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84-9-318. No interest retained in right to payment that is sold; rights and title of seller of account or chattel paper with respect to creditors and purchasers. (a) Seller retains no interest. A debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold.

(b) Deemed rights of debtor if buyer's security interest unperfected. For purposes of determining the rights of creditors of, and purchasers for value of an account or chattel paper from, a debtor that has sold an account or chattel paper, while the buyer's security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold.

History: L. 2000, ch. 142, § 38; July 1, 2001.

KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text and has not been amended. It sets forth rules governing the assignment of third-party obligations as collateral security for a loan.

Subsection (1). This subsection subjects the rights of the assignee of chattel paper or accounts to defenses of the account debtor arising out of the contract, as well as all the terms of the contract, under subsection (1)(a). For example, if the account debtor had no duty to pay the assignor because the goods delivered were defective, this defense could be raised against the assignee, who steps into the assignor's shoes for this purpose. The rights of the Article 9 assignee are thus much less than those of a holder in due course of a negotiable instrument. Compare 84-3-305(b). The assignee could obtain semi-negotiability by relying on a cutoff or waiver-of-defense clause under 84-9-206, but such clauses are rare. For decisions allowing the account debtor to foil the assignee because of the presence of a "defense or claim", see Ertel v. RCA, 307 N.E.2d 471 (Ind. 1974) and James Talcott, Inc. v. H. Corenzwit & Co., 387 A.2d 350 (N.J. 1978).

A financing assignee also takes subject to the account debtor's right of setoff from defenses or claims arising out of other contracts, under subsection (1)(b), so long as the right of setoff accrues before the account debtor receives notification of the assignment. For cases applying this rule, see Central State Bank v. State of New York, 73 Misc.2d 128, 341 N.Y.S.2d 322 (N.Y. Ct. Cl. 1973); American East India Corp. v. Ideal Shoe Co., 400 F. Supp. 141 (E.D. Pa. 1975).

What is the scope of the assignee's liability under this subsection? 84-9-317 makes it clear that the mere existence of a security interest does not impose affirmative liability on the secured party for assignor misconduct. See Kansas Comment 1996 to that section. In other words, although the assignee may be unable to collect the unpaid balance of the contract proceeds to amortize the debt, he will not be required to cough up damages for the account debtor, or return payments already made. Compare the Kansas Consumer Credit Code (K.S.A. 16a-3-404 and 16a-3-405), where the assignee financing a consumer credit transaction cannot be held liable for affirmative recovery. The judicial decisions also support this general principle. See, e.g., Anderson v. Southwest Savings & Loan Association, 571 P.2d 1042 (Ariz. App. 1977); Michelin Tires (Canada) Ltd. v. First National Bank of Boston, 666 F.2d 673 (1st Cir. 1981) (account debtor could not recover $ 700,000 in progress payments made directly to bank as assignee financing construction project); Marron v. H.O. Penn Machinery Co., 518 F. Supp. 1069 (D. Conn. 1981) (secured party not subject to products liability claim for personal injury caused by defective piece of equipment financed by secured party).

On the other hand, there are some cases which hold that the financing assignee must return certain payments made by the account debtor. Benton State Bank v. Warren, 562 S.W.2d 74 (Ark. 1978); Farmers Acceptance Corp. v. DeLozier, 496 P.2d 1016 (Colo. 1972); Massey-Ferguson Credit Corp. v. Brown, 567 P.2d 440 (Mont. 1977). Any financing assignee seeking to resist return of payments made under the assignment would do well to emphasize 84-9-317, which does indeed seem to insulate the assignee from affirmative liability based upon assignor misbehavior.

Subsection (2). This subsection, which is another example of how an assignee may have very "precarious security," makes good faith modification or substitution by the assignor and account debtor, even after notice of the assignment, effective without the assignee's consent, if the changes are in accordance with reasonable commercial standards. For example, the assignor could broaden the warranties applicable to products sold to the account debtor, thus increasing the possibility of a defense to payment. Such a modification would not need consideration to be binding (84-2-209(1)), and would be effective as against the financing assignee under this subsection. Moreover, good faith modification might in some cases include outright termination. See Official Comment 2.

Subsection (3). This subsection establishes the account debtor's risk of double liability. The account debtor may continue to make payment to the assignor until he receives notice that the account has been assigned and that payment is to be made directly to the assignee. In "non-notification" financing this will not occur until default by the assignor on the credit transaction. If the account debtor continues to make payments to the assignor following notification under this subsection, he runs the risk of double liability. For decisions applying this rule, see Valley National Bank of Arizona v. Flagstaff Dairy, 570 P.2d 200 (Ariz. App. 1977); First National Bank of Rio Arriba v. Mountain States Tel. & Tel. Co., 571 P.2d 118 (N.M. 1977); Bank of Commerce v. Intermountain Gas Co., 523 P.2d 1375 (Idaho 1974). The leading case setting forth the requirements of the notification which can lead to double liability is Surety Savings & Loan Co. v. Kanzig, 372 N.E. 2d 602 (Ohio 1978). The right of the assignee to collect directly from the account debtor upon the assignor's default is established by 84-9-502.

Subsection (4). This subsection denies effectiveness to contractual terms prohibiting assignments of accounts and chattel paper. It is a variation of the theme of free alienability of property. The Federal Assignment of Claims Act (40 U.S.C. @ 270(a)) reflects the same philosophy, expressly authorizing assignment of claims where the U.S. government is the account debtor, so long as special notification of the assignment is given to the government.

Revisor's Note:

Former section 84-9-318 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Paragraph (3) mentioned in discussion of impact of the Uniform Consumer Credit Code upon Kansas, Barkley Clark, 18 K.L.R. 277, 290 (1970).

CASE ANNOTATIONS

1. Priority between bank's perfected security interest and state agency's right of setoff examined. Bank of Kansas v. Hutchinson Health Services, Inc., 246 Kan. 83, 90, 785 P.2d 1349 (1990).


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