Rights to Payment

1. Rights to Payment

2. Almost all transactions give rise to rights to payment. • Example: I buy a car from you, but we agree I will pay you later.  You now own a right to be paid by me. • Rights to payment are either PROCEEDS of secured collateral, or can be COLLATERAL in their own right. • Because rights to payment are valuable in their own right, the UCC lets you SELL or take out LOANS using them as collateral.

3. The Major Rights to Payment: • Chattel Paper:  a (1) security interest in property OR a lease of property; AND (2) a monetary obligation.  [9-102(a)(11); Comment 5b].  The monetary obligation MUST relate to the property. • Promissory Note: a written promise to pay.  (NB: the difference between a Promissory Note and Chattel Paper is that the holder of Promissory Note has no right of recourse against the borrower's property.) [9-102(a)(65)]. • Accounts: payment owed for GOODS or SERVICES.  [9-102(a)(2)]. • Payment Intangible: primary monetary obligation NOT evidenced by an Instrument, and NOT for goods or services.  [9-102(61)]

4. Examples of Rights to Payment: • Chattel Paper: an installment sales contract. • Promissory Note: a basic IOU. • Account: purchases on unsecured credit. (I buy a computer, owe money for it). • Payment Intangible: an undocumented loan, or a share in loan participation. (QUESTION: are revenue streams "payment intangibles?")

5. Payment Intangibles and General Intangibles • Payment Intangibles are a subset of General Intangibles.  • Most General Intangibles -- like software or Intellectual Property -- are not Payment Intangibles. 

6. Why Have a Separate Section on Rights to Payment? • Because SALES of rights to payment are governed by the Code.  [9-109(a)(3)]. • So, sales of "accounts, chattel paper, payment intangibles, or promissory notes," are expressly part of the scope of Article 9.  [9-109(a)(3)] • This means that a BUYER of a right to payment for $$ up front must still comply with Article 9.  (Compare:  a BUYER of a toaster for $$ up front obviously doesn't have to file or otherwise comply with Article 9).

7. Buyers of Rights to Payment are required to "perfect" a "security interest." *BUT 9-330(d) still cuts off the interest if a third party buys in good faith, for new value, without knowledge, and takes possession UNLESS the interest in the promissory note is perfected by possession.

8. 9-330: Priority of Purchaser of Chattel Paper or Instrument Buyers of Chattel Paper or Instruments (including promissory notes) can cut off prior security interests (this includes the "security interests" of prior BUYERS of these rights to payment) if they meet certain conditions.

9. 9-330(d) Instrument Purchaser's Priority Purchaser of an instrument (including promissory notes) takes over a security interest perfected OTHER than by possession if the purchaser (1) gives value; (2) takes possession; (3) in good faith; and (4) without knowledge that the purchase violates the rights of the third party.

10. Bottom Line: • File in Accounts -- whether selling or using as collateral for a loan. 2) Take possession of promissory notes: EVEN IF the sale is auto-perfected, your interest can be cut off under 9-330. 3) Take possession of Chattel Paper: You *can* file, but filing can simply be cut off under 9-330.  If you can't take possession, for some reason, stamp your name on the Chattel Paper -- that gives notice of assignation under 9-330(a)(2) AND notice of violation under 9-330(b).