ChatGPT vs. Steve Kurtz: Who Gives the Better Answers?

Steve Kurtz of Levinson Arshonsky Kurtz & Komsky LLP puts his legal chops up against ChatGPT by asking the artificial intelligence platform a series of questions related to commercial finance law to see if the man or the machine comes up with more useful and insightful answers. 

BY STEVEN N. KURTZ, ESQ., LEVINSON ARSHONSKY KURTZ & KOMSKY LLP

Artificial Intelligence is one of the hottest topics being discussed now. AI technology is rapidly expanding and the possibilities for its use seem endless. There are also serious discussions being initiated by several technology pioneers, lawmakers and other knowledgeable people that believe AI development should be regulated and perhaps paused.

ChatGPT seems to be the leader in the AI field and is dominating the headlines, even though it was first launched in late November 2022. Because AI will soon impact the legal and commercial finance worlds, I thought I would ask Chat GPT four questions and see how its answers differ from mine.  Let’s see who has the better answers. 

Question: We sent a notice of assignment to a debtor. Some knucklehead in the accounting department told my AE that the agreement with our client prohibited any assignments and that they refuse to pay us. They ACH’ed their payments to our client, who wired the funds the next business day. This is a good deal for us. What should we do?

Kurtz: UCC Sec. 9-406(d) renders any provision in a contract which prohibits the assignment of the account to the secured party ineffective. Let’s educate this person first. Send them a nice response with a redacted copy of the factoring agreement and the UCC-1 and see if that works. If they still refuse to pay you, let’s go over their head and go to someone else in the company with authority and knowledge. If it’s a company policy that they won’t pay you, then you have two choices: Make this account debtor ineligible or we can do a work around, knowing that it’s not perfect. Perhaps you can change the payment instructions to the lockbox and bank account controlled solely by you and swept every day. If you do this, it’s safer to send another letter to the account debtor which preserves your rights. 

ChatGPT:  I am not a lawyer, but I can provide some general guidance. In this situation, it appears that the debtor's accounting department is claiming that the agreement with your client prohibits any assignments, which means they refuse to pay you directly. However, the debtor has ACH'ed their payments to your client, who then wired the funds to you the next business day.

Here are a few steps you could consider taking:

1. Review the agreement: Carefully review the agreement between your client and the debtor to determine if there are any clauses or provisions that indeed prohibit assignments. It's important to verify the accuracy of the accounting department's claim.

2. Seek legal advice: Consult with a lawyer who specializes in contract law to get professional advice on how to handle this situation. They can review the agreement and provide guidance based on the specific circumstances and applicable laws in your jurisdiction.

3. Communicate with your client: Discuss the situation with your client and explain the issue raised by the debtor's accounting department. Ensure transparency and open communication to understand their position and explore potential solutions.

4. Document everything: Maintain thorough documentation of all communication, including emails, agreements, payment records and any relevant evidence. This documentation can be valuable if legal action becomes necessary or for future reference.

5. Negotiate or mediate: Depending on the circumstances, it may be beneficial to engage in negotiations or seek mediation to resolve the payment issue amicably. This could involve discussing the matter with the debtor, your client, or both parties together to find a mutually agreeable solution.

6. Consider legal action: If all other attempts to resolve the matter fail, and it is determined that the debtor is legally obligated to pay you directly, you may need to pursue legal action. Your lawyer can guide you through the process and advise on the best course of action.

Remember, this is general guidance, and it's essential to consult with a legal professional to get advice tailored to your specific situation.

Comments: This is the generic, vanilla response that misses the issue. In all fairness, the question was presented as it might happen in a typical phone call and does not give ChatGPT enough information. It’s the lawyer’s job to understand what you are asking and solve the problem. ChatGPT does not have this ability … yet. The next question does contain a reference to the UCC and I will ask the question as it’s presented below. Let’s see how ChatGPT responds.

Question: I thought I was going to be bought out in a deal that I didn’t want to lose and told my friend at another factor that he can terminate my UCC-1. We all thought that the deal was going to close, but the other factor backed out at the last minute. My UCC-1 has been terminated and there is a loan with a community bank ahead of me now, which I consented to at the time. I still like the deal, but the community bank people won’t give me an intercreditor agreement because they do not want to hire a lawyer. Can I maintain a priority position on my collateral since I made a mistake in telling the other factor it can terminate my financing statement?   

