Bollinger Corp., Matter of

• Decision Date: 08 February 1980
• Docket Number: No. 79-1766,79-1766
• Citation: 614 F.2d 924
• Parties: 28 UCC Rep.Serv. 289 In the Matter of BOLLINGER CORPORATION, Bankrupt. Appeal of Carl L. BIGLER, Trustee for Bollinger Corporation.
• Court: U.S. Court of Appeals — Third Circuit

Page 924

614 F.2d 924

28 UCC Rep.Serv. 289

In the Matter of BOLLINGER CORPORATION, Bankrupt Appeal of Carl L. BIGLER, Trustee for Bollinger Corporation.

No. 79-1766.

United States Court of Appeals Third Circuit.

Argued Dec. 12, 1979.

Decided Feb. 8, 1980.

Robert G. Sable (argued), David W. Lampl, Lampl, Sable & Makoroff, Pittsburgh, Pa., for appellant.

Bernard Eisen (argued), Berkman, Ruslander, Pohl, Liber & Engel, Pittsburgh, Pa., for appellee.

Before ADAMS, ROSENN and SLOVITER, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal from a district court review of an order in bankruptcy presents a question that has troubled courts since the enactment of Article Nine of the Uniform Commercial Code (U.C.C.) governing secured transactions. Can a creditor assert a secured claim against the debtor when no formal security agreement was ever signed, but where various documents executed in connection with a loan evince an intent to create a security interest? The district court answered this question in the affirmative and permitted the creditor, Zimmerman & Jansen, to assert a secured claim against the debtor, bankrupt Bollinger Corporation in the amount of $150,000. We affirm.

I.

The facts of this case are not in dispute. Industrial Credit Company (ICC) made a loan to Bollinger Corporation (Bollinger) on January 13, 1972, in the amount of $150,000. As evidence of the loan, Bollinger executed a promissory note in the sum of $150,000 and signed a security agreement with ICC giving it a security interest in certain machinery and equipment. ICC in due course perfected its security interest in the collateral by filing a financing statement in accordance with Pennsylvania's enactment of Article Nine of the U.C.C. ¹

Bollinger faithfully met its obligations under the note and by December 4, 1974, had repaid $85,000 of the loan leaving $65,000 in unpaid principal. Bollinger, however, required additional capital and on December 5, 1974, entered into a loan agreement with Zimmerman & Jansen, Inc. (Z&J), by which Z&J agreed to lend Bollinger $150,000. Z&J undertook as part of this transaction to pay off the $65,000 still owed to ICC in return for an assignment by ICC to Z&J of the original note and security agreement between Bollinger and ICC. Bollinger executed a promissory note to Z&J, evidencing the agreement containing the following provision:

Security. This Promissory Note is secured by security interests in a certain Security Agreement between Bollinger and Industrial Credit Company . . . and in a Financing Statement filed by (ICC) . . ., and is further secured by security interests in a certain security agreement to be delivered by Bollinger to Z and J with this Promissory Note covering the identical machinery and equipment as identified in the ICC Agreement and with identical schedule attached in the principal amount of Eighty-Five Thousand Dollars. ($85,000).

No formal security agreement was ever executed between Bollinger and Z&J. Z&J did, however, in connection with the promissory note, record a new financing statement signed by Bollinger containing a detailed list of the machinery and equipment originally taken as collateral by ICC for its loan to Bollinger.

Bollinger filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in March, 1975 and was adjudicated bankrupt one year later. In administrating the bankrupt's estate, the receiver sold some of Bollinger's equipment but agreed that Z&J would receive a $10,000 credit on its secured claim.

Z&J asserted a secured claim against the bankrupt in the amount of $150,000, arguing that although it never signed a security agreement with Bollinger, the parties had intended that a security interest in the sum of $150,000 be created to protect the loan. The trustee in bankruptcy conceded that the assignment to Z&J of ICC's original security agreement with Bollinger gave Z&J a secured claim in the amount of $65,000, the balance owed by Bollinger to ICC at the time of the assignment. The trustee, however, refused to recognize Z&J's asserted claim of an additional secured claim of $85,000 because of the absence of a security agreement between Bollinger and Z&J. The bankruptcy court agreed and entered judgment for Z&J in the amount of $55,000, representing a secured claim in the amount of $65,000 less $10,000 credit received by Z&J.

