We want to extend a loan to a company and take all of their assets as collateral, including their accounts receivable. However, the company already has supply chain financing arrangements with other banks. For example, when the company wants to be paid immediately for goods sold to a buyer, the company contacts Bank A and receives immediate payment from the bank. Bank A in turn buys the relevant account receivable from the company. We are aware that Bank A has filed a Uniform Commercial Code (UCC) financing statement that may cover some of the company’s accounts receivable. Would Bank A’s security interest in an account receivable have priority over a financing statement we file afterward covering all of the supplier’s accounts receivable?

Yes, we believe that a prior sale of accounts that has already been perfected would have priority over any financing statement covering the same accounts that your bank files later in time.

Article 9 states that “a debtor that has sold an account does not retain a legal or equitable interest in the collateral sold.” For a buyer of an account to maintain priority over the account as to third parties, the buyer must perfect its security interest by filing a financing statement covering the account (although perfection also may be automatic if an assignment of accounts does not constitute a significant part of the assignor’s outstanding accounts).

Here, your customer has already sold certain accounts to Bank A, and it appears that Bank A has perfected its security interest in the accounts. Consequently, we do not believe that the supplier can sell the accounts to your bank, nor can your bank take and perfect a security interest in them.

It is possible that some of the supplier’s accounts have not yet been sold to Bank A or are not covered by Bank A’s financing statement, in which case your bank may be able to obtain and perfect security interests in the unsold accounts. Your bank would need to review the company’s accounts receivable offered as security and Bank A’s (and any other lender’s) financing statements to determine the extent to which prior security interests in the supplier’s accounts will interfere with your potential security interest.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/9-109(a) (“Except as otherwise provided in subsections (c) and (d), this Article applies to . . . (3) a sale of accounts, chattel paper, payment intangibles, or promissory notes.”)

Illinois UCC, 810 ILCS 5/1-201(b)(35) (“‘Security interest’ includes any interest of . . . a buyer of accounts.”)

Illinois UCC, 810 ILCS 5/9-102(a)(2) (“‘Account’, except as used in ‘account for’, means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of. . . .”)

Illinois UCC, 810 ILCS 5/9-318(a) (“A debtor that has sold an account . . . does not retain a legal or equitable interest in the collateral sold.”)

Illinois UCC, 810 ILCS 5/9-310(a) (“General rule: perfection by filing. Except as otherwise provided in subsection (b) and Section 9-312(b), a financing statement must be filed to perfect all security interests and agricultural liens.”)

Illinois UCC, 810 ILCS 5/9-309 (“The following security interests are perfected when they attach . . . (2) an assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles.”)

UCC § 9-318 cmt. 2 (“Section 1-201(37) defines ‘security interest’ to include the interest of a buyer of accounts. . . . Subsection (a) makes explicit what was implicit, but perfectly obvious, under former article 9: The fact that a sale of an account or chattel paper gives rise to a ‘security interest’ does not imply that the seller retains an interest in the property that has been sold. To the contrary, a seller of an account or chattel paper retains no interest whatsoever in the property to the extent that it has been sold. . . .”)

UCC § 9-318 cmt. 3 (“Another aspect of sales of accounts and chattel paper also was implicit, and equally obvious, under former article 9: If the buyer’s security interest is unperfected, then for purposes of determining the rights of certain third parties, the seller (debtor) is deemed to have all rights and title that the seller sold. The seller is deemed to have these rights even though, as between the parties, it has sold all its rights to the buyer. Subsection (b) makes this explicit. As a consequence of subsection (b), if the buyer’s security interest is unperfected, the seller can transfer, and the creditors of the seller can reach, the account or chattel paper as if it had not been sold.”)

UCC § 9-318 cmt. 4 (“If the security interest of a buyer of accounts or chattel paper is perfected the usual result would take effect: Transferees from and creditors of the seller could not acquire an interest in the sold accounts or chattel paper. The same result would occur if payment intangibles or promissory notes were sold, inasmuch as the buyer’s security interest is automatically perfected under section 9-309.”)

UCC § 9-318 cmt. 3 (“Example: Debtor sells accounts or chattel paper to Buyer-1 and retains no interest in them. Buyer-1 does not file a financing statement. Debtor then sells the same receivables to Buyer-2. Buyer-2 files a proper financing statement. Having sold the receivables to Buyer-1, Debtor would not have any rights in the collateral so as to permit Buyer-2’s security (ownership) interest to attach. Nevertheless, under this section, for purposes of determining the rights of purchasers for value from Debtor, Debtor is deemed to have the rights that Debtor sold. Accordingly, Buyer-2’s security interest attaches, is perfected by the filing, and, under section 9-322, is senior to Buyer-1’s interest.”)