Chase Manhattan Bank v. State, 40 N.Y.2d 590 (1976)
Under UCC § 9-318(1)(b), an account debtor can set off claims against the assignor that accrue before the account debtor receives actual notification of the assignment; constructive notice via UCC filing is insufficient to prevent setoff.
Summary
Chase Manhattan Bank, as assignee of Francis Brown, sought payment from the State for engineering services Brown provided. The State claimed a right to set off unpaid withholding and unemployment insurance taxes owed by Brown. Chase argued its perfected security interest, filed before the State’s tax claims arose, barred the setoff. The New York Court of Appeals held that the State could set off the tax debt because it did not receive actual notice of Chase’s assignment before the tax claims accrued. Constructive notice through UCC filing was insufficient; actual notice is required to preclude an account debtor’s right to set off subsequent debts.
Facts
In 1964, Brown contracted with the State Department of Transportation for highway survey and design work.
In November 1964, Brown granted Chase a security interest in all his personal property, including contract rights and accounts receivable, to secure existing and future loans.
Chase perfected its security interest by filing a financing statement on December 14, 1964.
From 1966 to 1967, Chase made multiple loans to Brown totaling over $700,000.
Brown completed his work for the State in 1968, but a payment dispute arose, leading to litigation and a judgment in Brown’s favor.
In 1968 and 1969, the State accumulated claims against Brown for unpaid withholding and unemployment insurance taxes, totaling $14,087.97.
Procedural History
Chase, as Brown’s assignee, filed an Article 78 proceeding seeking payment of the judgment against the State.
Special Term awarded judgment to Chase.
The Appellate Division modified the judgment to allow the State’s setoff for unpaid taxes.
Chase appealed to the New York Court of Appeals.
Issue(s)
1. Whether, under the Uniform Commercial Code, a perfected assignment bars a subsequently arising setoff in favor of an account debtor who is without actual notice of the assignment.
2. Whether filing with the Secretary of State constitutes actual notice of the assignment to the State when the State is both the account debtor and the official UCC filing repository.
Holding
1. No, because UCC § 9-318(1)(b) requires actual notice to the account debtor to preclude the right of setoff, and constructive notice through filing is insufficient.
2. No, because filing with the Secretary of State as a UCC filing repository does not constitute actual notice to the State as an account debtor.
Court’s Reasoning
The court reasoned that UCC § 9-318(1)(b) subordinates the rights of an assignee to any claims of the account debtor that accrue before the account debtor receives notification of the assignment. UCC § 1-201(26) defines “receives” as when notice comes to the person’s attention or is duly delivered to their place of business. Taken together, these provisions establish a requirement of actual notice.
The court emphasized that this interpretation aligns with the underlying policies of the UCC’s notice filing provisions. While the UCC simplifies secured transactions through filing, the protection afforded by filing is not absolute. “Section 9-318, in its first subdivision, which, as noted, subordinates the rights of assignees to defenses and claims of account debtors, was said by its drafters to make no substantial change in prior law”. Prior law required actual notice. The court reasoned that “receives notification” makes no sense except as a reference to actual notice rather than constructive notice.
The court noted the assignee can protect its rights by verifying the specific accounts assigned and notifying account debtors of the assignment.
Regarding whether filing with the Secretary of State constituted actual notice to the State, the court found this view unrealistic. A paper filed solely as a commercial repository to give constructive notice to all the world is not actual notice. The official receiving the financing statement has no duty beyond filing and indexing the statement; that indexing and filing is for the benefit of outsiders whose duty it may be to search the index and read the statements before they extend credit.