I. THE SCOPE OF ARTICLE 9
A. IN GENERAL
The first task for a lawyer advising a client about a planned secured transaction is to determine whether Article 9 applies to it (including whether it is a secured transactions at all). Reaching an incorrect conclusion on this issue can lead to a disastrous result. For example, if a person is unaware that Article 9 applies, the person might fail to perfect a security interest under Article 9 and end up losing all interest in the collateral to some other claimant. Alternatively, if Article 9 does not apply, the person might erroneously comply with Article 9 but fail to do whatever applicable law does require to obtain and perfect an interest in the collateral.
The latter problem arose in In re Montreal, Maine & Atlantic Railway, Ltd.,1 in which Wheeling & Lake Erie Railway Company (“Wheeling”) extended the debtor, Montreal, Maine & Atlantic Railway, a $6 million line of credit. The debtor in return granted Wheeling a security interest in all accounts and payment intangibles. A few years later, a tragic derailment accident occurred in Quebec and the debtor filed a claim with its insurer for business interruption damages. In the debtor’s bankruptcy, Wheeling claimed that the insurance proceeds were part of its collateral. The court concluded that—because Article 9 does not apply to an interest in, or a claim under, an insurance policy, unless the claim is for loss or damage to collateral,2 and because an insurance claim for lost business is not a claim for loss or damage to collateral—Article 9 did not apply to Wheeling’s security interest.3 The court then analyzed Wheeling’s security interest under Maine common law. The court was unsure what Maine law would require to perfect a security interest in an insurance policy or claim, but ultimately concluded that some step, beyond the execution of a security agreement, designed to furnish fair notice to other creditors is required.4 The secured party had taken none of the possible steps.5
Sometimes, other law takes precedence over Article 9. In Lili Collections, LLC v. Terrebonne Parish Consolidated Government,6 the court ruled that—because Article 9 does not apply to the extent that other state law expressly governs the creation, perfection, priority, or enforcement of a security interest created by the state or a governmental agency thereof,7 and because provisions of the relevant state law restrict the ability of state agencies to borrow funds and pledge assets— Article 9 did not apply to a contractor’s assignment of its right to payment from a state agency.8 According to the court, Article 9’s anti-assignment rules did not render ineffective the clause in the contractor’s agreement with the agency prohibiting assignment. This conclusion is suspect because the state did not create the security interest, the contractor did.
A somewhat similar issue arose in Etzler v. Indiana Department of Revenue,9 in which a secured party claimed its security interest in a breeder’s award owed to the debtor by a ...