Prior Uniform Statutory Provision: Subsection (3) - Section 14, Uniform Conditional Sales Act.

Changes: Completely rewritten.

Purposes of Changes:

1. Under Section 9-102 this Article applies to the transactions described in that Section "so far as concerns any personal property and fixtures within the jurisdiction of this state". That is equivalent to saying, in most cases, that the Article applies when the collateral is physically located in this state. This Section amplifies that general principle and states special rules in three situations which have given difficulty under earlier statutes. Subsections (1) and (2) in effect state when this state claims jurisdiction over accounts and contract rights (subsection (1)) and over mobile equipment and general intangibles (subsection (2)). Subsection (3) deals with the problem of collateral brought into this state subject to a security interest which attached elsewhere.

2. The general rule of Section 9-102 is difficult of application with respect to certain types of intangible collateral. This Article classifies intangible property as instruments (defined in Section 9-105 to include investment securities as well as conventional negotiable instruments), documents (defined in Sections 9-105 and 1-201 to include bills of lading, warehouse receipts and the like), chattel paper (defined in Section 9-105), accounts, contract rights and general intangibles (defined in Section 9-106). The general rule is appropriate and applies to instruments, documents and chattel paper: in contemplation of law and by common understanding and practice the property right or claim evidenced by an instrument, document or chattel paper is thought of as being merged in or symbolically represented by the piece of paper, whose indorsement or delivery is a prerequisite to a transfer of the underlying claim or right. This Article therefore applies to security interests in instruments, documents, and chattel paper when the relevant pieces of paper are in this State.

Accounts, contract rights and general intangibles do not fit that simple pattern. As to them there is no indispensable or symbolic document which represents the underlying claim, whose indorsement or delivery is the one effectual means of transfer.

There is a considerable body of case law dealing with the situs of choses in action. This case law is in the highest degree confused, contradictory and uncertain; it affords no base on which to build a statutory rule.

An account receivable arises typically out of a sale; the contract of sale may be executed in State A, the goods shipped from a warehouse in State B to the buyer (account debtor) in State C. The account may then be assigned to an assignee in State D. The seller-assignor may keep his principal records in State E. Under the non-notification system of accounts receivable financing, the seller-assignor, despite the assignment, bills and collects from the account debtor; under notification financing the account debtor makes payment to the assignee, but the bills may be prepared and sent out by either assignor or assignee. The contacts of the transaction are with many jurisdictions: to which one is it appropriate to look for the governing law?

All this applies with equal force to contract rights. Even more complicated situations may be anticipated when the collateral consists of novel or uncommon types of personal property, which fall within the definition of general intangibles.

If we bear in mind that one of the principal questions involved is where certain financing statements shall be filed, two things become clear. First: since the purpose of filing is to allow subsequent creditors of the debtor-assignor to determine the true status of his affairs, the place chosen must be one which such creditors would normally associate with the assignor; thus the place of business of the assignee and the places of business or residences of the various account debtors must be rejected. Second: since the validity of the assignment against third parties may depend on the filing of a financing statement in the proper place, it is vital that the place chosen be one which can be determined with the least possible risk of error.

Subsection (1), following some of the existing state statutes, adopts the rule that security interests in accounts or contract rights are covered when the office of the assignor where he keeps his records concerning them is in this state. Since general intangibles are not closely associated with particular records, a different rule (subsection (2) and Comment 5) is adopted for them.

In a state in which under this Article filing with reference to assignments of accounts and contract rights is generally in a state and not a county office, no problem arises under the subsection (1) rule if all the assignor's places of business are in this state. As to the optional provision for county filing, see Section 9-401 and Comment. For the multi-state business there is no easy solution. The office where the assignor keeps his records of accounts or contract rights will be typically the principal financial office of the enterprise. Frequently records of an account may be kept in several offices: for example, in the branch office where the account debtor placed his order and in the warehouse from which the goods were shipped as well as in the principal financial office: in such a case, it is the internal practice of the assignor -i.e., which of the various records is controlling for general accounting purposes of the enterprise -that determines whether the law of this state or of some other jurisdiction shall apply. In the great majority of cases the test of subsection (1) is easy to apply; some situations remain, which will have to be worked out on a case by case basis, and which neither this nor any other statutory formula can settle in advance beyond the possibility of a doubt. There is, however, one easy answer: if there might be more than one state in which it could be claimed that the assignor keeps his records, let the assignee file in all such states. Filing is simple and inexpensive, and the entire problem can thereby be avoided.

