next, UCC Section 9-404 protects a creditor’s recoupment rights, even when the creditor has received noti cation of a competing security interest.
UCC Section 9-404
According to UCC Section 9-404(a)(2), a lender’s blanket security interest in its borrower’s accounts receivable is subject to any defense or claim, including setoff, of the account debtor (the party owing the account receivable) against the lender’s borrower “which accrues before the account debtor receives a noti cation of the assignment authenticated by the [borrower] or the [lender].” The term “authenticate” means to manually sign or, in the case of
an electronic document or other non-written media, to electronically sign by attaching an electronic sound, symbol or process. However, according to UCC Section 9-404(a) (1), a secured lender’s rights are subject to “all terms of
the agreement between the account debtor and [lender’s borrower] and any defense or claim in recoupment”. Therefore, while a noti cation of a lender’s prior security interest cuts off a trade creditor’s setoff rights, it does not cut off a trade creditor’s recoupment rights.
The Wheeling & Lake Erie Railway Case
In Wheeling & Lake Erie Ry. Co. v. Maine Northern Ry. Co., Maine Northern Railway Company and New Brunswick Southern Railway Company Limited (together, the “Defendants”) owed money to Maine & Atlantic Railway,
Ltd., and its af liates (“MMA”) based on services MMA had provided to the Defendants. In 2009, Wheeling & Lake Erie Railway Company (“Wheeling”) provided MMA with a line of credit. As part of the loan transaction, MMA granted Wheeling a security interest in MMA’s accounts receivable.
On August 7, 2013, MMA  led a Chapter 11 bankruptcy petition and the bankruptcy court granted Wheeling relief from the automatic stay to pursue collection of MMA’s accounts receivable. Wheeling then sued the Defendants to collect
the accounts receivable they owed to MMA. The Defendants asserted their setoff rights, based on the amounts that MMA owed to the Defendants for services the Defendants had provided to MMA, as a defense to the lawsuit.
There was no dispute that the Defendants had received D&B reports prior to the inception of Defendants’ setoff rights. The D&B reports disclosed Wheeling’s security interest in MMA’s accounts receivable. However, Wheeling and the Defendants disagreed over whether the Defendants’ receipt of the D&B reports was suf cient notice under Maine’s version of UCC Section 9-404. The parties each  led motions asking the court for a determination of their rights.
The District Court’s Decision
The district court ruled that the Defendants’ setoffs rights had priority over Wheeling’s security interest and, therefore, the Defendants could setoff the accounts receivable they owed to MMA against amounts MMA owed to them. The district court agreed with the Defendants that their receipt of a D&B report disclosing Wheeling’s security interest was not suf cient notice under UCC Section 9-404 to cut off the Defendants’ setoff rights. The court reasoned that Section 9-404 required
either MMA or Wheeling to have provided an authenticated noti cation of Wheeling’s security interest to the Defendants. Neither MMA nor Wheeling prepared, signed—electronically or otherwise—or circulated the D&B reports to the Defendants. D&B prepared, issued and provided its reports directly to the Defendants.
The Communication Dynamics Case
On September 23, 2002, Communication Dynamics, Inc. (the “Debtor”) and its af liates  led their Chapter 11 cases
in the United States Bankruptcy Court for the District of Delaware. More than a year before the bankruptcy  ling, the Debtor had entered into an agreement with Thomas & Betts Corporation (“T&B”) through which the Debtor had agreed to distribute communication equipment for T&B. The agreement established standard prices at which the Debtor would purchase T&B’s equipment. The Debtor would then resell
the equipment to end-users. According to the agreement, if T&B authorized the Debtor to sell the equipment to end-users at prices lower than the standard prices, which the Debtor frequently did, T&B would give the Debtor a credit for the difference between the standard price and the lower sale price.
Shortly after entering into the distribution agreement with T&B, the Debtor entered into a credit agreement with a group of lenders (the “Lenders”) through which the Debtor granted the Lenders a security interest on all of its assets, including accounts receivable. At the time of the bankruptcy  ling, the Debtor owed the Lenders more than $120 million.
Following the bankruptcy  ling, T&B  led a motion for relief from the automatic stay to setoff or recoup $232,477 in credits that were generated prior to the bankruptcy  ling when the Debtor had sold equipment, for which the Debtor had already paid T&B, below the standard price. T&B sought to setoff these credits against amounts the Debtor owed T&B for other equipment the Debtor had purchased under the distribution agreement. The Debtor argued that T&B was not entitled to recoup or setoff the credits and that, consequently, T&B was required to pay the credits to the Debtor and was only entitled to a general unsecured claim for the amounts the Debtor owed T&B (for which the prospect for recovery was uncertain).
T&B’s Right of Setoff
The bankruptcy court  rst considered whether the Lenders’ security interest cut off T&B’s setoff rights. T&B claimed that its setoff rights were not subordinate to the Lenders’ security interest because neither the Debtor nor the Lenders had provided T&B with a noti cation of the security interest. The Debtor countered that T&B received notice of the Lenders’ security interest when T&B’s director of credit downloaded
a credit report of the Debtor from D&B, which included a statement that the Lenders had a security interest in all of the Debtor’s accounts receivable. The bankruptcy court agreed that T&B had received suf cient noti cation of the Lenders’ security interest under UCC Section 9-404. It upheld the suf ciency of the unsigned D&B report, which T&B admitted to often rely upon for con rming the existence of security interests, and further noted that a signed formal notice of the
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