In most UCC-related activity, there are four main components at play: the borrower, the lender, the collateral, and the jurisdiction. Simple and universal, except when it’s not.
Factoring is a unique branch of the financial world and can have interesting effects on secured lending. In the following scenario, we try to understand if a lender can have position to collect on an asset that doesn’t even exist when a court decision on standing is first issued.
In May 2011, plaintiff “ARA” entered into a factoring agreement with “JG Staffing." In March 2015, ARA sued JG Staffing for breach of the factoring agreement, and ARA won a jury award of more than $700,000.
In August 2015, “JG Staffing” entered a separate contract to provide temporary staffing for defendant “City of Glendale." In July 2016, ARA learned about the staffing contract and informed the City of Glendale of its asserted right to collect payments for the staffing services. Despite ARA’s request, Glendale continued to pay JG Staffing for the services. ARA subsequently filed this lawsuit in July 2017, alleging a breach of UCC law and contract. In its motion to dismiss, Glendale claims the 2011 factoring agreement does not apply to its present contract with JG Staffing.
In ARA v. City of Glendale 2018 U.S. Dist. LEXIS 46159, the court, applying Minnesota law as was stipulated in the agreement, looked to UCC law, finding that Minnesota had adopted a statute (9-204(a)):
(a) [After-acquired collateral.]
Except as otherwise provided in subsection (b), a security agreement may create or provide for a security interest in after-acquired collateral.
The court noted that neither the statute nor any Minnesota case explicitly specifies that any particular language is necessary for a security agreement to create an interest in after-acquired collateral. Specifically, that security agreements for accounts receivable presumptively include after-acquired property.
The court did note, however, that this is the common approach in other jurisdictions. The Ninth Circuit, for example, presumes that a security interest for accounts receivable includes after-acquired property because accounts receivable are "constantly turning over" and "no creditor could reasonably agree to be secured by an asset that would vanish in a short time in the normal course of business.” Thus, the court concluded that because inventory and accounts are self-liquidating (such that nothing would remain for the secured party if the security interest did not automatically attach to newly acquired inventory or accounts), the majority of other courts have held that mere use of the word 'inventory' or 'accounts' was sufficient to cover presently existing and after-acquired inventory and accounts.
ARA's factoring agreement with JG Staffing grants a security interest to ARA in JG Staffing's "business assets, including, without limitation, all accounts.” The agreement also defines "Accounts Receivable" to include accounts "arising out of or relating to the sale of temporary staffing or similar services any time or from time to time . . . ." Because Minnesota law does not explicitly require an after-acquired clause, and because ARA would not likely agree to be secured by an asset that would be depleted in a short time in the normal course of business, the language in the factoring agreement creates a security interest in JG Staffing's accounts acquired after the agreement's execution in May 2011.
In summary, it was found that yes, a factoring agreement creates an interest in an after-acquired property. It’s something to be aware of then next time you are a part of a relationship with factors.