Bristol Associates, Inc., In re, 74-1178

• Citation: 505 F.2d 1056
• Decision Date: 25 November 1974
• Docket Number: No. 74-1178,74-1178
• Parties: 15 UCC Rep.Serv. 561 In the Matter of BRISTOL ASSOCIATES, INC., Debtor. Appeal of GIRARD TRUST BANK.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 1056

505 F.2d 1056

15 UCC Rep.Serv. 561

In the Matter of BRISTOL ASSOCIATES, INC., Debtor Appeal of GIRARD TRUST BANK.

No. 74-1178.

United States Court of Appeals, Third Circuit.

Argued Sept. 9, 1974.

Decided Nov. 5, 1974, As Amended Nov. 25, 1974.

Leon S. Forman, Howard T. Glassman, Wexler, Weisman, Maurer & Forman, Philadelphia, Pa., for appellant.

Lewis H. Gold, Adelman & Lavine, Philadelphia, Pa., for appellee.

Before ALDISERT, ADMAS and ROSENN, Circuit Judges.

OPINION OF THE COURT

ADAMS, Circuit Judge:

The Court is here asked to determine whether a Pennsylvania, lender, who takes as collateral for a loan a security interest in a lessor-borrower's lease and in the rents thereunder, must comply with the filing provisions of Article 9 of the Uniform Commercial Code ¹ to perfect its interest against attack by a Receiver in bankruptcy.

In 1969, Bristol Associates, Inc. as lessor, entered into an Agreement of Lease, letting certain store premises for a period of 10 years to the Commonwealth of Pennsylvania, agent for the Pennsylvania Liquor Control Board. Two years later, in 1971, in consideration for a loan, Bristol gave Girard Trust Bank a promissory note and, as security, assigned to Girard its interest in the lease. Girard did not record its security interest in the real estate lease by filing a financing statement under Article 9 or make any other public record of the assignment of the lease.

The following year, in 1972, Bristol filed a petition under Chapter XI of the Bankruptcy Act, 11 U.S.C. 701 et seq. (1966), and a Receiver was appointed. Apart from the first month's rent from the Commonwealth inadvertently paid to Girard, the Receiver retained all rentals and applied them to Bristol's business operations. Girard thereupon filed a reclamation petition with the Bankruptcy Court to recover the rentals paid to the Receiver under the lease that had been assigned. The Bankruptcy Court denied the petition, and the denial was affirmed by the district court. 369 F.Supp. 1 (E.D.Pa. 1973).

Under section 70(c) of the Bankruptcy Act, 11 U.S.C. 110, and section 9-301(3) of the Code, the Receiver assumes the rights of a lien creditor. In this status, the Receiver takes priority over those other creditors of the insolvent debtor who hold unperfected security interests. Unperfected secured parties are relegated to the pool of general creditors.

If the assignment of the lease to Girard is a transaction within the scope of Article 9 and if Girard's interest has not been perfected, then Girard cannot successfully assert its security interest against the Receiver. If, however, the assignment of a lease is excluded from Article 9, the filing and perfection provisions of that Article are not applicable, and Girard's security interest in the lease and in the rents from the lease would not be subordinated to the Receiver.

The apposite statutory provisions and official Comment ² provide:

9-102 Policy and Scope of Article. (1) Except as otherwise provided . . . in Section 9-104 on excluded transactions, this Article applies so far as concerns any personal property and fixtures within the jurisdiction of this State (a) to any transaction (regardless of its form) which is intended to create a security interest in personal property . . .. (3) The application of this Article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this Article does not apply. Comment 4. An illustration of subsection (3) is as follows: The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage on Blackacre. This Article is not applicable to the creation of the real estate mortgage. Nor is it applicable to a sale of the note by the mortgagee, even though the mortgage continues to secure the note. However, when the mortgagee pledges the note to secure his own obligation to X, this Article applies to the security interest thus created, which is a security interest in an instrument even though the instrument is secured by a real estate mortgage. This Article leaves to other law the question of the effect on rights under the mortgage of delivery or non-delivery of the mortgage or of recording or non-recording of an assignment of the mortgagee's interest. See Section 9-104(j). 9-104. Transactions Excluded from Article. This Article does not apply . . . (j) . . . to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder. Comment 2. The exclusion . . . of leases and other interests in or liens on real estate by paragraph (j) merely reiterates the limitations on coverage already made explicit in Section 9-102(3). See Comment 4 to that section.

