Third-party rights

Article 9 validates, on specified conditions, the enforceability, by an assignee of an account, chattel paper or a general intangible, of an agreement by an account debtor (the person obligated on the assigned right, i.e., the debitor cessus) with the assignor that the account debtor will not assert against an assignee any claim or defense that it might have against the assignor. See section 9-403. This provision serves to make these payment rights more valuable as collateral; presumably, account debtors thereby benefit. Similarly, Article 9 provides for the override of both contractual and statutory anti-assignment clauses (albeit with protections, in the context of the assignment of rights other than rights to payment, for a third party who is otherwise entitled to such protection against having to deal with, as contrasted with simply paying money to, a party other than its original counter-party). See sections 9-406 and 9-408. Section 9-406 also contains provisions that elaborate on how an account debtor on an assigned payment right obtains discharge of its obligation. The provisions here described were influential in the development of the United Nations Convention on the Assignment of Receivables.

The filing system

Article 9 provides for a ‘‘notice filing” scheme -- a minimum amount of information (provided on a simple one-page form when filed on paper) is put on the public record. A financing statement is sufficient, under section 9-502, if it identifies the debtor and the secured party and provides an ‘‘indication” of the collateral (which may, under section 9-504, be specific or in very general terms or even in supergeneric language). The filing systems in the US are in the process of changing from paper-based to electronic filing (almost half of the states already accept electronic filings). In Canada, electronic filing is the norm; indeed, in New Brunswick, a province that recently adopted its Personal Property Security Act, only electronic filings are accepted. Any jurisdiction adopting a notice filing regime today no doubt would be fully computerized and likely would function solely on an electronic filing basis. Such a system not only is virtually error-free, but also is not expensive to establish, is extremely efficient, and is financially self-sustaining. Even in the paper-based US systems, filing is quite speedy, and in many states filings may be presented by fax. Filing fees generally range from $5 to $20. Searching can be done electronically via remote access on the internet in more than

half of the states (and in half of these, searching the index can be done free of charge).

Even the existing Article 9 filing system is inexpensive to operate, efficient and does not require a vast bureaucracy. It is not a repository of underlying documents and does not create, or even necessarily reflect, property rights. It simply provides to a searcher a method of discovering that there may be a secured party who may at some time claim real rights (created by a security agreement the terms of which are not put on the public record) which may have priority based on the date of filing of the financing statement. It is up to the searcher -- typically a prospective creditor -- to act on the information received from the public record (along with information received from the debtor and from marketplace sources) in whatever way it deems prudent to protect its interests. What is filed, whether on paper or electronically, is barebones information -- no details concerning a present or future credit extension are required and there is no requirement that a maximum amount secured be specified.

Under this system, for a nominal fee and the few minutes it takes to provide minimal data, a secured party can gain with certainty the priority accorded to a filed security interest that may cover millions of dollars of credit secured by millions of dollars worth of present and/or future collateral over a long period of time.

In most situations, under section 9-515, the effectiveness of the financing statement must be continued every five years -- again, by the filing of a simple continuation statement -- to retain priority over competing purchasers for value. The fixed duration makes calendaring and fee-calculation simple and efficient for both filer and filing office and enables the records to be automatically self-purging.

As noted above, a financing statement may be filed before attachment of the security interest, indeed, even before a security agreement is made. See section 9-502(d). A filed financing statement, however, is not effective unless the filing is authorized by the debtor. See section 9-509. Although authorization need not be evidenced by a signature on the financing statement, it must be reflected in an authenticated record (the authenticated security agreement will suffice). Evidence of authorization need not be placed in the public record. No information concerning the nature or amount of the secured obligations need be provided.

Because the debtor’s name is the key to discovery of the financing statement in the public record, Article 9 provides elaboration concerning the sufficiency of the name provided. See sections 9-503 and 9-506. On the other hand, the actual provider of credit need not be identified,

as the financing statement may provide the name of a representative of the secured party and the representative capacity need not be indicated. (For example, a title-retaining supplier or its customer might wish, for perfectly legitimate business reasons, to keep their relationship confidential.)

