of the Uniform Commercial Code
which has been adopted in some form by each state in the United States
. The Security Agreement also addresses issues such as permitted sales or other transactions with the collateral in the ordinary course of the grantor's business and notices that may be required to be given by the grantee to the grantor if certain actions are taken. There are many forms available for purchase from legal supply and banker supply companies, in addition to software that will produce a security agreement according to specific user input.
A security agreement may be oral if the secured party (the lender) has actual physical possession of the collateral. Where the collateral remains in the physical possession of the borrower, or where the collateral is intangible (such as a patent
, accounts receivable
, or a promissory note
), the security agreement must be in writing in order to satisfy the statute of frauds
.
The security agreement must be authenticated by the debtor, meaning that it must either bear the debtor's signature
, or it must be electronically marked. It must contain a reasonable description of the collateral, and must use words showing an intent to create a security interest
(the right to seek repayment of the loan by foreclosing on the collateral). In order for the security agreement to be valid, the borrower must usually have rights in the collateral at the time the agreement is executed. If a borrower pledges as collateral a car owned by a neighbor, and the neighbor does not know of and endorse this pledge, then the security agreement is ineffective. However, a security agreement may specify that it includes after-acquired property
. If such a specification is included, then a pledge of "all automobiles owned by borrower" would include the neighbor's car if the borrower were to buy that car from the neighbor.
In order for a security interest to attach to the collateral in the possession of subsequent purchasers, it must be perfected
. If the security agreement is for a purchase money security interest, perfection is automatic. Otherwise, the lender must record either the agreement itself, or a UCC-1 financing statement
, in an appropriate public venue (usually the state secretary of state or a state business commission under that person's authority). Perfecting the interest creates constructive notice
, which is deemed legally sufficient to inform the rest of the world of the lender's rights in the collateral. Where a borrower has used the same property as collateral with respect to multiple security agreements made with different lenders, the first lender to record the interest has the strongest claim to that property.
Law of the United States
The law of the United States consists of many levels of codified and uncodified forms of law, of which the most important is the United States Constitution, the foundation of the federal government of the United States...
, is a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
that governs the relationship between the parties to a kind of financial transaction known as a secured transaction
Secured transaction
Generally, a secured transaction is a loan or a credit transaction in which the lender acquires a security interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower's default. The terms of the relationship are governed by a...
. In a secured transaction, the Grantor (typically a borrower but possibly a guarantor or surety
Surety
A surety or guarantee, in finance, is a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults...
) assigns, grants and pledges to the grantee (typically the lender) a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
in personal property
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
which is referred to as the collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
. Examples of typical collateral are shares of stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, livestock
Livestock
Livestock refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning...
, and vehicles. A security agreement is not used to transfer any interest in real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
(land/real estate), only personal property. The document used by lenders to obtain a lien on real property is a mortgage or deed of trust
Trust deed (real estate)
In real estate in the United States, a trust deed or deed of trust is a deed wherein legal title in real property is transferred to a trustee, which holds it as security for a loan between a borrower and lender...
.
The security agreement sets out the various rights the grantee will have with respect to the collateral, which are in addition to all other rights which the lender may have by law, such as those rights contained in Article 9 of the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
which has been adopted in some form by each state in the United States
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
. The Security Agreement also addresses issues such as permitted sales or other transactions with the collateral in the ordinary course of the grantor's business and notices that may be required to be given by the grantee to the grantor if certain actions are taken. There are many forms available for purchase from legal supply and banker supply companies, in addition to software that will produce a security agreement according to specific user input.
A security agreement may be oral if the secured party (the lender) has actual physical possession of the collateral. Where the collateral remains in the physical possession of the borrower, or where the collateral is intangible (such as a patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
, accounts receivable
Accounts receivable
Accounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
, or a promissory note
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
), the security agreement must be in writing in order to satisfy the statute of frauds
Statute of frauds
The statute of frauds refers to the requirement that certain kinds of contracts be memorialized in a signed writing with sufficient content to evidence the contract....
.
The security agreement must be authenticated by the debtor, meaning that it must either bear the debtor's signature
Signature
A signature is a handwritten depiction of someone's name, nickname, or even a simple "X" that a person writes on documents as a proof of identity and intent. The writer of a signature is a signatory. Similar to a handwritten signature, a signature work describes the work as readily identifying...
, or it must be electronically marked. It must contain a reasonable description of the collateral, and must use words showing an intent to create a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
(the right to seek repayment of the loan by foreclosing on the collateral). In order for the security agreement to be valid, the borrower must usually have rights in the collateral at the time the agreement is executed. If a borrower pledges as collateral a car owned by a neighbor, and the neighbor does not know of and endorse this pledge, then the security agreement is ineffective. However, a security agreement may specify that it includes after-acquired property
After-acquired property
The After Acquired Title Doctrine is a legal doctrine under which, if a grantor conveys what is mistakenly believed to be good title to land that he or she did not own, and the grantor later acquires that title, it vests automatically in the grantee. A practical example is Husband and Wife own...
. If such a specification is included, then a pledge of "all automobiles owned by borrower" would include the neighbor's car if the borrower were to buy that car from the neighbor.
In order for a security interest to attach to the collateral in the possession of subsequent purchasers, it must be perfected
Perfection (law)
In law, perfection relates to the additional steps required to be taken in relation to a security interest in order to make it effective against third parties and/or to retain its effectiveness in the event of default by the grantor of the security interest...
. If the security agreement is for a purchase money security interest, perfection is automatic. Otherwise, the lender must record either the agreement itself, or a UCC-1 financing statement
UCC-1 financing statement
A UCC-1 financing statement is a legal form that a creditor files to give notice that it has an interest in the personal property of a debtor...
, in an appropriate public venue (usually the state secretary of state or a state business commission under that person's authority). Perfecting the interest creates constructive notice
Constructive notice
Constructive notice also known as the Doctrine of Constructive Notice is a legal fiction used in the law of both common law and civil law systems to signify that a person or entity is legally presumed to have knowledge of something, even if they have no actual knowledge of it.-Intellectual...
, which is deemed legally sufficient to inform the rest of the world of the lender's rights in the collateral. Where a borrower has used the same property as collateral with respect to multiple security agreements made with different lenders, the first lender to record the interest has the strongest claim to that property.