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Credit Research Foundation
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What Constitutes Su cient Noti cation of a Security Interest to Cut O  Trade Creditors’ Seto  Rights?
By: Bruce S. Nathan and Barry Z. Bazian of Lowenstein Sandler
4th Qtr.
When a trade creditor’s customer fails to pay
its debts, the creditor must consider its options and quickly exercise its rights. One such right
is a creditor’s right of setoff, which allows a creditor to net out debt the customer owes to the creditor against the debt the creditor owes to its customer. Setoff rights ensure that a creditor is not obligated to pay its customer for a debt the creditor owes while there are still amounts owing to the creditor.
However, in certain circumstances, noti cation of a lender’s security interest in its customer’s accounts receivable cuts off a trade creditor’s rights to setoff its outstanding indebtedness owing to the customer. Uniform Commercial Code (“UCC”) Section 9-404 states a lender’s security interest in accounts receivable takes precedence over a trade creditor’s setoff rights
that arose after the creditor had received a noti cation of the assignment.
An unresolved question is whether a trade creditor has received suf cient noti cation of a security interest to cut off its setoff rights when the creditor had previously received a Dun and Bradstreet (“D&B”) report that discloses the security interest. Or is more required, such as the creditor’s customer or its lender providing a manually or electronically signed noti cation of the security interest to the trade creditor?
In 2015, the United States District Court for the District of Maine, in Wheeling & Lake Erie Ry. Co. v. Maine Northern Ry. Co., held that the creditors’ receipt of D&B reports, which contained information about a lender’s security interest in the creditors’ customer’s accounts receivable,
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