2023 New Mexico Statutes › Chapter 55 - Uniform Commercial Code › Article 12 - Controllable Electronic Records (Effective January 1, 2024.) › Section 55-12-104 - Rights in controllable account, controllable electronic record and controllable payment intangible. (Effective January 1, 2024.)

(a) Sections 55-12-101 through 55-12-106 NMSA 1978 apply to the acquisition and purchase of rights in a controllable account or controllable payment intangible, including the rights and benefits pursuant to Subsections (c), (d), (e), (g) and (h) of this section of a purchaser and qualifying purchaser, in the same manner this section applies to a controllable electronic record.
(b) To determine whether a purchaser of a controllable account or a controllable payment intangible is a qualifying purchaser, the purchaser obtains control of the account or payment intangible if it obtains control of the controllable electronic record that evidences the account or payment intangible.
(c) Except as provided in this section, law other than Sections 55-12-101 through 55-12-106 NMSA 1978 determines whether a person acquires a right in a controllable electronic record and the right the person acquires.
(d) A purchaser of a controllable electronic record acquires all rights in the controllable electronic record that the transferor had or had power to transfer, except that a purchaser of a limited interest in a controllable electronic record acquires rights only to the extent of the interest purchased.
(e) A qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.
(f) Except as provided in Subsections (a) and (e) of this section for a controllable account and a controllable payment intangible or law other than Sections 55-12-101 through 55-12-106 NMSA 1978, a qualifying purchaser takes a right to payment, right to performance or other interest in property evidenced by the controllable electronic record subject to a claim of a property right in the right to payment, right to performance or other interest in property.
(g) An action may not be asserted against a qualifying purchaser based on both a purchase by the qualifying purchaser of a controllable electronic record and a claim of a property right in another controllable electronic record, whether the action is framed in conversion, replevin, constructive trust, equitable lien or other theory.
(h) Filing of a financing statement pursuant to Article 9 of the Uniform Commercial Code is not notice of a claim of a property right in a controllable electronic record.
History:
1978 Comp., § 55-12-104, enacted by Laws 2023, ch. 142, § 99.
OFFICIAL COMMENTS
UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
1.
Source.
Subsection (d) derives from Section 2-403(1) (concerning the rights of a purchaser).
Subsection (e) derives from Sections 3-306 (concerning the rights of a holder in due course of an instrument) and 8-303 (concerning rights of a protected purchaser of a security).
Subsection (g) derives from Section 8-502 (protecting entitlement holders).
Subsection (h) derives from Section 9-331(c) (filing under Article 9 does not provide notice for purposes of protections of purchasers under other articles).
2.
Applicability of section to controllable accounts and controllable payment intangibles.
Under subsection (a), the provisions of this section apply to controllable accounts and controllable payment intangibles in the same manner that they apply to controllable electronic records. For example, a qualifying purchaser of a controllable account that obtains control of the controllable electronic record that evidences the account (and who thereby obtains control of the account under subsection (b) and Section 9-107A) would take the account free of conflicting claims of a property right in the account under subsection (e). Under subsection (b), for purposes of determining whether a purchaser of a controllable account or controllable payment intangible obtains control, the purchaser obtains control by obtaining control of the controllable electronic record that evidences the account or payment intangible. Unless otherwise specified or the context otherwise requires, references to a controllable electronic record in the official comments in this Article also refer to a controllable account or controllable payment intangible.
3.
Applicability of other law.
As a general matter, subsection (c) leaves to other law the resolution of questions concerning the transfer of rights in a controllable electronic record, such as the acts that must be taken to effectuate a transfer of rights and the scope of the rights that a transferee acquires. Subsections (d) through (h) contain important exceptions to subsection (c).
Example 1:
A creates a controllable electronic record. Although the system in which the electronic record is recorded may determine how the electronic record can be used and control may be transferred, other law would determine what rights A has in the controllable electronic record. If, for example, A created the electronic record in the scope of its employment, A's rights would be subject to the terms of A's employment contract.
