Problem.Perfection as to proceeds

     A.  Ellis and Jones, a general partnership with offices in New Jersey and New York, borrowed $250,000 from Springs Bank to finance costs of a class action.  To secure the debt, Springs Bank took a security interest in all equipment and accounts (including after-acquired accounts) of the law firm and perfected its security interest by a sufficient and effective financing statement filed in the correct location(s).  Several months later, an employee of the law firm obtained a judgment against the law firm for sexual harassment.  To enforce the judgment, the successful plaintiff, now a judgment creditor, caused the sheriff to levy a writ of execution upon securities credited to a securities account of the law firm maintained by a brokerage firm (e.g. Merrill, Lynch), an entity known in U.C.C. parlance as a securities intermediary.  Some of the securities credited to the account had been transferred to the account at the instruction of a law firm client in payment for legal services rendered. 

     Would Springs Bank necessarily learn of the levy?  How?  Would it care?  In what circumstances?  Would the levy be a default under the security agreement with the law firm?  See our sample security agreement.  If the bank chose not to foreclose on the securities, should it do anything to preserve its rights against the debtor?  If the bank chooses to act on the default, what alternatives are there to pursuing the securities credited to the account with Merrill, Lynch? 

     Assume that Springs Bank learned of the levy of the writ of execution and wants to prevent the sale of the securities by the sheriff.  Springs Bank would be entitled to seek this relief through an appropriate state law procedure, e.g., in California, a third party claim under Cal. Code Civ. Pro. 720.210 et. seq.  It would be entitled to this relief if its security interest in the securities (as proceeds of an account) had priority over the judicial lien of the levying creditor that arose by virtue of the levy of the writ of execution.  It would have such priority if it held a perfected security interest in the securities at the time of the levy.   Does Springs Bank have a security interest in the stock, enforceable against the debtor?  U.C.C. 9-315(a)(2), 9-102(a)(2).  Does it have a perfected security interest in the securities?  When and how is the security interest in the securities perfected?  For how long does the perfection last?  U.C.C. 9-315(c), (d), (e), U.C.C. 9-312(a), U.C.C. 9-102(a)(49), U.C.C. 9-301, U.C.C. 9-305, U.C.C. 9-307. 

     (B) Suppose that Ellis and Jones sold most of their office furniture to another law firm for $20,000, $10,000 by a check and the balance payable in one year under a promissory note.  Would this sale be a default under the security agreement with the bank?  See our sample security agreement.  If yes, and if the bank wished to recover collateral in response, would it prefer the furniture from the buyer or the check and the promissory note?  What would Ellis and Jones most likely have done with the check?  With the promissory note?  Would Springs bank have a security interest in the check?  In the promissory note?  U.C.C. 9-315(a)(2).  What should Springs Bank do to realize on the check and the promissory note?  U.C.C. 9-607.  Would its security interest in them be perfected?  U.C.C. 9-315(c), (d), U.C.C. 9-312(a), U.C.C. 9-102(a)(9).