12.6.3.1.1 Subsection: Priorities under Article 9 of the Uniform Commercial Code Inroduction | rauvinj | November 01, 2012

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12.6.3.1.1 Subsection: Priorities under Article 9 of the Uniform Commercial Code Inroduction

Original Creator: Kessler, Gilmore & Kronman Current Version: rauvinj
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Article 9, like the short-lived accounts receivable statutes it replaced, adopted (with minor qualifications that we need not go into) a rule of absolute priority for the first assignee of accounts, contract rights, or general intangibles to "perfect" his interest. To perfect an interest in such intangibles, the assignee (or "secured party") must file with the public records a "financing statement" signed by the debtor, which gives the names of both assignor and assignee and describes the "collateral" by type or item. The financing statement "may be filed before a security agreement is made or a security interest otherwise attaches" (§9-402(1)). "Attaches" in the provision just quoted, is Article 9 terminology for the time when a security interest becomes enforceable against the debtor. See §9-203(2). Section 9-203(1) deals with the time when a security interest attaches. The term "security interest" is defined in §1-201(37). The part of the definition relevant to our discussion is; "'Security interest' means an interest in personal property . . . which secures payment or performance of an obligation. . . . The term . . . includes any interest of a buyer of accounts . . . which is subject to Article 9."

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The rule as to priorities between successive assignees of the same account is stated in §9-312(5). The two assignments, if both have been perfected, rank "according to priority in time of filing or perfection," whichever is earlier, "provided that there is no period thereafter when there is neither filing nor perfection" (§9-312(5)(a)). Section 9-312(5)(b) provides that "so long as conflicting security interests are unperfected, the first to attach has priority."

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The complicated distinction between the "first to file" rule of (5)(a) and the "first to attach" rule of (5)(b) can be illustrated by putting a few questions with respect to the State Factors Corp. case, supra p. 1550.

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1. If neither State Factors nor Sales Factors files, who wins? As to when the security interest "attaches," note particularly §9-203(1)(c).

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2. If Sales Factors files on April 30, 1937, who wins?

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3. If State Factors files on September 8, 1937 and Sales Factors files after that date (or does not file at all), who wins?

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4. Suppose that on September 21, 1937, neither assignee has filed. Thereafter, having learned of the September assignments to State Factors and knowing that State has not filed, Sales Factors files a financing statement and takes assignments of the accounts already assigned to State. Under §9-312(5)(a), Sales Factors wins, does it not? Does that seem a proper result?

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A few further questions may be put to illustrate the Article 9 treatment of assignments of intangibles.

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1. Shiro v. Drew, supra p. 1452. If Proctor and Drew had filed a financing statement, describing the collateral as proceeds of the Radome contract, would they prevail? Under §9-402, the financing statement would have to be signed by the Fiberlast Company, as debtor. In order for a security interest to attach, there would also have to be a security agreement" signed by Fiberlast (§9-203(1)(a)). Security agreement” (§9-105(g)) "means an agreement which creates or provides for a security interest." Would the letter of November 1, 1956 suffice?

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2. In re Dodge-Freedman Poultry Company, supra p. 1458. Does the "subordination agreement" create a security interest (a) against the Poultry Company (the common debtor)? (b) against Freedman (the subordinator)? Note that one consequence of calling the senior creditor's interest an Article 9 security interest is that, in order to 'protect his interest against third parties, he will be required to perfect by filing. These questions are much discussed in the references cited in Note 2 following the Dodge-Freedman case. (Section 1-209, added to the Code as an "optional provision" in 1966, provides that a subordination by a creditor "does not create a security interest as against either the common debtor or a subordinated creditor" and adds that [t]his section shall be construed as declaring the law as it existed prior to the enactment of this section and not as modifying it." For a case construing the meaning of §1-209, see Chase Manhattan Bank v. First Marion Bank, 437 F.2d 1040 (5th Cir. 1971)).

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3. Rockmore v. Lehman, supra p. 1477. Under §9-203 when did the assignee's interest "attach"?

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4. In re City of New York v. Bedford Bar & Grill, Inc., supra p. 1485. Is the case still "good law" in New York following the enactment of Article 9?

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February 15, 2015

12.6.3.1.1 Priorities under Article 9 of the Uniform Commercial Code

12.6.3.1.1 Subsection: Priorities under Article 9 of the Uniform Commercial Code Inroduction

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