In a surprising development, on September 11, 2019 the Seventh Circuit Court of Appeals issued a ruling on appeal reversing a lower bankruptcy court decision and found that a UCC financing statement that contained no collateral information whatsoever, but simply cross-referenced a security agreement, sufficiently “indicated” the collateral for purposes of UCC Article 9. In so doing, it put itself directly at odds with a January 2019 decision by the U.S. Court of Appeals for the First Circuit (In re Financial Oversight & Management Board)” in connection with the insolvency proceeding for Puerto Rico.

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Buying and selling receivables, the obligor of which is the United States government, requires consideration of the Federal Assignment of Claims Act (“FACA”).  As is the case with non-government account debtors, the federal government, in its capacity as an obligor, has the ability (with certain limited exceptions) to set off contractual payments owed by it to a seller of the right to receive such payments, against amounts payable to it by such seller for both (x) damages and related payments caused by such seller’s failure to perform under the applicable contract and (y) any other amounts owing to the government by such seller (including federal tax liability).  In the case of non-government obligors, under the terms of the Uniform Commercial Code, a purchaser of the right to receive a contractual payment owing by such obligor may, generally, limit or cut-off the applicable set off rights of the related obligor, by providing a somewhat simple notice to such obligor that the seller has assigned its right to receive such payments.  In order for a purchaser to limit the set off rights of the federal government, however, the purchaser must comply with the more complicated requirements of FACA.

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Well … a lot. But one that comes across our desks far too often is: “I didn’t realize you need to file a UCC financing statement to perfect an outright sale of accounts receivable.” So as to not bury the lede: you should always file a UCC financing statement to perfect the sale of accounts. Now there is an narrow exception and maybe in a particular transaction there may be an eyes-wide-open reason that someone would choose not to file, but Article 9 of the UCC is clear. So clear in fact that official comment 4 to UCC 9-309 simply says: “Any person who regularly takes assignments of any debtor’s accounts or payment intangibles should file.” I generally recommend staying on-sides with a statue’s drafters.

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