A and B agree to the sale of the controllable electronic record to B. Other law would determine what steps need to be taken for B to acquire rights in the controllable electronic record. Once B acquires those rights under other law, B would be a purchaser (as defined in Section 1-201), whose rights also would be determined by subsection (d) (i.e., the shelter principle, discussed below in Comment 4). However, even if B did not acquire rights under other law, if B met the requirements for a qualifying purchaser, its rights would be determined by subsections (e) and (g). See Comments 7 and 8, below.
The "law other than this article" that may apply to the transfer of rights in a controllable electronic record under subsection (c) includes UCC Article 9. Section 9-203 would apply, for example, to determine whether a purported secured party acquired an enforceable security interest in a controllable electronic record.
4.
Purchaser and transferor under subsection (d): shelter principle and resulting controllable electronic records.
Subsection (d) sets forth the familiar "shelter" principle, under which a purchaser of a controllable electronic record acquires whatever rights the transferor had or had power to transfer. However, in some cases the controllable electronic record that is acquired by the purchaser will not be the "same" controllable electronic record that was transferred by the transferor. Such a transfer might involve the elimination of a "transferred" controllable electronic record and the resulting and corresponding derivative creation and acquisition of a new controllable electronic record. An example of such a resulting controllable electronic record is the unspent transaction output (UTXO) generated by a transaction in bitcoin. The Bitcoin protocol operates by allowing users to "spend" their UTXOs to create one or more new UTXOs for the same amount of bitcoin, so each transfer produces new UTXOs controlled by the transferees (one of which may be the transferor—spender—of the bitcoin). Subsection (d) should be construed broadly to encompass such transfers and resulting derivative controllable electronic records acquired by a purchaser. Because subsection (d) addresses the rights of a purchaser in the "purchased" asset and not the "transferred" asset, this construction is wholly consistent with the statutory text.
Notwithstanding the broad subsection (d) shelter principle, which provides that a purchaser acquires "all rights" of the transferor, those rights are subject to the reach of Section 1-304. Under that section a contract or duty under the UCC imposes an overarching "obligation of good faith in its performance and enforcement." Section 1-304. In this context, "performance and enforcement" include the exercise of rights under the UCC, such as the rights conferred on a purchaser by the subsection (d) shelter principle. See Section 1-304, Comment 2. For example, consider a qualifying purchaser of a controllable electronic record, controllable account, or controllable payment intangible who then sells that asset to a person who is not a qualifying purchaser. If the second purchaser had previously engaged in fraudulent or illegal activity in connection with the purchased asset or an asset to which the purchased asset is attributable, the purchaser's exercise of rights under subsection (d) as to the purchased asset may be in breach of its obligation of good faith. Section 3-203(b) states this result directly with respect to a transferee of a negotiable instrument if the transferee previously engaged in fraud or illegality with respect to the same instrument. Section 3-203(b). The same result would apply under subsection (d). Subsection (d) relies on the application of the general obligation of good faith under Section 1-304 to reach the appropriate result. However, unlike negotiable instruments, many controllable electronic records are fungible. For this reason, in some cases it might not be possible to establish that an acquired controllable electronic record has a sufficient nexus with a transferee's earlier fraud or illegality.
5.
Nonpurchaser having control.
Under Section 12-105, a person may have control of a controllable electronic record even if the person has no property interest in the controllable electronic record. A person that has control of, but no property interest in, a controllable electronic record would not be a purchaser of the controllable electronic record and so would not be eligible to be a qualifying purchaser under this section.
Example 2:
Debtor granted to Secured Party a security interest in all Debtor's existing and after-acquired accounts, chattel paper, and payment intangibles. Secured Party perfected its security interest in a specific controllable account by obtaining control of the controllable electronic record that evidences the controllable account. See Section 9-107A.
