After-acquired collateral

     In the context of Article 9, after-acquired collateral is property in which the debtor acquires rights after the debtor agrees to the creation of a security interest in favor of the secured party. We encounter this concept in Central Production Credit Assoc. v. Hopkins, where a lender claimed (unsuccessfully) that cattle being purchased by the debtor, a farmer, were subject to the after-acquired property clause in the security agreement between the lender and the debtor.

    A clause in the security agreement capturing after-acquired collateral is critical where a lender takes a security interest in the inventory of a debtor or in the accounts of a debtor generated by the sale of inventory,  Find such a clause in our sample security agreement. In the normal course of events, the debtor must sell its inventory and collect its accounts to stay in business. Thus, soon after a security agreement is reached between the debtor and secured party, the inventory and accounts in existence at the time the security agreement was reached will be gone.  For reasons we explore elsewhere, the security interest in that inventory will generally not follow the inventory into the hands of a buyer, and the debtor's collection of accounts, in the form of cash or checks deposited into a bank account, may not be traceable by the secured party. Without new inventory and new accounts in place of the old, that is, without a clause granting the secured party a security interest in after-acquired collateral, the secured party would soon find itself unsecured. Article 9 thus validates the concept of a "floating lien:" the river of inventory and accounts flows in and out of the debtor's hands and the lien floats on the collateral in which the debtor has rights at any particular point in time. See U.C.C. 9-204(a) and Comment 2 to U.C.C. 9-204.

     The after-acquired property clause makes less sense in other credit contexts. The lender that loans against the security of equipment of a debtor's business generally loans an amount less than the value of the equipment and does not expect the debtor to sell the equipment, at least not until the loan is paid. In addition, the lender typically will fully amortize such a loan over a period of time shorter than the useful life of the equipment.  Thus there appears to be little if any need for after-acquired collateral. Even though equipment depreciates, the loan will be repaid before the equipment is valueless. Nonetheless, often you will see after-acquired property clauses in this context, not unlike suspenders for the person already wearing a belt.

     In the financing of consumer purchases (e.g. a car, an appliance, a computer, furniture), secured creditors also typically amortize the loan over a period shorter than the useful life of the product. Here, however, they rarely can get extra support from after-acquired property. The effect of such clauses in consumer financing is severely limited by U.C.C. 9-204(b)(1).  

     In bankruptcy cases, Bkry. Code 552 restricts the reach of after-acquired property clauses and of clauses granting a secured party an interest in rents and profits.