74 N.Y.2d 144 (1989)
To perfect a security interest in a promissory note, a secured party must take possession of the note unless the note constitutes part of chattel paper, in which case perfection can occur either by possession or filing.
Summary
This case addresses whether a creditor’s judgment lien on a promissory note has priority over a prior security interest claimed by a financing company. Chavo International, Inc. (Chavo) assigned its receivables to Congress Talcott Corp. (Talcott) under a factoring agreement. Later, Chavo received a promissory note from Forest Lake Ltd. (Forest Lake) as payment for assets. Susan Berkowitz obtained a judgment against Chavo and sought to enforce it against the Forest Lake note. The court held that the promissory note was an ‘instrument’ under UCC Article 9, requiring Talcott to take possession to perfect its security interest. Because Talcott did not possess the note, Berkowitz’s judgment lien had priority.
Facts
Susan Berkowitz won an arbitration against Chavo for unpaid sales commissions and obtained a judgment in California, which was then filed in New York. Prior to Berkowitz’s claim, Chavo had a factoring agreement with Talcott, assigning all present and future receivables to Talcott as security. Subsequently, Chavo sold assets to Forest Lake, receiving a promissory note in return. The note directed payments to Talcott to reduce Chavo’s debt under the factoring agreement. Berkowitz then served a restraining notice on Forest Lake to enforce her judgment against the note’s proceeds.
Procedural History
Berkowitz sought to enforce her judgment against the promissory note. Talcott moved to vacate Berkowitz’s restraining notice, claiming a superior security interest. The Supreme Court granted Talcott’s motion, holding that Talcott had a perfected security interest prior to Berkowitz’s lien. The Appellate Division reversed, holding that the promissory note was an ‘instrument’ requiring possession for perfection, which Talcott lacked. The Court of Appeals granted leave to appeal.
Issue(s)
1. Whether the promissory note from Forest Lake to Chavo constitutes an ‘instrument’ under UCC Article 9?
2. Whether the promissory note constitutes ‘chattel paper’ which could be perfected by filing instead of possession?
3. Whether Talcott’s factoring agreement gave them a security interest in the note.
Holding
1. Yes, because the promissory note is a writing that evidences a right to payment of money and is of a type that is transferred in the ordinary course of business.
2. No, because the promissory note and purchase agreement, taken together, do not evidence a monetary obligation and a security interest in specific goods.
3. Yes, because the factoring agreement between Talcott and Chavo assigned to Talcott all of Chavo’s receivables, including “all obligations of every kind at any time owing to [Chavo]”.
Court’s Reasoning
The court reasoned that the promissory note met the definition of an ‘instrument’ under UCC 9-105(1)(i) because it was a writing evidencing a monetary obligation. The court addressed and rejected Talcott’s argument that the note constituted chattel paper. “Chattel paper” is defined as writings that evidence both a monetary obligation and a security interest in specific goods or a lease of specific goods. The court found that the purchase agreement, taken together with the promissory note, did not create a security interest in the assets sold. Chavo retained no residual interest in the assets. The court stated, “[C]hattel paper and non-negotiable instruments lie somewhere on the spectrum between the negotiable instrument on the one hand and the account on the other; for the former possession is everything, for the latter it is nothing.” Since Talcott didn’t possess the instrument, they did not have a perfected security interest, so Berkowitz’s lien had priority. The court emphasized the importance of possession for perfecting a security interest in instruments, stating that if possession were not required, Talcott’s security interest would have prevailed. The court found that the factoring agreement was broad enough to encompass the promissory note because it included “all obligations of every kind at any time owing to [Chavo].”