Z&J appealed to the United States District Court for the Western District of Pennsylvania, which reversed the bankruptcy court and entered judgment for Z&J in the full amount of the asserted $150,000 secured claim. The trustee in bankruptcy appeals. ²

II.

Under Article Nine of the U.C.C., two documents are generally required to create a perfected security interest in a debtor's collateral. First, there must be a "security agreement" giving the creditor an interest in the collateral. Section 9-203(1)(b) contains minimal requirements for the creation of a security agreement. In order to create a security agreement, there must be: (1) a writing (2) signed by the debtor (3) containing a description of the collateral or the types of collateral. Section 9-203, Comment 1. The requirements of section 9-203(1)(b) further two basic policies. First, an evidentiary function is served by requiring a signed security agreement and second, a written agreement also obviates any Statute of Frauds problems with the debtor-creditor relationship. Id. Comments 3, 5. The second document generally required is a "financing statement," which is a document signed by both parties and filed for public record. The financing statement serves the purpose of giving public notice to other creditors that a security interest is claimed in the debtor's collateral.

Despite the minimal formal requirements set forth in section 9-203 for the creation of a security agreement, the commercial world has frequently neglected to comply with this simple Code provision. Soon after Article Nine's enactment, creditors who had failed to obtain formal security agreements, but who nevertheless had obtained and filed financing statements, sought to enforce secured claims. Under section 9-402, a security agreement may serve as a financing statement if it is signed by both parties. The question arises whether the converse is true: Can a signed financing statement operate as a security agreement? The earliest case to consider this question was American Card Co. v. H.M.H. Co., 97 R.I. 59, 196 A.2d 150, 152 (1963) which held that a financing statement could not operate as a security agreement because there was no language granting a security interest to a creditor. Although section 9-203(1)(b) makes no mention of such a grant language requirement, the court in American Card thought that implicit in the definition of "security agreement" under section 9-105(1)(h) was such a requirement; some grant language was necessary to "create or provide security." This view also was adopted by the Tenth Circuit in Shelton v. Erwin, 472 F.2d 1118, 1120 (10th Cir. 1973). Thus, under the holdings of these cases, the creditor's assertion of a secured claim must fall in the absence of language connoting a grant of a security interest.

The Ninth Circuit in In re Amex-Protein Development Corp., 504 F.2d 1056 (9th Cir. 1974), echoed criticism by commentators of the American Card rule. The court wrote: "There is no support in legislative history or grammatical logic for the substitution of the word 'grant' for the phrase 'creates or provides for'." Id. at 1059-60. It concluded that as long as the financing statement contains a description of the collateral signed by the debtor, the financing statement may serve as the security agreement and the formal requirements of section 9-203(1)(b) are met. The tack pursued by the Ninth Circuit is supported by legal commentary on the issue. See G. Gilmore, Security Interests in Personal Property, § 11.4 at 347-48 (1965).

Some courts have declined to follow the Ninth Circuit's liberal rule allowing the financing statement alone to stand as the security agreement, but have permitted the financing statement, when read in conjunction with other documents executed by the parties, to satisfy the requirements of section 9-203(1)(b). The court in In re Numeric Corp., 485 F.2d 1328 (1st Cir. 1973) held that a financing statement coupled with a board of directors' resolution revealing an intent to create a security interest were sufficient to act as a security agreement. The court concluded from its reading of the Code that there appears no need to insist upon a separate document entitled "security agreement" as a prerequisite for an otherwise valid security interest.

A writing or writings, regardless of label, which adequately describes the collateral, carries the signature of the debtor, and establishes that in fact a security interest was agreed upon, would satisfy both the formal requirements of the statute and the policies behind it.

Id. at 1331. The court went on to hold that "although a standard form financing statement by itself cannot be considered a security agreement, an adequate agreement can be found when a financing statement is considered together with other documents." Id. at 1332. See In re Penn Housing Corp., 367 F.Supp. 661 (W.D.Pa.1973); but see Union National Bank of Pittsburgh v. Providence Washington Insurance Co., 21 U.C.C.Rep.Serv. 1463 (W.D.Pa.1977).

More recently, the Supreme Court of Maine in Casco Bank & Trust Co. v. Cloutier, 398 A.2d 1224, 1231-32 (Me.1979) considered the question of whether composite documents were sufficient to create a security interest within the terms of the Code. Writing for the court, Justice Wernick allowed a financing statement to be joined with a promissory note for purposes of determining whether the note contained an adequate description of the collateral to create a security agreement. The court indicated that the evidentiary and Statute of...