Revised Article 9 added several provisions to make even more clear the ministerial nature of the role of the filing office, and to make operation of filing offices more efficient, more transparent and more uniform. Article 9 specifies a limited number of grounds on which a filing may be rejected by the filing office -- a short list, susceptible of objective application, of items necessary for the functioning of the system, but not based on formalities. Likewise, the revisions express the filing provisions in language that is neutral as to medium, to encourage the use of electronic filing or still more efficient techniques that might be developed in the future.

The Article 9 filing system should be distinguished from registries familiar to virtually all legal systems such as those covering real property. Those are, in many cases, the source of real rights (rather than simply a form of publicity for actual or potential rights otherwise created). In those registries, original substantive documents, usually manually executed with great formality (e.g., notaries, witnesses, seals), are placed in full on the record. Not infrequently, in such registries, the record is accessible only to those who have satisfied the registry officials of their legitimate interest in examining the record. Also, in such registries, the registry officials commonly scrutinize the documents before permitting their recordation. Thus, registering is often a slow, expensive and highly technical process.

The Article 9 filing system should also be distinguished from registration such as exists, for example, in the Netherlands for the private (non-notarized) deed for a bezitloos pand or a stil pand; that registration is designed to establish a certain date for the effectiveness of the transaction, but is not searchable by the public and is not intended to serve a notice function.

Post-default rights and remedies

Finally, Article 9 provides efficient flexible market-oriented enforcement remedies. While providing debtor protection in several key provisions (which mostly may not be waived, although some may be waived by an agreement authenticated after default), it recognizes that in most

instances creditors are not abusive and that debtors benefit by the maximization of the net proceeds realized as a result of enforcement.

The key remedy added by Article 9, which supplements otherwise available judicial remedies (e.g., the familiar sale by a court officer), is the authorization to the secured party to dispose of the collateral at a nonjudicial sale. Inclusion of this remedy recognizes that a far better price is likely to be realized when the collateral is sold, in a public or private sale, by the secured party on a businesslike basis than would be obtained at a sale by a court officer, and likely also more rapidly and at a lower cost. The secured party’s obligation is to carry out the disposition in good faith and in a ‘commercially reasonable’ manner. Although much of the case law under former Article 9 involved the issue of commercial reasonableness, the vast majority of enforcement of security interests in the US is carried out without judicial involvement. Of course, either party may invoke judicial intervention at any stage of the enforcement process. Nonjudicial disposition is typically carried out after the secured party has peacefully obtained possession of the collateral without the involvement of a court officer (often referred to in the literature as ‘‘self help”). Article 9 authorizes the secured party to take possession of the collateral ‘‘without judicial process, if it proceeds without breach of the peace.” Debtor cooperation is commonplace because of the existence of effective enforcement remedies.

Orderly creditor action is made more likely because of the existence of the definitive priorities regime. Of course, if a federal bankruptcy proceeding has been commenced prior to disposition of the collateral, the secured party must obtain ‘‘relief” from the ‘‘automatic stay” before proceeding with enforcement remedies; in the interim, the secured party is entitled to ‘‘adequate protection” (these are terms of art in US bankruptcy practice).

Article 9’s nonjudicial enforcement scheme contrasts sharply with that typically found in Europe. In Belgium, for example, even a pledgee in possession may not dispose of the collateral without judicial involvement (see Civil Code article 2078).

Finally, an alternative, highly efficient, remedy, significantly enhanced under Revised Article 9, is also available to the secured party -- acceptance of the collateral in full or partial satisfaction of the secured obligation. See sections 9-620--9-622. The secured party, upon notification to the debtor and others having subordinate interests in the collateral, may propose such retention in lieu of disposition, but may not retain the collateral as proposed over timely objection.