12.6.2.1.1 2 G. Gilmore, Security Interests in personal Property §25.7 (1965) | rauvinj | November 02, 2012

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12.6.2.1.1 2 G. Gilmore, Security Interests in personal Property §25.7 (1965)

Original Creator: Kessler, Gilmore & Kronman Current Version: rauvinj
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2 G. GILMORE, SECURITY INTERESTS IN PERSONAL PROPERTY §25.7 (1965) (some footnotes have been omitted): ". . . The pressures generated by novel methods of receivables financing would sooner or later have collapsed the common law rules and led to a statutory reformulation. However, the common law phase came to an unexpectedly sudden end on March 8, 1943, or Klauder day. On that date the Supreme Court held, in Corn Exchange National Bank & Trust Co. v. Klauder,[29] that a non-notification accounts receivable financing arrangement in an English-rule state (Pennsylvania) was invalid against the assignor's trustee in bankruptcy under the 1938 version §60 of the Bankruptcy Act on voidable preferences. We are not presently concerned with §60 or with the merits of Mr. Justice Jackson's Klauder opinion as an essay in statutory construction or an act of judicial statesmanship. The wreckage left in Klauder's immediate wake was that non-notification receivables financing was impossible in an unknowable number of states. The number of states was unknowable for two reasons. In the first place, it was far from clear how many English-rule states there were: authorities were ambiguous in some states and lacking in others.[30] In the second place, Klauder threw no clear light on the question whether its doctrine applied only to English-rule states or whether it might extend to Massachusetts, Restatement or four-horsemen states as well. (The status of the Massachusetts rule under Klauder was debated in the lower federal courts for several years, with varying results, unti1 the problem was otherwise put to rest.)[31] It was, however, clear that non-notification receivables financing was safe in New York rule states — although once again there was no way of knowing how many such states (besides New York) there were. The New York rule stood up under Klauder for this reason: the Klauder construction of §60 (1938 version) was that any transfer of property, although made in fact for a present consideration, was to be treated as if it had been made for a past consideration and therefore vulnerable to attack as a voidable preference, if, under applicable state law, a subsequent good faith purchaser of the property could take priority over the transferee. In English-rule states a non-notifying assignee could be defeated by a later assignee who first notified; therefore (without notification) it was impossible for him ever to perfect his interest against a trustee in bankruptcy. In New York rule states a non-notifying assignee could not be defeated by any subsequently accruing claim; in such states, therefore, Klauder had no effect on non-notification financing.

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"If non-notification financing was not to be given up altogether, there were, after Klauder, two possible routes to salvation. One was to procure the amendment of §60 by deleting from it the so-called 'good faith purchaser test' of the 1938 version. The other was to procure a statutory enactment of the New York rule in all states which had not clearly and unambiguously adopted the rule at common law. Both routes were followed and, in time, successfully. Congress, which had, to be sure, more important issues than non-notification accounts receivable financing to concern it, proceeded at a stately pace; §60 was finally amended in 1950, the 'good faith purchaser test' being replaced (as to personal property) by a 'lien creditor test.' But before that had happened, most of the doubtful states had already enacted statutes which, whatever else they did, thoroughly codified the New York rule on priorities between successive assignees of a chose in action.

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"If the Bankruptcy Act amendment had come first and the state accounts receivable statutes later, the draftsmen of the state statutes would have been in a position to weigh the merits of the various priority rules and select whichever seemed best fitted to the occasion. It should be borne in mind that, drafting under the whip of Klauder, the draftsmen were in no position to consider what might be the best policy. They were engaged in an emergency operation and, with respect to priorities, they had only one choice: a rule of absolute priority, with no exception whatever. Nothing else was safe so long as the Klauder construction of §60 remained in force. All the statutes, whether they required filing as a condition of perfection or were of the so-called 'validation' (or automatic perfection) type, adopted in different verbal formulations such an absolute priority rule. The Texas statute, although wordier than most, may be quoted as typical of the result aimed at. Section 6 of the Texas statute provided 'that from the time an assignment became 'protected'

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. . . all subsequent assignees, purchasers and transferees of or from the assignor shall be conclusively deemed to have received notice of such assignment . . . no purchaser from the assignor, no creditor of any kind of the assignor, and no prior or subsequent assignee or transferee of the assignor . . . shall in any event have, or be deemed to have acquired, any right in the account or accounts so assigned or in proceeds thereof, or in any obligation substituted therefor, superior to the rights therein of the [first filing] assignee. . . .

"What the drafting may have lacked in felicity, it more than made up for in emphasis. It will be noted that the Texas statute quoted extended the assignee's priority to the 'proceeds' of assigned accounts; a comparable reference to 'proceeds' was found in almost all the statutes. Taken literally, the 'proceeds' provision could have been read to mean that a 'protected' assignee would have priority even over a creditor of the assignor to whom proceeds of assigned accounts had been paid over in ordinary course of business — a result which would go beyond need or reason. Such a contention seems never to have been made in litigation, and, if made, would be, it must be hoped, unsuccessful. The point is, however, worth making as an illustration of the thoroughness with which the draftsmen went about the business of fashioning their absolute priority rule.

"The somewhat erratic coverage of the accounts receivable statutes is discussed in another chapter. For present purposes it is enough to point out that the statutes by no means covered the entire range of intangibles which may become collateral in financing arrangements. Indeed some of the better drafted statutes were quite precisely limited to the trouble area revealed by Klauder: short-term receivables of the type which were customarily the subject of non-notification financing. Thus, even after most states had enacted accounts receivable statutes containing an absolute priority rule, the several common law rules continued to have a considerable area in which to operate."

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[29] 318 U.S. 434, 63 S. Ct. 679, 87 L. Ed. 884 (1943).

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[30] One estimate of the time found the states lined lip as follows: fourteen states probably followed either the New York rule or the Massachusetts rule and three more states possibly followed one of these two rules; seven states probably followed the English rule and possibly seven more. The remaining states either had no relevant decisions or had completely confusing decisions. Kupfer and Livingston, Corn Exchange National Bank & Trust Co. v. Klauder Revisited: The Aftermath of Its Implications, 32 Va. L. Rev. 910, 914-915 (1946).

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[31] See, e.g., In re Rosen, 157 F.2d 997 (3d Cir. 1946), cert. denied. 330 U.S. 835 (1947) (assignment upheld); In re Vardaman Shoe Co., 52 F. Supp. 562 (E.D. Mo. 1943) (assignment invalid).

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Annotated Text Information

February 15, 2015

12.6.2.1.1 2 G. Gilmore, Security Interests in personal Property §25.7 (1965)

12.6.2.1.1 2 G. Gilmore, Security Interests in personal Property §25.7 (1965)

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