Designated Assets as Collateral in Security Agreements
Sometimes when lenders are structuring a transaction, they contemplate that only certain of the borrower’s property will be used to secure the loan. In such situations, borrowers generally require that the security agreement be limited to that certain collateral. A problem may arise, however, when lenders take a security interest in collateral that may be identified by the borrower at a later point in time.
For example, if the lender financed the borrower based upon a portion of the borrower’s accounts receivable, a security agreement granting lender a security interest in borrower’s “designated accounts receivable” has the potential to be very dangerous for the lender. If the borrower does not then subsequently designate which accounts are pledged as collateral to the lender as “designated accounts receivable” the lender’s security interest may not attach to any of the borrower’s accounts receivable.
Consequently, in situations where only a portion of the borrower’s assets are pledged, the bank should be sure not only to adequately describe the collateral, but also, if at all possible, be sure that the borrower is not required to take any further action, such as designation of accounts, for the bank’s security interest to attach. Ideally, either a broader collateral description should be used or a more detailed description of the sub-set of the borrower’s asset should bs used in the security agreement.