Because Debtor's security agreement does not cover controllable electronic records, Secured Party would have no interest in the controllable electronic record. Accordingly, Secured Party would not be a purchaser of the controllable electronic record. However, as a purchaser of the controllable accounts and controllable payment intangibles, Secured Party could benefit from the take-free rule in subsection (e) (discussed in Comment 7).
6.
Distinction between controllable electronic record and controllable account or controllable payment intangible evidenced by the controllable electronic record.
Even though a controllable electronic record evidences a controllable account or controllable payment intangible, the controllable electronic record is distinct from the account or payment intangible that it evidences. The account or payment intangible is connected with (or "tethered" to) the electronic record by virtue of the relevant account debtor's obligation to pay the person in control of the controllable electronic record. Moreover, control of the controllable account or payment intangible is achieved only by obtaining control of the controllable electronic record that evidences the account or payment intangible. Example 2 explains that a purchaser may obtain a property interest in the controllable account or controllable payment intangible even if it does not acquire any interest in the controllable electronic record that evidences the account or payment intangible. (On the other hand, merely obtaining control of a controllable electronic record does not result in the acquisition of an interest in the record.) This approach is intended to avoid a trap for the unwary purchaser that obtains an interest in the account or payment intangible (which is the asset that has stand-alone value) but might fail to acquire an interest in the related controllable electronic record. However, good practice may encourage a purchaser to acquire an interest in the controllable electronic record as well, which would eliminate any potential confusion.
7.
The take-free rule.
Subsection (e) makes controllable electronic records and, under subsection (a), controllable accounts and controllable payment intangibles, highly negotiable. Subsection (e) derives from Section 3-306, under which a holder in due course takes a negotiable instrument free of a claim of a property right in the instrument. A qualifying purchaser of a controllable electronic record, controllable account, or controllable payment intangible takes free of all claims of a property right in the purchased controllable electronic record, account, or payment intangible.
Example 3:
Hacker, a thief, "steals" and obtains control of a controllable electronic record. Hacker then sells the controllable electronic record to Buyer, who obtains control and otherwise meets the requirements for a qualifying purchaser (by obtaining control and purchasing for value, in good faith, and without notice of a claim of a property right).
As a general matter, law other than Article 12 would determine whether any particular transaction creates a property interest in a controllable electronic record. Section 12-104(c). However, even if under other applicable law Hacker has no rights in, and no right to transfer, the "stolen" controllable electronic record, subsection (e) enables Buyer, a qualifying purchaser, to take the controllable electronic record (or any purchased controllable account or controllable payment intangible evidenced by the controllable electronic record) free of claims of a property right—including that of the rightful owner.
As Example 3 illustrates, a person in control of a controllable electronic record, such as Hacker, has the power, even if not the right, to transfer rights in the record to a qualifying purchaser. Of course, if the qualifying purchaser is a secured party whose security interest secures an obligation, the purchaser would take free of the conflicting property right only to the extent of the obligation secured. See Section 12-104(d) (purchaser of a limited interest); cf. Section 3-302(e). Moreover, even if a secured party were not a qualifying purchaser of a controllable electronic record, controllable account, or controllable payment intangible, its security interest in the collateral over which it obtained control would, however, have priority over a conflicting security interest that was perfected by a method other than control. Section 9-326A.
8.
Subsection (g)—the "no-action" rule.
Subsection (g) applies in the situation (explained in Comment 4) in which the "resulting" controllable electronic record (or controllable account or controllable payment intangible) purchased by a qualifying purchaser is not the "same" record, account, or payment intangible that was transferred. In such a situation, a person claiming a property right in the transferred asset may assert a claim against a purchaser of the "resulting" asset even though the claimant is not asserting a claim of a property right in the purchased asset. If the claim is based on both the purchaser's purchase of the acquired asset and the claimant's claim of a property right in the transferred asset, subsection (g) protects the qualifying purchaser from liability to the claimant based on any theory. The qualifying purchaser's protection from the assertion of such a claim does not depend on any proof that the purchased asset is somehow "traceable" to the transferred asset.
