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How is a security interest created through the “assignment of accounts receivable” and “contract rights”?
Generally, the sale or assignment of rights in accounts, payment intangibles, or promissory notes (account) creates a security interest for the individual to whom the account is assigned. This attaches the security interest to the account. Article 9 requires that an individual file a financing statement to perfect a security interest in an account. There are, however, two exceptions that allow the assignee of the account to perfect a security interest without publicly filing a financing statement.
• Single Account to Satisfy a Debt – The assignment of a single account in satisfaction of a preexisting debt;
⁃ Example: ABC Inc., transfers and account payable to 123 Inc., in satisfaction of a debt that ABC owed to 123. While ABC maintains control over the account payment, 123 has a security interest in the account that is perfected without filing a financing statement.
• Automatic Perfection – The assignor transfers a limited number of accounts to the assignee that does not constitute a significant number of the assignor’s accounts.
⁃ Note: For automatic perfection to apply in this situation, the transferred account cannot constitute a significant percentage of the outstanding accounts of the transferor and the recipient cannot regularly take assignment of accounts in satisfaction of debts.
• Discussion: How do you feel about the ability of an assignee to perfect a security interest in an intangible account? Why do you think it is important to grant the assignee of an account receivable or contract benefits a security interest? Hint: Think about who is in control of the accounts receivable and contract rights before and after the assignment. Do you agree with the above-referenced exceptions to the requirement to file a financing statement? Why or why not?
• Practice Question: ABC Corp sells product at wholesale. It regularly takes payment on accounts for 90 days. These accounts sit in accounts receivable until paid. ABC Corp transfers several of these accounts to 123 Corp but maintains control over the account in order to effectuate collections. What do we need to know about this transfer to determine whether 123 Corp has a perfected security interest in the accounts?