The Use of Legal Malpractice Claims as Security under the UCC Revised Article 9

Article excerpt

I. Introduction

Suppose Superman is in hock up to his ears.1 As Clark Kent, Superman earns a meager salary reporting the news,2 but it is not nearly enough to get by on, considering that his lifestyle includes an ongoing relationship with Lois Lane,3 frequent travel from Earth,4 and outfitting his Fortress of Solitude.5 To maintain his image, Superman takes out an unsecured loan from Bizarro Creditors. To further alleviate his financial woes and to remedy past wrongs, he decides to sue successful inventor and long-time arch-nemesis Lex Luthor for assault, battery, and intentional infliction of emotional distress.6 He hires Brainiac as his attorney, who somehow manages to flub the case. Superman defaults on his debt to Bizarro Creditors, and his only remaining asset is his legal malpractice claim against Brainiac. Bizarro wants a piece of that hefty legal malpractice claim. Can Superman give Bizarro a voluntary security interest in his legal malpractice claim? Not under the present Uniform Commercial Code Article 9, but the revised Article 9 would permit it in certain circumstances.7

This Note analyzes the revised Article 9's position on using commercial tort claims as collateral within the context of legal malpractice claims. Generally, the revised Article 9 authorizes the use of commercial tort claims as collateral but does not purport to address the underlying alienability of these claims.8 If a debtor gives a creditor a security interest in a legal claim but that claim is not alienable, the creditor cannot pursue the claim.9 Among the states there is a split of authority on whether legal malpractice claims are assignable.10

This Note addresses the effect of using legal malpractice claims as collateral under Article 9. First, this Note will analyze the new provision permitting commercial tort claims to be used as security. Second, the present split of authority on the assignability of legal malpractice claims is explained. Third, this Note analyzes the effect of section 9-401, which incorporates non-Article 9 determinations of assignability. Finally, this Note concludes by analyzing foreseeable cases that might arise under the revised Article 9 involving legal malpractice claims as collateral.

II. Revised Article 9 Permits Commercial Tort Claims as Collateral

The American Law Institute and the National Commissioners' Conference on Uniform State Laws have approved a revised version of the widely adopted section in the Uniform Commercial Code on secured transactions. The revised version follows the same general approach of the old Article 9, requiring attachment and perfection by filing.11 But there are significant changes to justify the revision.12 One important change is in the expanded scope of the new Article 9.(13) The new Article 9 will apply to more types of collateral than did the old version.14 Once the revised Article 9 takes effect15 in those states that have adopted it,16 section 9-109(d)(12) will permit debtors to use commercial tort claims as Article 9 security.17

Formerly, Article 9 excluded from its score "a transfer in whole or in part of any claim arising out of tort."18 That exclusion was narrowed during revisions, when the drafters specifically excepted commercial tort claims from the exclusion.19 Naturally, the result of an exception to exclusion is inclusion, if the other requirements of Article 9 are satisfied.20 Thus, security interests in commercial tort claims fall within the scope of the revised Article 9.

In addition, the revised Article 9 clearly contemplates that a security interest in the proceeds of a tort claim21 is conceptually distinct from one in the tort claim itself.22 Under the former Article 9, it was unclear whether the two were distinct.23 Under the new Article 9, this distinction between a security interest in the claim (a general intangible) and one in the proceeds of the claim (a payment intangible) clearly manifests itself in the rules relating to attachment, perfection, and priority, in which the two categories differ. …