If instead, such a claimant were to assert a claim based on a property right in the purchased asset, then the qualifying purchaser would take free of that claim under subsection (e). Subsection (e) applies whether or not the acquired asset is the same asset that was transferred.
9.
"Tethered" assets.
Certain controllable electronic records may carry with them rights to other assets, for example, goods or rights to payment. By its terms, the take-free rule in subsection (e) applies to controllable electronic records (and, under subsection (a), controllable accounts and controllable payment intangibles evidenced by a controllable electronic record). One might argue that the inclusion of controllable accounts and controllable payment intangibles in the scope of subsection (e) is unnecessary. By taking a controllable electronic record free of property claims, the argument would be that a person takes not only the controllable electronic record itself but also all rights that are "carried" in the controllable electronic record free and clear.
Subsection (f) defeats that argument. It limits the application of the take-free rule in subsection (e) to controllable electronic records and, through the application of subsection (a), controllable accounts and controllable payment intangibles evidenced by a controllable electronic record. Under subsection (f), except as provided in subsections (a) and (e), a qualifying purchaser takes rights to payment (other than controllable accounts and controllable payment intangibles), rights to performance, and interests in property that are evidenced by a controllable electronic record subject to third-party property claims, unless law other than Article 12 provides to the contrary. The reference in subsection (f) to "law other than this article" contemplates that another article of the UCC might provide a contrary rule for some types of property that might be tethered to a controllable electronic record.
The treatment of controllable accounts and controllable payment intangibles in Articles 9 and 12 is feasible because Article 9 already provides the legal framework for assignments of accounts and payment intangibles. In addition, because accounts and payment intangibles are rights to payment of monetary obligations, tethering of an account or payment intangible to a controllable electronic record is straightforward. The account debtor is obligated to pay the person that has control of the relevant controllable electronic record (subject to the qualifications imposed by Section 12-106).
10.
Creating the functional equivalent of a negotiable instrument.
Two defining characteristics of an Article 3 negotiable instrument are that a holder in due course (i) takes free of claims of a property or possessory right to the instrument (Section 3-306) and (ii) takes free of most defenses and claims in recoupment (Section 3-305). Article 3 applies only to written instruments. Article 12 and the revisions to Article 9 provide a method for reaching a similar result with respect to controllable accounts and controllable payment intangibles.
As regards the first characteristic, a qualifying purchaser could acquire the controllable account or controllable payment intangible free of any claim of a property interest. As regards the second characteristic, the definition of "qualifying purchaser" omits some of the conditions for becoming a holder in due course. For example, to qualify as a holder in due course, a holder must take "without notice that any party has a defense or claim in recoupment . . . ." Section 3-302(a)(2)(vi). A controllable electronic record is information; there are no parties to a controllable electronic record. However, there are parties to a controllable account or controllable payment intangible. Accordingly, Sections 9-404 and 9-403 would determine whether a purchaser of the controllable account or controllable payment intangible takes free of a defense. Section 9-403 ordinarily would give effect to the account debtor's agreement not to assert claims or defenses.
Section 9-403 adopts the meaning of value in Section 3-303, as does Article 12. The concept of value in Section 3-303 is narrower than the concept in Section 1-204, which applies generally to UCC transactions. Under Section 1-204, a person gives value for rights if the person acquires them in return for a promise. However, under Section 3-303, if a negotiable instrument is issued or transferred for a promise of performance, the instrument is transferred for value only to the extent that the promise has been performed.
ANNOTATIONS
Effective dates.
— Laws 2023, ch. 142, § 112 made Laws 2023, ch. 142, § 99 effective January 1, 2024.
Compiler's notes.
— Laws 2023, ch. 142, § 99 enacted a new 55-12-104 NMSA 1978, effective January 1, 2024. Former 55-12-104 NMSA 1978, as enacted by Laws 1985, ch. 193, § 42, was recompiled as 55-11A-104 NMSA 1978, effective January 1, 2024.