Mbank Alamo National Ass'n v. Raytheon Co.
1989 WL 120010, 886 F.2d 1449 (1989)
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Rule of Law:
A creditor who provides goods (inventory) to a debtor does not obtain a purchase money security interest (PMSI) in the accounts receivable generated from the subsequent sale of those goods. A PMSI in inventory does not extend priority to the resulting accounts receivable, which are considered separate collateral under the UCC.
Facts:
- MBank and DuPont held perfected security interests in the present and future accounts receivable of Howe X-ray ('Howe'). MBank also had a perfected security interest in Howe's inventory.
- Raytheon, an x-ray equipment manufacturer, entered into an agreement with Howe, its distributor.
- Under the agreement, Raytheon would ship equipment to Howe only after Howe had secured a contract with a customer for the sale and installation of that specific equipment.
- In exchange for Raytheon providing the equipment, Howe agreed to assign the specific account receivable from its customer to Raytheon.
- Between July 1983 and December 1984, Raytheon collected over $850,000 from these assigned accounts receivable.
- By November 1984, Howe defaulted on its financial obligations to MBank and DuPont.
Procedural Posture:
- MBank and DuPont filed a conversion action against Raytheon in the United States District Court.
- Raytheon raised the defense that it held a purchase money security interest (PMSI) in the collected accounts, giving it priority over MBank and DuPont.
- MBank and DuPont filed motions for summary judgment.
- The district court granted summary judgment in favor of MBank and DuPont, ruling that Raytheon did not have a PMSI in the accounts receivable.
- Raytheon appealed the district court's summary judgment ruling to the United States Court of Appeals for the Fifth Circuit.
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Issue:
Does a creditor who provides goods to a debtor in exchange for an assignment of the accounts receivable generated from the sale of those goods obtain a purchase money security interest (PMSI) in those accounts receivable with priority over a prior perfected security interest in the same accounts?
Opinions:
Majority - Reavley, J.
No. A creditor providing goods to a debtor does not obtain a purchase money security interest (PMSI) in the accounts receivable generated from the sale of those goods. To qualify for a PMSI under UCC § 9.107(2), the value given by the creditor must enable the debtor to acquire rights in the collateral itself. Here, Raytheon's advance of x-ray machines enabled Howe to acquire rights in the machines (inventory), not the accounts receivable. The accounts receivable are proceeds of the inventory, not the primary collateral acquired with Raytheon's value. The UCC drafters intentionally limited the priority of an inventory PMSI to the inventory itself and identifiable cash proceeds, specifically excluding accounts receivable to protect and provide certainty for accounts financing. Allowing Raytheon's claim would subvert this clear statutory scheme and permit an end-run around the notice requirements for inventory PMSI holders under § 9.312(c).
Dissenting - Goldberg, J.
Yes. An account receivable can serve as collateral for a purchase money security interest, and Raytheon's creative financing arrangement should be recognized as such. The UCC's definition of 'collateral' explicitly includes 'accounts,' and Article 9 was intended to be flexible enough to accommodate innovative commercial practices. Raytheon's advance of the x-ray machine was the direct and necessary cause—it 'enabled'—Howe to acquire the account receivable, as the account would not have existed otherwise. The majority misapplies the rules governing proceeds from inventory financing (§ 9.312(c)) to a situation where the creditor is claiming a direct PMSI in the account itself as the primary collateral under § 9.107(2). Recognizing a PMSI here aligns with the UCC's policy of enabling heavily indebted businesses to obtain new credit and continue operating, which benefits all creditors.
Analysis:
This decision reinforces the UCC's strict delineation between different types of collateral and the priority rules that govern them. It clarifies that a supplier of goods cannot transform its inventory financing into a super-priority claim on accounts receivable simply by structuring the transaction as an exchange for the accounts. By refusing to expand the definition of a PMSI to cover this scenario, the court provides crucial certainty for lenders who engage in accounts receivable financing, assuring them that their prior perfected security interests will not be defeated by subsequent inventory suppliers. The case serves as a strong precedent against recharacterizing transactions to circumvent the UCC's carefully balanced priority scheme.
