Rights to Payment

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.

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)]

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?")

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.

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).

Buyers of Rights to Payment are required to

"perfect" a "security interest."
Right

Sale

Loan

Account

File

File

Chattel Paper

File<Pledge/Possession File<Pledge/Possession

Promissory Note

Auto-perfect*

File<Pledge/Possession

Payment Intangible

Auto-perfect

File

*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.

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.

9-330(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.

Bottom Line:
1)

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).