NOTE

1. Does it follow from the Bedford case, supra p. 1485, that Miss Kingman's claim to the My Fair Lady royalties could have been defeated by a judgment creditor of Pascal? Or are the two cases distinguishable? Or does Speelman overrule Bedford?

2. In Miller v. Commissioner of Internal Revenue, 299 F.2d 706 (2d Cir. 1962), it appeared that in 1952 Mrs. Miller, widow of the bandleader Glenn Miller, granted to Universal Pictures Company "the exclusive right to produce, release, distribute and exhibit . . . one or more photo-plays based on the life and activities of Glenn Miller throughout the world." In 1954 Universal, which had produced "The Glenn Miller Story," paid Mrs. Miller approximately $400,000 under the 1952 agreement. The Commissioner of Internal Revenue claimed that the $400,000 was taxable as ordinary income. Mrs. Miller argued that it was taxable only as a capital gain. The difference between the two tax rates amounted to approximately $160,000. Mrs. Miller's case depended on proving that in 1952 she had sold "property" to Universal. Judge Kaufman commented:

Undeterred by her failure to find case authority which would substantiate the existence of "property rights" petitioner invokes the authority of logic. With considerable ingenuity, she argues:

(1) Universal paid petitioner $409,336.34 in 1954, which is a great deal of money.

(2) Universal was a sophisticated corporate being to which donative intent would be difficult to ascribe.

(3) If there was no danger in free use of Glenn Miller material, why did Universal pay?

Petitioner appears to find this question unanswerable unless it is conceded that there was a sale of a "property right." Petitioner is wrong.

Id. at 709. Thus Mrs. Miller had to pay the higher tax.

The Speelman case (1961) is not cited in the opinion in the Miller case (1962). If you had been counsel for Mrs. Miller would you have relied on Speelman? Under the assignment from Pascal, did Miss Kingman receive a "property right" in the future royalties of My Fair Lady, when and if the show was produced?

3. In the terminology of Article 9, Miss Kingman's claim to a share of the royalties from My Fair Lady would be classified as a "general intangible" (§9-106). Article 9 provides that a security interest in general intangibles can be perfected only by filing; there is nothing in Article 9, however, that governs the assignment of such claims other than for security.

4. In 1972, Article 9 was substantially amended by the Code's Permanent Editorial Board. In its pre-1972 version, §9-106 had distinguished three different sorts of intangibles, rather than the two it now covers. The third category of intangibles, eliminated in 1972, consisted of what were termed "contract rights," defined as "any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper." Prior to 1972, "accounts" covered only the right to payment under an executed contract; rights under executory contracts were covered by the separate category of contract rights. In the 1972 amendments to §9-106, the term "contract right" was dropped and "account" was redefined to include any right to payment "whether or not It has been earned by performance." Also eliminated in the 1972 revisions was §9-204(2), which had provided, in part, that a debtor has no rights "in a contract right until the contract has been made" or "in an account until it comes into existence." (It is important to determine when a debtor acquires rights in the property he is proposing to sell or use as collateral since this is one of the prerequisites for what, in the Article 9 scheme, is called "attachment," which in turn is one of the prerequisites for perfection. See §§9-203(1), 9-303(1).)

Do the revisions just described seem to you, on the whole, an improvement or would it be useful to preserve a distinction between what the Code originally called accounts and contract rights?

5. The Restatement Second deals with the assignment of future intangibles as follows:

§321. Assignment of Future Rights

(1) Except as otherwise provided by statute, an assignment of a right to payment expected to arise out of an existing employment or other continuing business relationship is effective in the same way as an assignment of an existing right.

(2) Except as otherwise provided by statute and as stated in Subsection (1), a purported assignment of a right expected to arise under a contract not in existence operates only as a promise to assign the right when it arises and as a power to enforce it.

According to Restatement Second §330(2), the effect of a contract to assign "on the rights and duties of the obligor and third persons is determined by the rules relating to specific performance of contracts." Comment d to §330 adds:

In general a contract to give security is specifically enforceable as between the parties even as to rights arising after the contract is made. By statute or decision, however, an exception has been made for contracts to assign wages under future employments. See §321. And in some states, on the analogy of rules applied to mortgages of after-acquired tangible property, an "equitable assignment" of rights not in existence is subordinate to the claims of creditors of the assignor whose rights attach after the rights have arisen and before the assignor has made a present assignment. In the absence of statutory provision for public notice, the rights of the promisee are inferior to those of a subsequent good faith purchaser for value without notice of the prior contract.

The notice filing system of U. C. C. Article 9 constitutes one such "statutory provision."

6. This section has considered a sequence of New York cases, state and federal. New York, having long been an important commercial state, has a uniquely rich harvest of case law in this area. The rules that developed in other states as to the possibility of making an effective present assignment of future claims were exceedingly various. The pre-Code Massachusetts rule, for example, is said to have been that such an assignment was both a legal and a logical impossibility.

In Taylor v. Barton-Child Co., 228 Mass. 126, 117 N.E. 43 (1917), Rugg, C.J., wrote:

The crucial question is whether the assignment of book accounts, which are to come into existence in the future in connection with an established business, will be enforced in equity against a trustee in bankruptcy. It is a well recognized principle of the common law that a man cannot sell or mortgage property which he does not possess and to which he has no title. The vendor must have a vested right in personal property in order to be able to make a sale of it. "A man cannot grant or charge that which he hath not." Jones v. Richardson, 10 Metc. 481, 488; Moody v. Wright, 13 Metc. 17, 46 Am. Dec. 706; Leverett v. Barnwell, 214 Mass. 105, 109, 101 N.E. 75.

