Chattel Paper Financing: Metaphysical Property and Real Money
Idaho Law Review
This Article first examines the operation of section 9-308 with respect to competing claims for the same chattel paper. The current rule subordinates an inventory financer who claims the chattel paper "merely as proceeds" of the sale of inventory to a chattel paper purchaser" who has given "new value" and taken possession of the chattel paper "in the ordinary course of his business." The chattel paper purchaser also prevails over an inventory financer even if the inventory financer has given new value and has relied on the chattel paper, if the chattel paper purchaser "acts without knowledge" that the specific paper is subject to a security interest. This Article determines that these two rules have been effective to consistently award superior status to the chattel paper purchaser, but questions whether this policy applies to all chattel paper transactions and whether it unnecessarily burdens the system in an era when chattel paper financing is no longer in its infancy. Section 9-308 favors the chattel paper financing industry, promotes conscious ignorance, exempts chattel paper purchasers from the normal obligation to check the record, elevates possession over filing as a means of perfection, and deprives an inventory financer from any meaningful protection afforded by perfecting its security interest in chattel paper through filing a financing statement. If, despite these anomalies, the policy to-protect chattel paper purchasers outweighs the value of a harmonious notice filing system with respect to chattel paper and the tangible goods securing the value thereof, section 9-308 should be revised. Revised Article should plainly state the circumstances under which a chattel paper purchaser will take priority over other creditors. The second part of this Article develops the theme of the chattel paper purchaser as a "new value" lender who enables the buyer to acquire goods, or the use of the goods through lease chattel paper, and who enables the dealer to acquire the chattel paper from the buyer. Just as purchase money lenders are required to take special steps to minimize harm to prior perfected secured parties, so too, should chattel paper purchasers undertake to establish super-priority by providing notice to interested parties. The third part of this Article analyzes various theories employed by the courts to solve problems that do not fall within the present formulation of section 9-308. These problems arise principally from successive transfers of the tangible goods that are represented by chattel paper and which become particularly acute when the goods reappear in the debtor's inventory. Typically, courts have resolved the ensuing disputes by construing section 9-306(5) with section 9-308. Opinions diverge on issues that are outcome determinative, including the negotiability of chattel paper and the effect of a sham sale on the creation of a security interest in chattel paper, the proper means to perfect a chattel paper purchaser's security interest in the collateral, the exclusion of an inventory financer from the meaning of a "creditor or purchaser of the transferor" in section 9-306(5)(d) the nature of returned or repossessed goods, and the classification of tangible goods as proceeds of chattel paper. The Article concludes that the repetitive nature of the problems, and the divergence of judicial action, both in opinion and in result, manifest a need to revise sections 9-306 and 9- 308 to restore uniformity and promote fairness. Accordingly, the final part of this Article summarizes available options and recommendations for reform raised in the discussion of these issues.
Julianna J. Zekan, Chattel Paper Financing: Metaphysical Property and Real Money, 29 IDAHO L. REV. 723 (1992).