Are investors in securitized receivables to be treated as the owners of an asset whose sale has taken it beyond the reach of the trustee in bankruptcy of their sellers? O are they to be treated as holders of a security interest in the transferred asset who have left behind an interest in the sellers' hands that would cause the asset to be subject to claims and interference by the sellers' grasping trustee? By adopting contrasting-arguably conflicting-statements in two subsections of a single section, the drafters of 1999 Article 9 have thrust this issue in the faces of courts and commentators. They did this by adopting section 9-318 which reads in full as follows: Section 9-318. No interest retained in right to payment that is sold; rights and title of seller of account or chattel paper with respect to creditors and purchasers. (a) [Seller retains no interest.] A debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold. (b) [Deemed rights of debtor if buyer's security interest unperfected.] For purposes of determining the rights of creditors of, and purchasers for value of an account or chattel paper from, a debtor that has sold an account or chattel paper, while the buyer's security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold. Subsection (a) embraces the securitizers' position; it unequivocally indorses the form of the transaction. Upon "sale" everything is gone: all is beyond the grasp of the trustee. There are no qualifications; neither perfection, nor notice, nor any other act is required. This "sale" of receivables is as much a "sale" as the debtor's sale of inventory to a buyer for value would be a "sale." But subsection (b) looks to the substance of the transaction and rejects the form. Here a "sale" of certain covered receivables is the grant of a "security interest." Like the grant of a security interest, this sale without perfection leaves behind fragments of title large enough to give purchase to the sellers' creditors. Of course lawyers are accustomed to ignoring form and following substance, and of doing the opposite. What is different here is that the drafters ask us-with respect to the same transaction-to do one in subsection (a) (respect form) and the other in subsection (b) (ignore form). It may be possible to make the two subsections get along with one another, but it requires work. On their face, they appear inconsistent. I am not the first to see the apparent inconsistency between the two subsections. Members of the drafting committee saw it,' and the use of the verb "deemed" in subsection (b) shows that the drafters anticipated this claim. In this article I consider how we came to this place and whether the drafters have successfully found a path through this thicket that will allow them to satisfy the securitizers (all is gone with a sale) and the creditors of a seller whose buyer has not perfected (enough is left behind despite a sale to give the creditors a hold) without, at the same time, giving purchase to the trustee in bankruptcy of a seller of perfected, securitized receivables.
White, James J. "Chuck and Steve's Peccadillo (Symposium: Threats to Secured Lending and Asset Securitization)." Cardozo L. Rev. 25, no. 5 (2004): 1743-58.