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2 Int'l Fin. L. Rev. 38 (1983)
United States

handle is hein.journals/intfinr2 and id is 566 raw text is: Remedies against third parties in secured transactions Two recent cases illustrate the dif- ficulties a secured lender may encounter in enforcing its security interest against third parties. The first case, BarclaysAmerican/Business Credit v Paul Safran Metal Company, 566 F Supp 254 (ND 11 1983), involved a security interest in accounts receivable, while in the second case, Sterling National Bank & Trust Company v Southwire Company, 713 F 2d 684 (11th Cir 1983), the secured party had taken a security interest in the debtor's inventory. In the Barclays case, the finance company made a loan to Interstate Smelting & Refining Company secured by an assignment of all of Interstate's present and future accounts receivable. One such receivable arose when Interstate sold US $44,125 of metal products to Safran Metal Company, the defen- (Lant in the case. Three months after the sale, Barclays notified Safran of its right to receive payments on the account. Interstate subsequently defaulted on its obligations under the Barclays' loans and Barclays demanded payment of the account from Safran. Safran refused to pay Barclays on the grounds that it had sold certain metal scrap to Interstate and that Interstate still owed Safran US $50,725 on account of this trans- action. In the view of Safi'an, Barclays' right to collect the account receivable was subject to Safran's claim against Interstate. Barclays brought suit against Safran in the United States )istrict Court for the Northern District of Illinois. Citing Section 9-318(1) of the Uniform Commercial Code, the court decided' the case in favour of Barclays with respect to that portion of Safran's sales to Interstate which arose qfter Safran's receipt of notif- ication from Barclays that the account receivable had been assigned by Interstate to it (this was CONTRACT LAW When is a commitment letter binding? Connecticut General Life Insur- ance Company (ConGen) is an institutional mortgage lender which n rnationial t 1,anc Law Review icecmber : 1983 only US $10,662 of the US $44,125 account). However, with respect to the balance of Safran's sales to Inter- state which arose prior to the date of such notification (US $40,063), the court ruled that such claim could be raised as a defence against Barclays. Accordingly, Barclays' claim against Safran on the receivable was reduced by US $40,063. The basis for this decision is UCC 9-318(l)(b) which provides that the rights of an assignee (Barclays) are subject to any defence or claim, whether or not related to the assigned account, of the account debtor (Safran) against the assignor (Interstate) which accrues before the account debtor rece ives notification of the assignment. What could Barclays have done here to protect itself? Most obviously, it should have notified Safran of the assignment as soon as Interstate made the initial sale to Safran, assuming Barclays was noti- fied of such sale and the security agreement with Interstate gave it the right to notify Safran at such tite. Alternatively, it could have required that the account debtor (Safran) waive any defence or claim against Interstate as a condition to accepting that account receivable as security and as a basis for disbursement. In the Sterling National Bank case, the bank advanced almost US $4 m to Metric International, Inc, a dealer in copper and other metals. As security for these advances, Sterling took a security interest in Metric's metals inventory, which covered raw materials, goods in process, finished goods and pro- ceeds. In a supplement to the financing agreement, Metric agreed that except for sales in the regular course of business, it would not sell any collateral without Sterling's prior written consent. After concluding these arrange- ments with Sterling, Metric trans- loans money for real estate develop- ient. In September, 1976 B B Cohen, a mortgage broker, sub- mitted an application for commercial rcal estate mortgage financing to Con(wen on behalf of certain real estate developers (the Developers). In January, 1977 ConGen made a ferred 265,000 pounds of copper cathode to Southwire Company in satisfaction of a pre-existing debt owing by Metric to Southwire tinder a tolling contract. Shortly thereafter, Metric filed for bankruptcy. When Sterling found out that Metric's supplies of cathode had been greatly reduced, it sued Southwire for con- verting the 265,000 pounds of cathode which had been transferred to it in payment of the tolling charges. The United States District Court for the Northern District of Georgia granted summary judgement in favour of Sterling and the l1th Circuit has recently affirmed this ruling. The Circuit Court cited UCC 9-306(2) which provides that a security interest continues in col- lateral notwithstanding sales, exchange or other disposition thereof unless the disposition was authorised by the secured party in the security agreement or otherwise. A 'buyer in the ordinary course of business' may take the goods free of an existing security interest, but the court ruled that a buyer acquiring goods in total or partial satisfaction of a debt could not be a buyer in the ordinary course. Similarly, the transfer by Metric as payment for the tolling charges was not a sale in the regular course of its business. Accordingly, the sale was prohibited by the supplement to the financing agree- mient and Sterling's security interest in the goods continued under UCC 9-306(2). The Sterling National Bank case illustrates the importance of a ncga- tive plcdge clause in all security agreements. The negative pledge should cover not only liens, encum- brances and pledges, but transfers, sales, or any type of disposition. Robert S Rendell; Rogery & i4lls; New York written offer to the Developers, in the form of' a (letailcd commitment lcttcr. to provide such financing. The cocimmitment letter provided that die Developers' 'acceptance of the agreement must be accompanied by a ftee of US $600,000 in cash' or a certificate of deposit. The fee would

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