Business Law Newsletter
| Publication year | 1981 |
| Pages | 522 |
| Citation | Vol. 10 No. 3 Pg. 522 |
1981, March, Pg. 522. Business Law Newsletter
In light of present economic realities, lenders are frequently looking to more unique forms of collateral in order to make marginal loans palatable. On occasion, the novelty of these security interests falls outside the scope of Article 9 of the Uniform Commercial Code ("Code"). Although some lenders, and attorneys, may feel apprehensive in dealing with the Code in its particulars, since one of the stated purposes of the Code was to simplify and clarify the law,(fn1) the realities of compliance with common law or non-uniform statutes appear to be a more legitimate fear.
The purpose of this inquiry is to alert the lender to the extent that certain "services rendered"(fn2) may not technically be considered "accounts" within the bailiwick of the Code,(fn3) and to point out the potential pitfalls inherent in securing a loan with these contract rights derived from services rendered.
Under the 1978 revision of Article 9, the term "contract right" as a "right to payment not yet earned by performance"(fn4) was incorporated into the generic term "account," itself defined as "any right to payment for goods sold or leased or for services rendered not evidenced by an instrument or chattel paper."(fn5) Consequently, collateral involving "services rendered" would ordinarily involve compliance with the Code; i.e., the lender giving value and obtaining a security agreement signed by the debtor describing the collateral in which the debtor has some rights.(fn6) In addition, to perfect this security interest against third parties, the secured party would be required to file a financing statement, generally with the Secretary of State(fn7) or in the county in situations involving the sale of farm products by a farmer.(fn8)
While "services rendered" appear to be a type of collateral covered by the law of secured transactions, it is readily apparent that one of the most common varieties of "services rendered" is not covered by the Code. Article 9 provides specifically that it does not apply "to a transfer of a claim for wages, salary or other compensation of an employee."(fn9)
In this regard, paragraph 4 of the Official Comments indicates that "in many states assignments of wage claims and the like are regulated by statute. Such assignments present important social problems whose solution should be a matter of local regulation." Consequently, the Code has left the determination of the validity and manner of creating perfected security interests in wages to the discretion of the individual states.
Assignments of wages were prohibited under common law as champertous,(fn10) which commercial law modified initially in order to permit seamen to utilize their wages in advance of a lengthy voyage.(fn11) This permissive attitude soon resulted in abusive practices, however, including loan sharking.(fn12) Public indignation around the turn of the century resulted in legislative regulation in most states,(fn13) including various notice and consent...
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