CPA Exam — REG (Regulation)Business LawEasy
A secured creditor takes a security interest in a debtor's inventory. The security agreement includes a clause stating that the security interest also applies to 'all inventory acquired by the debtor in the future.' The debtor subsequently acquires new inventory from a different supplier. Does the creditor's security interest extend to this newly acquired inventory?
- ANo, a new security agreement is required for each new acquisition of inventory.
- BNo, a security interest can only attach to collateral existing at the time of the agreement.
- CYes, due to an after-acquired property clause, which is valid for inventory.
- DYes, but only if the new inventory is purchased from the same original supplier.
Show answer & explanationAnswer & explanation
Correct answer: C. Yes, due to an after-acquired property clause, which is valid for inventory.
Under UCC Article 9, an 'after-acquired property clause' is generally effective and allows a security interest to attach to property acquired by the debtor after the security agreement is made. This is particularly common and effective for fluctuating collateral like inventory.
Why the other options are wrong
- A. Requiring a new security agreement for each new acquisition would be impractical for inventory and is not required under the UCC when an after-acquired property clause is used.
- B. This is incorrect. UCC Article 9 specifically allows for security interests to attach to after-acquired property.
- D. The source of the new inventory does not impact the validity of an after-acquired property clause; the clause applies to all future inventory, regardless of supplier.
After-Acquired Property Clause (UCC)
A provision in a security agreement that grants a secured party a security interest in property that the debtor acquires after the security agreement is executed.
- Commonly used for inventory, accounts, and equipment.
- Automatically extends the security interest to future property.
- Generally effective unless the property is consumer goods (with some limitations).
Memory trick: After-Acquired: Your Security Grows with Their Goods.