We are required to apply the law of Pennsylvania to issues such as the one before us. In Re Royal Electrotype Corp., 485 F.2d 394 (3d Cir. 1973). However, the Pennsylvania courts have made no ruling on the interplay of sections 9-102 and 9-104 to resolve the question whether a real estate lease used as collateral falls within the ambit of Article 9. Therefore, it is incumbent on the federal court not only to apply the relevant state law, but to ascertain what that law, in fact, is.

Our analysis proceeds from the statute. We must give effect insofar as possible to the language and intent of the legislators, giving each section a meaningful interpretation while not eclipsing any other portion of the statute. ³

The question confronting us here thus becomes whether 'an interest in real estate' subsequently employed in a 'transaction which is intended to create a security interest' is covered by section 9-102, placing the transaction under the Code, or by section 9-104(j), placing the transaction outside the Code.

The Receiver contends that, when the borrower assigned the lease to the lender, the transaction came within the ambit of Article 9 and its provisions for perfecting security interests. In support of this position, the Receiver advances as a syllogism that Article 9 expressly covers security interests in all personal property; that a lease in Pennsylvania is personal property; ⁴ and that the transaction in question here therefore falls within Article 9 coverage. Section 9-104(j) Would, under this analysis, be read narrowly, exempting from Article 9 only those transactions touching on the real estate itself, such as the creation of a lease or mortgage; subsequent uses of the lease or mortgage, 'intended to create a security interest,' would not be excluded. Under the Receiver's approach the 'transfers' excluded from Article 9 by section 9-104(j) would be only those where no intent to create a security interest was present, for example, transfers of blocks of mortgages and the sale of real estate on which outstanding leases were transferred as part of the sale.

The Receiver would place the lease within the scope of section 9-102, Comment 4, supra, asserting that, analogous to the promissory note, the lease evidences an obligation to pay. Although the Receiver concedes that the underlying lessor-lessee contract is excluded from the Code by section 9-103(j), he nevertheless maintains that its use as security could, under a reasonable interpretation of the language, fall within section 9-102(3). If section 9-104(j) is construed narrowly, claims the Receiver, so that the 'transfers' it excludes do not cover transfers as security pledges, a consistent reading of the two sections emerges.

Girard argues in opposition that section 9-104(j) explicitly exempts from compliance with the provisions of Article 9 any transfer of an interest in realty, no matter what the purpose. Under this reading of the statute, it becomes irrelevant whether a lease is considered realty or personalty under the state law for other purposes. Even if the lease is deemed personalty, its transfer is claimed by Girard to be the subject of express exclusion from the provisions of Article 9.

Responding to the Receiver's reading of section 9-104(j), Girard suggests that the Receiver would nullify the effect of that section by interpreting it to exclude from Article 9 only transactions which that Article does not purport to cover, namely, real property transactions and transfers where there is no intent to create a security interest. Girard contends that a proper reconciliation of the two sections results only from interpreting section 9-104(j) to exclude from Article 9 transactions that would otherwise fall within it, such as the transactions involved in the present litigation.

The evolution of the Code since its original enactment, the views of authorities and the realities of the pertinent business practices have persuaded us that the intent of the Legislature was to exclude from the filing and perfection provisions of Article 9 the use of a lease as collateral for a loan.

Sections 9-102 and 9-104 have both been amended since their original enactment. Together, the amendments limit the application of section 9-102 where transactions touch realty and, simultaneously, provide greater explicitness in section 9-104(j), exempting both the creation and transfer of interests in realty. The amendments were proposed in order to clarify the Code as ambiguities in language became evident, rather than to alter the direction or scope of the Code. ⁵

As originally enacted in Pennsylvania, section 9-102 did not contain subsection (3). ⁶ In 1959 subsection (3) was added, accompanied by the explanatory Comment 4. ⁷ Since the effect produced by Comment 4 was not clear, the Conference of Commissioners on Uniform State Laws and the American Law Institute recommended, in 1962, that the Comment be modified. Before and after the amendment, the relevant portion of Comment 4 read:

However, when the mortgagee in turn pledges this note and mortgage to secure his own obligation to X, this Article is applicable to the security interest thus created in the note and the...