CONTINENTAL AMERICAN LIFE INSURANCE COMPANY
v.
GRIFFIN.
39834.
Supreme Court of Georgia.
Decided September 8, 1983.Penland & Schaikewitz, Steven Schaikewitz, for appellant.
Troutman, Sanders, Lockerman & Ashmore, Kevin C. Greene, for appellee.
GREGORY, Justice.
Plaintiff-appellee, Warren S. Griffin ("Griffin") brought this diversity action in the United States District Court for the Northern District of Georgia against defendant-appellant, Continental American Life Insurance Company ("Continental"). Griffin sought to enforce his perfected security interest in fifty percent (50%) of all insurance commissions payable to Norman Greenberg ("Greenberg"), an employee of Continental. Continental answered alleging it was entitled to a set-off against any and all sums which may be payable to Greenberg pursuant to his employment contract. The case was decided on cross-motions for summary judgment in favor of Griffin. Continental appealed to the United States Court of Appeals for the Eleventh Circuit which certified questions of state law for our resolution. (Rule 36 of the Supreme Court of Georgia. See, OCGA § 15-2-9 (Code Ann. § 24-3902); Code Ann. § 24-4536.) The questions and our responses are:
1. Under Georgia law does Article Nine (Secured Transactions) of the Uniform Commercial Code apply to contractual rights of set-off? Yes.
2. If Article Nine applies to contractual rights of set-off, does the contractual right of set-off have priority over a perfected security interest in the same fund? No.
Two other certified questions need not be answered in view of our responses to these questions.
In 1971, Greenberg was indebted to the First National Bank of Atlanta in the amount of $100,000 pursuant to a promissory note on which Griffin acted as indemnitor. On September 20, 1977, Greenberg's debts were discharged in bankruptcy. Griffin was called *413 upon to satisfy the $100,000 indebtedness.
At the time, Greenberg was employed by National Life of Vermont as an insurance agent. To compensate for Griffin's payment of the First National Bank debt, and other debts, Greenberg agreed to indemnify and hold harmless Griffin for any payments made by Griffin on behalf of Greenberg. In connection with the indemnification, on May 17, 1976, Greenberg and Griffin executed a written agreement whereby Greenberg granted Griffin a security interest in 50% of all new or renewal commissions to which Greenberg would be entitled so long as his debt to Griffin remained unsatisfied.
After entering into the indemnification agreement with Griffin, Greenberg commenced employment with Continental. In connection with this employment, Greenberg signed an agreement allowing Continental to retain amounts owed Continental by Greenberg from commissions due him from Continental.
Griffin subsequently perfected his security interest in commissions due Greenberg from Continental by filing a financing statement. Continental has never filed a financing statement with regard to its interest in commissions due Greenberg. Griffin attempted to obtain immediate possession of Greenberg's commissions by obtaining a writ of possession in a state court legal proceeding. Continental refused to pay Greenberg's commissions over to Griffin. Continental alleged that during his employment with Continental, Greenberg became indebted to it in an amount exceeding the amount of commissions owed. Griffin then filed the present action.
In determining whether Article Nine, the Uniform Commercial Code's chapter on secured transactions, is applicable to the assertion of a right of set-off, we are confronted with statutory language that "This article [chapter] does not apply ... to any right of set-off ..." OCGA § 11-9-104(g) (Code Ann. § 109A-9 ' 104). While the language is plain enough, the conclusion that this section removes from operation of the Code any controversy between a set-off and a secured party is not warranted by the narrow purpose this provision was intended to serve. Professor Gilmore, a principal reporter for Article Nine of the Code, gives this explanation for the set-off exclusion:
"This exclusion is an apt example of the absurdities which result when draftsmen attempt to appease critics by putting into a statute something that is not in any sense wicked but is hopelessly irrelevant. Of course, a right of set-off is not a security interest and has never been confused with one: the statute might as appropriately exclude fan dancing. A bank's right to set-off against a depositor's account is *414 often loosely referred to as a `banker's lien,' but the `lien' usage has never led anyone to think that the bank held a security interest in the bank account. Banking groups were, however, concerned lest someone, someday, might think that a bank's right to set-off, because it was called a lien, was a security interest. Hence, the exclusion, which does no harm except to the dignity and self-respect of the draftsmen." Gilmore, Security Interest in Personal Property (1965), at 315-316.
Plainly banks need not comply with the requirement of Article Nine in order to create a right to set-off against their depositors. But given the narrow purpose of the set-off exclusion, we are unwilling to read it as removing commercial transactions or conflicts from the operation of the UCC whenever the priority of a set-off is involved. See, Citizens Nat. Bank v. Mid-States Development Co., 380 NE2d 1243 (Ind. Ct. App. 1978); Associates Discount Corp. v. Fidelity Union Trust Co., 268 A2d 330 (Super. Ct. N.J. 1970). We believe the Code's priority rules require Griffin's perfected security interest to prevail over Continental's right of set-off.
At the outset we acknowledge there is no specific priority rule that deals directly with the conflict between Griffin's security interest and Continental's set-off rights. Nonetheless, underlying the complex Code priority provisions is the keystone rule of OCGA § 11-9-201 (Code Ann. § 109A-9-201):
"Except as otherwise provided by this title a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors ..."
The effect of this section is to give the Article Nine secured party, upon a debtor's default, priority over "anyone, anywhere, anyhow" except as otherwise provided by the remaining Code priority rules. The Priority Rules of Article Nine, 62 Cornell L. Rev. 834, 842 (1977); J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code (1972) at 901. Continental, as a creditor of Greenberg, falls within the ambit of this section. There being nothing else in the Code to resolve the priority conflict between Griffin and Continental, section 11-9-201 is controlling. As a general unsecured creditor, Continental's claim of set-off should be subordinated to the perfected security interest asserted by Griffin.
The secured party should be able to rely on compliance with the Code's requirements for perfection and search of the public recording system as against the unrecorded interest of a party asserting set-off rights. Were this otherwise, a secured party could not rely on recording but would be required to take additional steps to insure that he was accorded full protection.
Certified questions answered as provided herein.
*415 All the Justices concur.