Making Sense of UCC Section 9-332(B)

Abstract

The common law requirements for an effective “pledge” of a bank account were difficult to satisfy and typically required that the secured party deprive the debtor of access to the funds on deposit. Revised Article 9 removed these impediments and, except in consumer transactions, enabled debtors to create security interests in bank accounts and other deposit accounts in the same way in which they create security interests in other collateral, by authenticating a security agreement containing a description of the collateral.To insure that widespread security interests in deposit accounts neither interrupt the free flow of funds through the payment system nor impair the willingness of payees to accept payment from deposit accounts, revised Article 9 added § 9-332(b), which addressed the rights of recipients of funds paid from an encumbered deposit account: “A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.”Judicial opinions construing § 9-332(b) have raised a host of issues concerning its interpretation. They include the following: Who qualifies as a “transferee of funds from a deposit account”? What is a “transfer” of funds? Which security interests does § 9-332(b) affect? What does it mean to “act[ ] in collusion with the debtor”? A difference of opinion has arisen with respect to certain issues, leading to unnecessary uncertainty. Many opinions contain an analysis that is incomplete, if not just plain wrong, and some misconstrue the official comments on which they rely. The cases reveal no pattern; some erroneously deprive transferees of the protection to which § 9-332(b) entitled them; others afford protection to transferees who were not entitled.After a brief history of the development of § 9-332, this Article provides a thorough analysis of the section, its underlying policies, and the case law construing it. This Article explains where the courts have followed the law and where they have gone astray, in the hope that future opinions will construe the statute properly.