Personal Property Security Interests in Washington-adoption of the 1972 Official Text of the Uniform Commercial Code Will Make a Good Law Better

• Publication year: 1979

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 3, No.1FALL 1979

Personal Property Security Interests In Washington-Adoption Of The 1972 Official Text Of The Uniform Commercial Code Will Make A Good Law Better

Leland L. Bull, Jr.(fn*)

TABLE OF CONTENTS

I. Introduction ................................. 2

II. The Scope of Article Nine .................... 4

III. Classification of Personal Property ........... 6

A. Goods.................................... 6

B. Intangibles ............................... 9

IV. Creating an Enforceable Security Interest ..... 12

A. The Contract Aspects-Attachment ........ 12

B. After-Acquired Property Clauses............ 15

V. Perfection ................................... 18

A. The Requirement of Perfection ............. 18

B. The Manner of Perfection.................. 21

VI. Special Priority Problems for Perfected Security Interests ..................................... 29

A. Validity of After-Acquired Property Clauses in Bankruptcy .............................. 30

B. Mechanic's Liens ......................... 32

C. Buyers of the Collateral ................... 34

1. In General ............................ 34

2. Buyers of Farm Products ............... 35

D. Competing U.C.C. Financiers-The General Rule ..................................... 39

E. Competing U. C. C. Financiers-Purchase Money Security Interests .................. 41

F. Competing U.C.C. Financiers-Perfection and Priority in Proceeds ....................... 45

1. Perfection ............................. 45

2. Priority ............................... 48

G. Perfection in Fixtures-Priority over Conflicting

Real Estate Interests ...................... 50

1. The Problem .......................... 50

2. The 1962 Text of Section 9-313.......... 51

3. The 1972 Text of Section 9-313.......... 53

VII. Multi-State Problems ........................ 57

A. Choice of Law in General .................. 57

B. Perfection in Multi-State Transactions59 VIII. Default and Enforcement ..................... 65

A. Defining Default .......................... 65

B. 1972 Amendments to Part Five ............. 66

C. Cumulation of and Limitations on Remedies67

D. Secured Party Self-Help ................... 71

E. Satisfaction by Sale or Otherwise ........... 76

IX. Conclusion .................................. 82

I. Introduction

The purpose of this article is to review the Washington State law of personal property security interests under the existing 1962 Text(fn1) of Article 9 of the Uniform Commercial Code (U.C.C.) adopted by the legislature in 1965(fn2) and to introduce the reader to the substantive and procedural improvements adoption of the 1972 Text(fn3) would make in existing Washington practice. This article advocates the approval of the 1972 Text at the next session of the Washington Legislature. In addition, the article proposes several nonuniform amendments and changes in existing Washington nonuniform provisions, which would improve the functioning of the personal property security system in Washington, and which, therefore, should be considered by the legislature in conjunction with the 1972 Text. These proposals include elimination of all special provisions in Article 9 relating to farm credit; extention of existing nonuniform subsection 9-204(6) to protect all cash sellers, not just sellers of livestock, from loss of their goods to the buyer's inventory financier on dishonor of the buyer's check; and modification of the language of the second paragraph of subsection 9-501(1) to prohibit a deficiency judgment against a consumer after repossession in all cases of consumer purchase money financing, and not just in the case of conditional sales. Finally, the article surveys the interpretations of the existing text of Article 9 given by the Washington Supreme Court and Court of Appeals in the approximately three dozen Washington appellate cases reported(fn4) in the twelve years since the Code became effective in Washington and discusses how these cases will be affected by the adoption of the 1972 Text.

By July, 1979, twenty-six states had adopted the 1972 Text, including Oregon, Idaho, and California, and the leading commercial states of New York, Michigan, Illinois, and Texas.(fn5) Yet through the end of the 1979 Extraordinary Session of the Washington Legislature, no bill to enact the 1972 Text in Washington has ever been introduced. That the 1972 Text, which apparently has generated no active opposition, is noncontroversial and intended to make an already good law even better is an explanation, but not an excuse, for why the legislature has overlooked the 1972 Text. For the very same reasons, it is not a cause that generates vocal support, and even the Washington State Bar Association appears not to have undertaken active sponsorship. This article has been prepared in the hope that it will explain the 1972 amendments to Article 9 in the context of the existing Washington law. Its passage would not only improve Washington commercial law but also harmonize Washington law with that of the majority of other states.

II. The Scope of Article Nine

Under subsection 9-102(1)(a), Article 9 extends to transactions(fn6) well beyond what are normally thought of as security interests.(fn7) The Code expressly recognizes, for example, that a transaction in the form of a lease may actually be a security interest disguised in an effort to hide it from public view.(fn8) Because the rights of a lessor of personal property historically have been enforced against a creditor of the lessee by an action of replevin based upon the lessor's title, either at common law or under modern statute a lease of personal property does not have to be recorded to avoid conflict with the rules against fraudulent conveyances. Thus, the lessor's right to recover his property from the lessee's creditors creates, in fact, a secret, or unrecorded, interest in what is ostensibly the lessee's property. To prevent the public notice requirements imposed upon nonpossessory security devices from being undercut, the Code, in subsection 1-201(37), sets out objective standards for judging whether a lease is a true lease or shall be deemed to be a security interest and thus subject to the provisions of Article 9.

Subsection 9-102(l)(b) also includes all sales of accounts receivable within the scope of the Article.(fn9) The Code recognizes the functional similarity between the borrowing against and the selling of accounts receivable in the financing of a business(fn10) and imposes upon the account buyer the same third-party notice requirements under Article 9 as fall upon the account lender. In doing so, the provision continues the practice begun by statutes such as Washington's assignment of accounts receivable statute,(fn11) which mandated filing of notice to perfect assignments of accounts. Under the earlier common law, a sale of accounts was treated as merely a special case of the assignment of choses in action, which required the creditor to notify the account debtor in order to claim priority against subsequent purchasers.(fn12) Although such notification may be effective protection for the account debtor against requests for payment by a later assignee, it is not only a cumbersome method of perfection in large scale financing, but also is frequently for business reasons objectionable. Thus, because of the need for providing adequate notice, simplifying the procedure, and making information concerning accounts receivable financing more easily accessible to third parties, the drafters followed the tendency of modern law by including all accounts transactions within Article 9 filing provisions.

III. Classification of Personal Property

The methods required for perfection against the claim of third parties of a secured party's rights in the debtor's property vary according to the kind of property, or collateral,(fn13) involved. Also, if the filing of a financial statement is the required method of perfection, the place where filing is required may vary depending on the nature of the collateral subject to the security interest. In addition, with certain kinds of collateral third parties can obtain rights that will defeat even a perfected security interest. Hence, an accurate classification of the collateral is essential.

A. Goods

Collateral can be categorized as either tangible personal property (goods)(fn14) or intangible property.(fn15) Goods are further subdivided in section 9-109 according to their use by the debtor. The four classifications of goods are consumer goods, equipment, farm products, and inventory. Inventory includes not only raw materials and products held for sale, but also property held for lease.(fn16) Equipment is property used in a business; it also forms the residual category for all goods that do not fit within any of the other three categories.(fn17)

The proper classification of goods, under the definitions in section 9-109, depends upon their use by the debtor granting the security interest, and the method of perfection (i.e., whether filing is required or not, and if so, where) depends upon the classification. Problems with respect to perfection can arise when the debtor's use of the goods changes after the security interest is properly perfected according to the rules relating to the debtor's original use. Will the new use require a new...