Kurtz: A termination is considered an amendment to a financing statement. All amendments are valid and enforceable if authorized. This is true even for a mistaken authorization since you authorized the termination and are now dealing with the unhappy consequences of the effect of the termination because you must refile again. This is a hard and fast rule because if someone terminated your financing statement and it was not authorized, that termination would be of no force and effect, and you would maintain your priority. If you want the deal, let’s assess the community bank SBA loan, make sure it’s paid every month and, depending on the bank and the fact that it won’t want to hire a lawyer, we can discuss next steps. However, you will now be in a second position absent the bank’s subordination. 

ChatGPT: I am not a lawyer, but I can provide some general information that may be helpful in your situation. However, please note that consulting with a lawyer who specializes in commercial law or secured transactions would be the best course of action to obtain specific advice tailored to your circumstances.

Based on the information provided, it seems that you mistakenly allowed the other factor to terminate your UCC-1 financing statement. As a result, there is now a loan from a community bank ahead of you in terms of priority on your collateral. Additionally, you mentioned that the community bank is unwilling to provide you with an intercreditor agreement.

In general, when a financing statement is terminated, it can impact your priority position on the collateral. Without the UCC-1 filing, it may be difficult to assert your priority rights against the community bank or any other creditor.

To better understand your options, it is crucial to review the specific terms of your original agreement, the loan from the community bank and any relevant state laws governing secured transactions. Some potential courses of action could include:

1. Consult with a lawyer: Engage a lawyer who specializes in commercial law or secured transactions. They can review the details of your situation, including the agreements involved, applicable laws and any relevant documentation. The lawyer can provide advice on potential strategies and actions to protect your interests.

2. Negotiate with the community bank: Even without an intercreditor agreement, it may still be possible to negotiate with the community bank to establish some form of agreement regarding the priority position on the collateral. This could involve discussions on subordination or other arrangements that protect both parties' interests.

3. Assess potential remedies: Your lawyer can help you determine if there are any legal remedies available to you, such as asserting a mistake or exploring other legal theories that may help reinstate or protect your priority position. Again, this will depend on the specific laws and circumstances of your case.

4. Consider legal action: If negotiations and other efforts fail to yield a satisfactory resolution, you may need to consider pursuing legal action against the other factor or the community bank to protect your interests. Your lawyer can guide you through this process and advise on the viability of such actions.

Remember, the specific laws governing secured transactions and the details of your agreements will greatly influence the outcome in your case. Consulting with a lawyer will provide you with the most accurate advice based on your unique circumstances.

Comments: This is still largely the same generic response, but there was enough information in the question for ChatGPT to recognize the area of law involved. I guess ChatGPT does not want to be accused of practicing law without a license.

The next question was rephrased to resemble a more traditional search question as done in one of the commercial legal search engines.   

Question: If a debtor transfers its assets to a third party for no consideration and there is a lender who has a lien against the transferred assets, will the third party take the transferred assets subject to the lender's lien? Are there any steps which the lender should take to protect its lien against the assets now held by the third party?

Kurtz: An unauthorized transfer of your collateral is still subject to your lien. Your lien follows the collateral. If this third party is organized in the same state as your existing factor client, you will need to amend your existing financing statement to add the Newco, file a new financing statement in the Newco’s name and put in some language to clarify why you are filing your amendment and new financing statement. If the Newco is registered in a different state, you will need to file in the new state. There are nuances with UCC Secs 9-507 and 9-508, with 9-508 requiring a new financing statement and 9-507 requiring an amendment. It’s safer and more effective to utilize both procedures. If you do this within 120 days of the transfer, you will maintain your priority against a new secured party. Let’s hope we don’t run into a double debtor problem, as those can get messy.

ChatGPT: I am not a lawyer, but I can provide some general information that may be helpful. However, it is important to consult with a qualified attorney who specializes in commercial law or secured transactions for specific advice tailored to your situation.

In the scenario you described, where a debtor transfers its assets to a third party without receiving any consideration, and there is a lender with a lien against those transferred assets, the specific laws and regulations governing the transfer will determine the rights and obligations of the parties involved. Generally, if the transfer is found to be fraudulent or made to hinder, delay, or defraud creditors, the lender may have recourse to protect its lien against the transferred assets.

Here are a few steps that a lender could consider taking to protect its lien:

1. Review the transaction: Thoroughly examine the details of the transfer, including the timing, nature of the transfer and any indications of fraudulent intent or efforts to hinder or defraud creditors. Consult with a lawyer to assess the situation and determine the applicable legal principles and potential courses of action.

2. Assert fraudulent transfer claims: If the lender believes that the transfer was made fraudulently or with the intent to hinder or defraud creditors, it may be possible to assert fraudulent transfer claims against the debtor and/or the third party. These claims seek to undo or reverse the transfer and protect the lender's lien against the assets.