If the record-keeping office is moved into "this state" after a security interest has been perfected under the law of another jurisdiction, the secured party should file in this state, since Section 9-401(3) is inapplicable.

3. Another class of collateral for which a special rule is stated (subsection (2)) is mobile goods which are normally moved for use from one jurisdiction to another. Such goods are generally classified as equipment; occasionally they may be classified as inventory, for example, autos owned by a car rental agency. Under many present chattel mortgage and conditional sales acts the mortgagee or conditional vendor must file in each filing district in which such mobile equipment is used -which is possible although onerous in some cases, but not even possible in the case, for example, of non-scheduled trucking operations. Subsection (2) provides that a security interest in such equipment or inventory is subject to this Article when the debtor's chief place of business is in this state. "Chief place of business" does not mean the place of incorporation; it means the place from which in fact the debtor manages the main part of his business operations. That is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing. The term "chief place of business" is not defined in this Section or elsewhere in this Act. Doubt may arise as to which is the "chief place of business" of a multi-state enterprise with decentralized, autonomous regional offices. A secured party in such a case may easily protect himself at no great additional burden by filing in each of several places. Although under this formula, as under the accounts receivable rule stated in subsection (1), there will be doubtful situations, the subsection states a rule which will be simple to apply in most cases, which will make it possible to dispense with much burdensome and useless filing, and which will operate to preserve a security interest in the case of non-scheduled operations.

Similarly, if the chief place of business of the debtor is moved into "this state" after a security interest has been perfected in another jurisdiction, the secured party should file in this state, since Section 9-401(3) is inapplicable.

Section 9-302(3) should be consulted for certain transactions to which the filing provisions of this Article do not apply. Where property is covered by a certificate of title, the governing rule is stated in subsection (4) of this section.

4. Notice that the rule of subsection (2) applies to goods of a type "normally used" in more than one jurisdiction; there is no requirement that particular goods be in fact used out of state. Thus if an enterprise whose chief place of business is in State X keeps in this state goods of the type covered by subsection (2), this rule of the subsection applies even though the goods never cross a state line. The definitions of "equipment" and "inventory" (Section 9-109) should be consulted.

5. General intangibles present the same problem as accounts and contract rights, but with an added difficulty. The "office where records are kept" rule which subsection (1) applies to accounts and contract rights is not available here since no records will be kept with respect to many types of property which would be "general intangibles". The "chief place of business" rule of subsection (2) is adopted as providing a convenient filing place. If the debtor's chief place of business is moved into "this state" after a security interest has been perfected in another jurisdiction, the secured party should file in this state, since Section 9-401(3) is inapplicable.

6. Under subsection (1) this state in effect disclaims jurisdiction over certain accounts and contract rights and under subsection (2) over general intangibles which, by common law rules, might be held to be within the state's jurisdiction; in the same way under subsection (2) there is a disclaimer of jurisdiction over mobile chattels even though they are physically located here. So far as validity, perfection and filing are concerned, the subsections state the rule that the applicable law, if it is not the law of this state, will be that of the jurisdiction where the assignor keeps his records of accounts or contract rights, or in the case of mobile chattels or general intangibles where the debtor's chief place of business is located. If the jurisdiction whose law is applicable has enacted this Article or comparable legislation, filing, for example, in that jurisdiction will be recognized in this state as perfecting the security interest here. The other jurisdiction may, however, not have such legislation. For example, mobile equipment is located in this state; the debtor's chief place of business is in State X, which has not enacted this Article. Presumably State X will not permit or recognize filing on property not physically located in State X. Subsections (1) and (2) solve this difficulty by making specific reference to the conflict of laws rules of State X. If the law of State X does not assert the jurisdiction which is disclaimed by the subsections, then the applicable law will be the law which the courts of State X would apply to the transaction under their conflict of laws principles. In the case of mobile equipment, that would be presumably this state, where the equipment is located, and so filing in this state would perfect the interest. In the case of accounts, contract rights and general intangibles it would be the jurisdiction where the property is deemed located under the State X case law on the situs of choses in action.

It is clear that cases may arise where the application of these rules will not be a simple matter. It is thought however that the advantages of the rules far outweigh these difficulties -which indeed already exist under several state accounts receivable statutes. The incorporation of the other jurisdiction's conflict of laws rules makes it possible to arrive at a solution in any given case. Where both jurisdictions have enacted this Article or comparable legislation, there is no difficulty in applying the rules.

