Often times 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 the actual collateral. A problem may arise, however, when lenders take a security interest in collateral that may later be designated by the borrower.
For example, if the lender were financing 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.
In the event that the borrower does not subsequently actually designate which accounts are pledged as collateral to the lender, 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.
Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com
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