Abstract Rights versus Paper Rights under Article 9 of the Uniform Commercial Code

Rights versus Paper Rights under Article 9 of the Uniform Commercial Code Robert C. Clark Yale Law School Follow this and additional works at: http://digitalcommons.law.yale.edu/fss_papers Part of the Commercial Law Commons, and the Legal Writing and Research Commons This Article is brought to you for free and open access by the Yale Law School Faculty Scholarship at Yale Law School Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship Series by an authorized administrator of Yale Law School Legal Scholarship Repository. For more information, please contact [email protected]. Recommended Citation Clark, Robert C., "Abstract Rights versus Paper Rights under Article 9 of the Uniform Commercial Code" (1975). Faculty Scholarship Series. Paper 4409. http://digitalcommons.law.yale.edu/fss_papers/4409 Abstract Rights versus Paper Rights underRights versus Paper Rights under Article 9 of the Uniform Commercial Code Robert Charles Clarkt The documentary embodiment of a secured party's rights has intriguing and varying consequences in a number of situations governed by Article 9 of the Uniform Commercial Code.' This article will explore some of these consequences and the broader questions they raise, and will suggest some hypotheses about the functional significance of documentation 2 and alternatives to documentation in different branches of commercial life. For brevity, and to avoid confusion over the word "documentary," such embodiments of rights are referred to here by a phrase not found in the UCC, "paper rights." The article will examine problems concerning four specific kinds of paper rights: promissory notes3 and stock certificates 4 (defined by Article 9 as members of a larger class of paper rights called "instruments"5), warehouse receipts6 (a part of the larger Article 9 class of Assistant Professor of Law, Yale University. 1. Hereinafter cited as the UCC or the Code or by section number only. All citations are to the 1972 official text unless otherwise indicated. 2. By "documentation" I mean the evidencing of rights in a paper form that rises to the level of a negotiable or quasi-negotiable instrument or document. 3. See § 3-104: (1) Any writing to be a negotiable instrument within this Article must (a) be signed by the maker or drawer; and (b) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this Article; and (c) be payable on demand or at a definite time; and (d) be payable to order or to bearer. (2) A writing which complies with the requirements of this section is idi *a "note" if it is a promise other than a certificate of deposit. (3) As used in other Articles of this Act, and as the context may require, the [following] terms [including] ... "note" may refer to instruments which are not negotiable within this Article as well as to instruments which are so negotiable. 4. See § 8-102(l)(a), quoted in note 39 infra. 5. See § 9-105(l)(i): "Instrument" means a negotiable instrument (defined in Section 3-104), or a security (defined in Section 8-102) or any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in ordinary course of business transferred by delivery with any necessary indorsement or assignment.... 6. See § 1-201(45): "Warehouse receipt" means a receipt issued by a person engaged in the business of storing goods for hire. HeinOnline -84 Yale L.J. 445 1974-1975 The Yale Law Journal Vol. 84: 445, 1975 "documents" 7), and "chattel paper" (a broad Article 9 classification). Each of these pieces of paper puts its holder in a legal position somewhat different from that of the mere possessor of the underlying or corresponding unembodied form of the right; the holder has a right which has been "concretized" in the paper, rather than remaining an abstract right to the property.right to the property. In the case of instruments like promissory notes or stock certificates, the corresponding unembodied right is usually an intangible, a right which does not represent an interest in particular, concrete personal property but which represents instead an interest, defined by a formula or a set of rules, in a legally recognizable locus of value. Consider the situation which gives rise to a promissory note. A consumer's obligation to pay money to a retailer may be called an account receivable or, in UCC terminology, an account.9 The obligation may of course be satisfied by any of the money, or indirectly by any of the property, owned by the consumer.'0 Furthermore, the retailer may treat the account as intangible property and may sell or hypothecate it. On the other hand, the consumer's obligation may be embodied in more or less definite paper form, as when he gives the retailer a promissory note. The retailer then has a paper right rather than an abstract right. The shareholder in a corporation finds himself in a similar situation. Traditionally, a shareholder's interest has been represented by a 7. See § 9-105(l)(f): "Document" means document of title as defined in the general definitions of Article 1 (Section 1-201), and a receipt of the kind described in subsection (2) of Section 7-201 See § 1-201(15): "Document of title" includes bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers. To be a document of title a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee's possession which are either identified or are fungible portions of an identified mass. 8. See § 9-105(l)(b): "Chattel paper" means a writing or writings which evidence both a monetary obligation and a security interest in or lease of specific goods, but a charter or other contract involving the use or hire of a vessel is not chattel paper. When a transaction is evidenced both by such a security agreement or a lease and by an instrument or series of instruments, the group of writings taken together constitutes chattel paper. 9. See § 9-106: "Account" means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. 10. That is, the retailer has a claim against the total pool of his debtor's nonexempt resources. Of course, specific items of property owned by the debtor may be subject to claims that take precedence over the retailer; other creditors and claimants may have priority in the residual pool of assets over retailer's claim in that pool; and the assemblage of claimants on a par with the retailer may have claims which in toto greatly exceed the value of the pool of resources left over for them so that, in a bankruptcy proceeding, each would receive a partial but pro rata satisfaction of his claim.