Problem.Drafting a security agreement

     You represent Sarah Longsuff in a proceeding for the dissolution of her marriage. In negotiations for the division of property, Sarah's husband, a contractor and carpenter, has agreed to purchase Sarah's interest in his tools and pick-up truck for $15,000, payable, with interest, over 5 years. You think it wise to secure the obligation with a lien on the tools and pick-up truck.   If the obligation is not secured it might be difficult to collect if Sarah's husband falls on hard times and might be discharged entirely if Sarah's husband later files a Chapter 7 bankruptcy (under 11 U.S.C. 523(a)(15)). If the obligation is secured, a discharge of the debt in bankruptcy will not affect the lien so created.

     You must draft a security agreement, to be incorporated in an overall property settlement agreement to be presented to the court with jurisdiction over the dissolution. The agreement may be incorporated into the court's decree of dissolution such that the obligation and the security will be imposed by court order.

     Under 9-203(b)(3)(A) you could get away with a one sentence, signed composition:  "I grant Sarah Longsuff a security interest in [describe collateral]."  You could even tell your client to have her soon to be ex spouse simply e-mail her that sentence and type his name at the bottom.  But you think that a little more of your effort would serve your client better.  How should the security agreement describe the truck and the tools?   See U.C.C. 9-108

     Would your description need to be different if the obligation was also secured with the husband's post separation inheritance of some stock that he holds through an account with the investment firm of Provident Investments?  See U.C.C. 9-108, U.C.C. 9-102(b), and the following definitions from U.C.C. Article 8:  

8-102(a)(14).   "Securities intermediary" means:
(i) a clearing corporation; or
(ii) a person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity.

8-102(a)(15).  "Security," except as otherwise provided in Section 8-103, means an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer:
(i) which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer;
(ii) which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and
(iii) which:
(A) is, or is of a type, dealt in or traded on securities exchanges or securities markets; or
(B) is a medium for investment and by its terms expressly provides that it is a security governed by this Article.

8-102(a)(16). "Security certificate" means a certificate representing a security.

8-102(a)(17). "Security entitlement" means the rights and property interest of an entitlement holder with respect to a financial asset specified in Part 5.

8-102(a)(18). "Uncertificated security" means a security that is not represented by a certificate.

8-501. Securities Account; Acquisition of Security Entitlement from Securities Intermediary.
(a) "Securities account" means an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset.
(b) Except as otherwise provided in subsections (d) and (e), a person acquires a security entitlement if a securities intermediary:
(1) indicates by book entry that a financial asset has been credited to the person's securities account;
(2) receives a financial asset from the person or acquires a financial asset for the person and, in either case, accepts it for credit to the person's securities account; or
(3) becomes obligated under other law, regulation, or rule to credit a financial asset to the person's securities account.
. . . .

     What are some of the things you would like the security agreement to provide? For example, are you worried that the tools and pick-up truck might be moved, stolen, or damaged by fire? Are you worried about loan of the tools and pick-up truck to others? Would you allow the husband to sell some of the tools or the pick-up truck?  Would you allow the husband to encumber the tools or the pick-up truck with a security interest in favor of someone else?  Should the pick-up truck be serviced?   If you require in the security agreement that the husband do certain things (e.g. insure the property), what happens if the husband fails to perform?

     Pick a few of your concerns and draft clauses for a security agreement that would protect your client. After having done so, look at our sample security agreement.   Is there language in the sample security agreement that you prefer to the language that you have drafted? Does the sample security agreement address concerns that didn't occur to you? Are there provisions in the sample security agreement that you don't think you need?