After Acquired Property Clause: Everything You Need to Know
After acquired property clause can be included in a contract, any property acquired after the date of contract signing can be used as additional security.3 min read
2. The Enforceability of After Acquired Property Clauses
An after acquired property clause is a provision that can be included in a contract. It states that any property acquired after the date of the contract signing can be used as additional security in the signed agreement.
After Acquired Property Definition
Any personal or real property that a debtor acquires after they have signed a security agreement that secures their debt with all of their property can be considered after acquired property. With this in mind, any new property can become collateral for the purposes of debt collection. This includes making real property improvements if that property is a security on a mortgage or a deed of trust. Personal property that is pledged in security agreements may also fall under this category.
The purpose is to be able to make additional properties subject to the creditor's liens while removing any doubt regarding whether repairs or improvements to the property in question should be included in a secured transaction agreement. In other words, any property that a debtor obtains after a mortgage or some other form of debt is executed when that property can be used as a means to secure the debt. According to the Uniform Commercial Code, or UCC, which has been widely adopted in one way or another in almost every state, the following can be considered after acquired property:
- Any improvements made to real property that is a security on a mortgage or deed of trust
- Any personal property that is pledged in a relevant security agreement
In terms of bankruptcy law, after acquired property is any property that has been acquired by the person filing for bankruptcy after they have filed their petition. This property is immune to any claims a creditor may wish to make against an individual's property and cannot be included when considering the assets that can be used to pay off the person's debt. Only property that existed at the time that bankruptcy was filed for may be claimed by a creditor. Certain exceptions may apply, however, to property that has been obtained during a six month period of time following the filing of the bankrupt individual's petition.
The Enforceability of After Acquired Property Clauses
Although the issue of after acquired property predates the creation of the Uniform Commercial Code, referencing the UCC is necessary as an understandable point of origin. Official comments state that the section in question intends to specifically reject case laws that were in place before the UCC was drafted, which limit the potential effectiveness of an after acquired property clause. This also applies to future advance clauses.
UCC §9-204, Comment One, states that UCC limitations are explicitly rejected regarding instances of the after acquired property clause. Comment Five of the UCC states that it's necessary to differentiate between future advance and after acquired property clauses. An after acquired property clause makes provisions that any later acquired property can secure commitments and liabilities that existed earlier. A future advanced clause, however, makes provisions describing that security and collateral agreements can secure liabilities that come into existence at a later time.
After acquired property clauses are also commonly referred to as "floating liens," while future advanced clauses are sometimes called "dragnet clauses." Despite the UCC's official stance that laws regarding clauses of this nature should be uniform, many courts have experienced difficulty when trying to abandon ideas that existed prior to the UCC coming about. Some of these older ideas place additional contractual limitations on the potential effectiveness of after acquired and future advance clauses.
This issue normally arises in scenarios that involve real estate and personal property collateral. Most frequently, the issue arises in bankruptcy cases. It can sometimes come up in lift stay motions regarding the value and extent of available collateral. Other times, it can arise when objections to a claim are made and, still other times, in matters of preference. Rule 7001 of bankruptcy law outlines a requirement for adversary proceedings to determine the extent and validity of liens in these cases.
If the issue comes up in an objection to a claim according to Rule 3007, the matter then becomes what is known as an adversary proceeding. Not all courts, however, will insist that conversion to an adversary proceeding actually take place.
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