Prior Uniform Statutory Provision: Sections 9(a) and 10 of Uniform Trust Receipts Act.

Changes: Important changes in substance.

Purposes of Changes:

1. Chattel paper is defined (Section 9-105) as "a writing or writings which evidence both a monetary obligation and a security interest in or a lease of specific goods". In terms of existing security devices the definition covers, for example, the conditional sale contract, the bailment lease and the chattel mortgage. Such paper has become an important class of collateral in financing arrangements, which may - as in the automobile and some other fields - follow an earlier financing arrangement covering inventory or which may begin with the chattel paper itself.

Arrangements where the chattel paper is delivered to the secured party who then makes collections, as well as arrangements where the debtor, whether or not he is left in possession of the paper, makes the collections, are both widely used, and are known respectively as notification (or "direct collection") and non- notification (or "indirect collection") arrangements. In the automobile field, for example, when a car is sold to a consumer buyer under an installment purchase agreement and the resulting chattel paper is assigned, the assignee usually takes possession, the obligor is notified of the assignment and is directed to make payments to the assignee. In the furniture field, for an example on the other hand, the chattel paper may be left in the dealer's hands or delivered to the assignee; in either case the obligor is usually not notified, and payments are made to the dealer- assignor who receives them under a duty to remit to his assignee. The widespread use of both methods of dealing with chattel paper is recognized by the provisions of this Article which permit perfection of a chattel paper security interest either by filing or by taking possession.

2. Although perfection by filing is permitted as to chattel paper, certain purchasers of chattel paper allowed to remain in the debtor's possession take free of the security interest despite the filing. The second sentence of the Section deals with the case where the security interest in the chattel paper is claimed merely as proceeds - i.e. in favor of an inventory financer, whether or not his filed financing statement claimed proceeds, who has not by some new transaction with the debtor acquired a specific interest in the chattel paper. In that case a purchaser, even though he knows of the inventory financer's proceeds interest, takes priority provided he gives new value and takes possession of the paper in the ordinary course of his business. The first sentence deals with the case where the non- possessory security interest in the chattel paper is more than a mere claim to proceeds - i.e. exists in favor of a secured party who has given value against the paper, whether or not he financed the inventory whose sale gave rise to it. In this case the purchaser, to take priority, must not only give new value and take possession in the ordinary course of his business; he must also take without knowledge of the existing security interest. Thus a secured party, who has a specific interest in the chattel paper and not merely a claim to proceeds, and who wishes to leave the paper in the debtor's possession can, because of the knowledge requirement, protect himself against purchasers by stamping or noting on the paper the fact that it has been assigned to him.

3. The rule of the first sentence of the Section also applies to non-negotiable instruments. Note that the term "non- negotiable instrument" is by no means as broad as the common law concept of "chose in action": accounts, contract rights and general intangibles (all defined in Section 9-106) are not included. It should also be noted that under Section 9-304(1) a security interest in an instrument, negotiable or non-negotiable, cannot be perfected by filing. Thus the only type of perfected non-possessory security interest that can arise in an instrument is the temporary 21 day perfection provided for in Section 9-304(4) and (5). Where such a perfected interest exists in a non-negotiable instrument, purchasers will take free if they qualify under the first sentence of the Section. Since the second sentence applies only to chattel paper, knowledge of the existing security interest would defeat the purchaser of a non- negotiable instrument even though that interest was claimed merely as proceeds.

Cross References:

Point 1: Sections 9-304(1) and 9-305.

Point 2: Section 9-306.

Point 3: Section 9-304.

Definitional Cross References:

"Chattel paper". Section 9-105.

"Instrument". Section 9-105.

"Inventory". Section 9-109.

"Knowledge". Section 1-201.

"Proceeds". Section 9-306.

"Purchaser". Section 1-201.

"Security interest". Section 1-201.

"Value". Section 1-201.