The ground of our decision may be stated shortly. There can be no present conveyance or transfer of property not in existence, or of property not in the possession of the seller to which he has no title. A sale of personal chattels is not good against creditors unless there has been a delivery. Manifestly there can be no delivery of chattels not in existence. In order that after-acquired chattels may be brought under the lien of a mortgage, or of hypothecation, there must be some act of the parties subsequent to the time when such chattels come into existence and into the ownership and possession of the mortgagor. The mortgage is held not to have the effect of changing the title to after-acquired chattels without some further act of the parties.

There is an exception at the common law to the effect that one may sell that in which he has a potential title although not present actual possession. The present owner might sell the wool to be grown upon his Hock, the crop to be harvested from his field or the young to be born of his herd, or assign the wages to be earned under existing employment. Kerr v. Crane, 212 Mass. 224, 229, 98 N.E. 783, 40 L.R.A., N.S., 692; St. Johns v. Charles, 105 Mass. 262; Farrar v. Smith, 64 Me. 74, 77; McCarty v. Blevins, 5 Yerg. (Tenn.) 195, 26 Am. Dec. 262; Dugas v. Lawrence, 19 Ga. 557. But see now Sales Act, St. 1908, c. 237, §5(3). That principle of the common law has never been carried so far as to include the case at bar. The catch of fish expected to be made upon a voyage about to begin cannot be sold. Low v. Pew, 108 Mass. 347, 11 Am. Dec. 357. There can be no sale of the wool of sheep, the crop of a field or the increase of herd not owned but to be bought, and there can be no assignment of wages to be earned under a contract of employment to be made in the future. Eagen v. Luby, 133 Mass. 543; Citizens' Loan & Trust Co. v. Boston & Maine R.R., 196 Mass. 528,531,82 N.E. 696,14 L.R.A., N.S., 1025, 124 Am. St. Rep. 584, 13 Ann. Cas. 365.

It is also the established doctrine in this commonwealth that a mortgage of future acquired property will not be enforced in equity before actual possession taken by the mortgagee as against persons subsequently acquiring an interest therein for value and having possession. That has long been settled although the contrary rule prevails more widely. Federal Trust Co. v. Bristol County St. Ry. Co., 222 Mass. 35,45,46, 109 N.E. 880, where cases are collected. It would be anomalous for a court governed by these principles as to sales and mortgages of future acquired goods and chattels to hold that there could be an assignment of future acquired book accounts valid and enforceable under circumstances where a like attempt to hypothecate future acquired chattels would be held unenforceable.

Note that Chief Justice Rugg in the passage quoted equates the problem of the after-acquired property interest in chattels with that of the assignability of future claims. Contrast the New York distinction between these two problems, discussed in Rockmore v. Lehman, supra p. 1477, and the Note following that case.

Pre-Code authorities on the "future intangible" problem are collected in 1 G. Gilmore, Security Interests in Personal Property §§7.10-7.12 (1965),

7. U.C.C. §9-204(1) states that except in certain consumer transactions, "a security agreement may provide that any or all obligations covered by the security agreement are to be secured by after-acquired collateral." According to the Official Comment, this means that

a security interest arising by virtue of an after-acquired property clause has equal status with a security interest in collateral in which the debtor has rights at the time value is given under the security agreement. That is to say: the security interest in after-acquired property is not merely an "equitable" interest; no further action by the secured party — such as the taking of a supplemental agreement covering the new collateral — is required.

The Comment continues:

This Article accepts the principle of a "continuing general lien." It rejects the doctrine — of which the judicial attitude toward after-acquired property interests was one expression — that there is reason to invalidate as  matter of law what has been variously called the floating charge, the free-handed mortgage and the lien on a shifting stock. This Article validates a security interest in the debtor's existing and future assets, even though (see Section 9-205) the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral. (See further, however, Section 9-306 on Proceeds and Comment thereto.)

The widespread nineteenth century prejudice against the floating charge was based on a feeling, often inarticulate in the opinions, that a commercial borrower should not be allowed to encumber all his assets present and future, and that for the protection not only of the borrower but of his other creditors a cushion of free assets should be preserved. That inarticulate premise has much to recommend it. This Article decisively rejects it not on the ground that it was wrong in policy but on the ground that it was not effective. In pre-Code law there was a manipulation of security devices designed to avoid the policy: field warehousing, trust receipts, factor's lien acts and so on. The cushion of free assets was not preserved. In almost every state it was possible before the Code for the borrower to give a lien on everything he held or would have. There have no doubt been sufficient economic reasons for the change. This Article, in expressly validating the floating charge, merely recognizes an existing state of  things. The substantive rules of law set forth in the balance of the Article are designed to achieve the protection of the debtor and the equitable resolution of the conflicting claims of creditors which the old rules no longer give.

Notice that the question of assignment of future accounts is treated like any other case or after-acquired property: no periodic list of accounts is required by this Act. Where less than all accounts are assigned such a list may of course be necessary to permit identification of the particular accounts assigned.