The optional sentence at the end of subsection (2) provides a special rule for security interests in airplanes owned by a foreign air carrier. Without that sentence subsection (2) may refer such a case to the law of a foreign nation whose law is difficult or impossible to ascertain, and there may be doubt as to whether the third sentence of subsection (2) is applicable so as to permit perfection by filing "in this state." The optional sentence clears up such doubts by treating as the chief place of business the office designated for service of process in the United States under the Federal Aviation Act of 1958. To the extent that it is applicable, the Convention on the International Recognition of Rights in Aircraft supersedes state legislation on this subject, but many nations are not parties to that Convention.

7. Collateral other than accounts, contract rights, general intangibles and mobile equipment may be brought into this State subject to a security interest which has attached and may have been perfected under the laws of another jurisdiction. If the property is covered by a certificate of title, subsection (4) applies. In other cases, under subsection (3) this Article applies from the time the collateral comes into this state, except that (1) the validity of the security interest is determined by the law of the jurisdiction where it attached (unless pursuant to an understanding of the parties the collateral is brought here within 30 days thereafter) and (2) if the security interest was perfected in the jurisdiction where the collateral was kept before being brought here, it continues perfected in this state for four months after the collateral is brought in, although the filing requirements of this Article have not been complied with here. After the four month period the secured party must comply with the perfection requirements of this Article (i.e., must file if filing is required). This rule differs from that of Section 14 of the Uniform Conditional Sales Act. Under that section a conditional seller was required to file within 10 days after he "received notice" that the goods had been removed into this state. Apparently, under the Uniform Conditional Sales Act, if the seller never "received notice" his interest continued or became perfected in this state without filing, whether or not it had been perfected in the original jurisdiction. Subsection (3) proceeds on the theory that not only the secured party whose collateral has been removed but also creditors of and purchasers from the debtor in this state should be considered. The four month period is long enough for a secured party to discover in most cases that the collateral has been removed and to file in this state; thereafter, if he has not done so, his interest, although originally perfected in the state where it attached, is subject to defeat here by those persons who take priority over an unperfected security interest (see Section 9-301). Under Section 9-312(5) the holder of a perfected conflicting security interest is such a person even though during the four month period the conflicting interest was junior. Compare the situation arising under Section 9-403(2) when a filing lapses.

In case of delay beyond the four-month period, there is no "relation back"; and this is also true where, in this state, the security interest is perfected for the first time.

Note that even after the four-month period, it is the law of the jurisdiction where the security interest attached which determines its validity. That is to say, such matters as formal requisites continue to be tested by the law with reference to which the parties originally contracted; other matters (rights of third parties, rights on default and so on) are governed by this Article.

Subsection (3) does not apply to the case of goods removed from one filing district to another within this state (see subsection (3) of Section 9-401), but only to property brought into this state from another jurisdiction (i.e., from another state, from a foreign country, or from Federal territory).

8. Optional subsection (5) makes an exception to subsection (1) and to Section 9-302 on the requirement of filing. Where subsection (1) refers to the law of a foreign nation for the validity and perfection of a security interest in accounts or contract rights, the governing law may be difficult or impossible to ascertain. Subsection (5) therefore provides a substitute rule for such cases, if the transaction is one which bears an appropriate relation to this state. Compare Sections 1-105, 9-102. If a buyer of goods in this state (account debtor) owes money to a foreign seller (assignor) who keeps his records abroad, and an assignment of the account to an assignee in this state is executed here, subsection (5) makes the Article applicable and makes notification to the account debtor the exclusive method of perfecting the assignment. Where there are points of contact with other states as well as this state, the question whether the relation to this state is "appropriate" is left to judicial decision.

Cross References:

Sections 1-105, 9-102 and 9-401.

Point 3: Section 9-302.

Point 7: Sections 9-301, 9-312 and 9-402.

Definitional Cross References:

"Account". Section 9-106.

"Contract right". Section 9-106.

"Debtor". Section 9-105.

"Equipment". Section 9-109.

"General intangibles". Section 9-106.

"Goods". Section 9-105.

"Inventory". Section 9-109.

"Security interest". Section 1-201.

Subparagraphs (i) to (iv), of subsection (6)(e), redesignated pursuant to §23G-15(1).