3. Consider legal remedies: Your lawyer can advise on potential legal remedies available to protect the lender's rights, such as seeking an injunction to prevent further dissipation of assets, filing a lawsuit to challenge the transfer, or asserting a lien on the assets held by the third party.

4. Investigate other potential claims: Depending on the specific circumstances, there may be other legal theories or claims that the lender can pursue to protect its lien, such as unjust enrichment, conversion, or constructive trust. Your lawyer can evaluate the facts and advise on the viability of these claims.

5. Monitor the situation: Stay vigilant and monitor any further actions or transactions involving the transferred assets. If additional transfers or encumbrances occur, it may be necessary to take immediate legal action to protect the lender's rights.

It is crucial to consult with an attorney who specializes in commercial law or secured transactions to fully understand your rights and the available legal options in your jurisdiction. They can provide guidance based on the specific laws and regulations applicable to your situation.

Comments: ChatGPT still gave a generic response but did discuss a potential fraudulent transfer; however,  ChatGPT also got this question wrong. A fraudulent transfer outside of bankruptcy is now analyzed under the Uniform Voidable Transactions Act (the “UVA”). A careful reading of the definitions in the UVA likely precludes relief to a secured creditor under the UVA. The UVA is predicated upon definitions. One must have a transfer of an asset to have a voidable transaction. The UVA carves out assets which are subject to a valid lien from enforcement under that statute. A perfected security interest constitutes a valid lien under the UVA. The UVA defines a valid lien as a lien that is effective as against a judicial lien, which is basically a creditor enforcing its rights under a judgment or pre-judgment remedy against your collateral. A properly perfected creditor will have priority over a lien creditor but can lose priority under UCC Sec.  9-323 under certain circumstances.

I also asked the same question of Bing AI, a competitor of ChatGPT and here is its answer:

“If a debtor transfers its assets to a third party for no consideration and there is a lender who has a lien against the transferred assets, the third party will take the transferred assets subject to the lender’s lien. However, if the transfer was made with the primary intent other than creditor avoidance and was made for reasonable value, it is not considered a fraudulent transfer.

“To protect its lien against the assets now held by the third party, the lender should take steps to enforce its lien rights. The Uniform Commercial Code (UCC) provides several methods for perfecting a security interest in personal property, including filing a financing statement with the appropriate UCC filing office. The UCC also specifies that if two or more creditors are properly perfected, then the priorities among such competing secured creditors are spelled out in the UCC, but the general rule is that the first to perfect has priority.

“I hope this helps answer your question. Let me know if you have any further questions or if there is anything else I can help you with.”

Comments: Bing got closer to the issue but still was not there. Bing had two footnotes in its answer which were links to different law firms. 

Question: Mah nishtanah halyla hazeh mikol halaylot.  She'bechol halaylot ain anu matbilin afilu pa'am echat, halyla hazeh shtei pe'amim. (Transliterated from Hebrew: What makes this night different from all [other] nights.  On all nights we need not dip even once, on this night we do so twice?)

Kurtz: This is the first of the four questions that that has been asked at Passover Seders for thousands of years. The words are transliterated from Hebrew into English and translates as “What makes this night different from all [other] nights.  On all nights we need not dip even once, on this night we do so twice?” After the youngest child asks the four questions, the leader of the Passover Sedar answers the child with the answer in the Hagadah (the book you use during the seder) and depending on the group and timing, can jump into other discussions or move on because everyone is hungry. 

ChatGPT: מה נשתנה הלילה הזה מכל הלילות, שבכל הלילות אין אנו מטבילין אפילו פעם אחת, הלילה הזה שתי פעמים.

Translated: This is the beginning of the Four Questions traditionally asked during the Passover Seder, which is part of the Jewish holiday of Passover. The questions are asked to prompt a discussion about the unique customs and rituals observed on Passover compared to other times of the year. The answer to this question is that on all other nights, we do not dip even once, but on this night, we dip twice.

Comments: I presented the question to see if the transliteration would cause a “hallucination,” which is slang for when AI responds with a completely off the wall answer or response.  ChatGPT came back with the question written in proper Hebrew and gave a good machine generated answer, which gave the literal answer with no meaning or context. This shows that ChatGPT has a very comprehensive knowledge base.    

AI is in its infancy but can and will soon be a good research tool. For now, AI can only give limited mechanical answers to commercial finance legal questions but only if you input the questions in a way that AI can process the information. Because law and commerce require intuition, common sense and other human qualities that AI lacks, for now I would say that Kurtz wins. I would like to revisit this subject in a few years to see how this technology has progressed. Stay tuned.