APPEAL OF UIP ENGINEERED PRODUCTS CORP.
| Citation | 43 BR 480 |
| Decision Date | 27 September 1984 |
| Docket Number | No. 84 C 4973,Bankruptcy No. 83 B 12245,83 B 12246.,84 C 4973 |
| Parties | In re Appeal of U.I.P. ENGINEERED PRODUCTS CORPORATION. |
| Court | U.S. District Court — Northern District of Illinois |
Ira J. Bornstein, Harvey J. Barnett & Assoc., Chicago, Ill., for U.I.P.
Robert W. Berliner, Jr., Chicago, Ill., for A.P. Machine & Development.
Ronald S. Barliant, Miller, Shakman, Nathan & Hamilton, Chicago, Ill., for LaSalle National Bank.
Daniel A. Zazove, Towbin & Zazove, Chicago, Ill., for C.T.R., Inc.
This bankruptcy appeal raises no issues of bankruptcy law, but instead asks the Court to decide whether a title-retention contract created a "security interest" under the Uniform Commercial Code ("UCC"). For the reasons stated below, we affirm the decision of the Bankruptcy Court, which held that a security interest was created.
The material facts are undisputed. The Appellee ("CTR") was a sublessee of the Appellant ("UIP") of a building owned by the LaSalle National Bank. Under the sublease, CTR had the right to use several cranes then owned by UIP. However, CTR defaulted on the sublease, and UIP obtained a money judgment against CTR and an order of replevin on the cranes.
On October 12, 1982, the parties signed a written agreement ("the agreement") settling the above claims and vacating the judgment. Under the relevant part of the agreement, UIP was to sell the cranes to CTR for about $15,000. CTR was to pay in monthly installments as part of a total settlement package of some $76,500.00. Paragraph two of the agreement stated that UIP would retain title to the cranes until CTR completely satisfied its obligation under the agreement.1 Because the cranes were at the premises before the agreement, they were not moved upon the signing of the agreement.
CTR paid about $40,000 under the agreement before defaulting. On October 5, 1983, it filed its Chapter 11 bankruptcy petition. UIP had never filed a financing statement regarding the cranes or taken other steps to perfect a security interest in the cranes under Article 9 of the Uniform Commercial Code. Ill.Rev.Stat. ch. 26, § 9-101 et seq. (1983) ().
In the Bankruptcy Court, CTR and others filed a "Joint Motion to Sell Machinery, Equipment, and Related Property." On February 7, 1984, CTR filed and the Court entered an agreed order which stated that CTR owned the cranes, subject only to an unperfected security interest in favor of UIP. The order allowed CTR to convey the cranes to a third party.
On February 17, 1984, in order to prevent the sale of and regain possession of the cranes, UIP filed a motion for relief from automatic stay under 11 U.S.C. § 362(d).2 The Bankruptcy Judge denied the motion, holding that the title-retention provision of the agreement created only a "security interest," § 1-201(37), that UIP never perfected the security interest, and that UIP was therefore merely a general unsecured creditor of the CTR estate with no right to relief from a § 362 automatic stay. UIP then appealed to this Court.
At the outset we note that in reviewing orders of the Bankruptcy Court, we evaluate factual questions under the "clearly erroneous" standard, but review questions of law independently. See In re Evanston Motor Co., 735 F.2d 1029, 1031 (7th Cir.1984); In re Tarnow, 35 B.R. 1014, 1015 (N.D.Ind.1983). This appeal presents only a legal question. Thus, the Court has an independent scope of review. With this standard in mind, we address the one issue on appeal: did the title-retention clause of the agreement create a security interest under the UCC?
CTR argues that the court below correctly held that the title-retention agreement created a security interest, which UIP failed to perfect. We agree. The UCC defines a "security interest" in relevant part as:
an interest in personal property or fixtures which secures payment or performance of an obligation. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer (Section 2-401) is limited in effect to a reservation of a "security interest." . . .
Section 1-201(37). UIP does not deny that it had an "interest" in the cranes; indeed, it concedes as much when it argues that it holds title. Nor does UIP deny that its "interest . . . secured payment or performance of" the settlement agreement. That much is plain from the face of the title-retention clause. Thus, the agreement easily satisfies the requirements of the first sentence of § 1-201(37). We also believe that under the second sentence, UIP's "retention of title . . . is limited in effect to a reservation of a security interest."
The rest of the analysis flows easily from the conclusion that the title-retention agreement created a security interest. Because a security interest was created, Article 9 of the UCC applies to the agreement. See § 9-102;3 § 9-113.4 Under Article 9, whether UIP or CTR held title to the cranes is immaterial to determining their respective rights. Section 9-202.5 UIP admittedly failed to file a financing statement under § 9-401 and thus never perfected its security interest. Accordingly, UIP's unperfected security interest is subordinate to the rights of CTR, who as debtor-in-possession, is considered under the Bankruptcy Code, 11 U.S.C. §§ 554(a), 1107, to be a hypothetical judgment creditor without notice under state law. See § 9-301(1)(b) (); § 9-301(3) ().
UIP argues that the above analysis is too neat. It does not contest that part of the analysis which flows from the conclusion that the title-retention contract fell within § 1-201(37). Rather, it argues that the contract does not in fact satisfy § 1-201(37), and so the rest of the above analysis is irrelevant.6 Its argument rests on the fact that the cranes were not moved after the sale to CTR because CTR already possessed them under the sublease. Since they were not moved, they were not "shipped or delivered," claims UIP, and thus the second sentence of § 1-201(37) is not satisfied. We have already met that sentence, which says, "The retention . . . of title by a seller of goods notwithstanding shipment or delivery to the buyer (Section 2-401) is limited in effect to a reservation of a `security interest.'" (Emphasis added). In effect, UIP is arguing that § 1-201(37) distinguishes title-retention contracts which involve physical delivery from title-retention contracts where the buyer already possesses the goods: in the former situation a security interest is created, but in the latter, one is not. We believe that the UCC contemplates no such distinction, and indeed, the policies underlying the Code forbid such a distinction.
The plain grammar of the second sentence does not reasonably imply UIP's interpretation. The phrase, "notwithstanding shipment or delivery," does not act as a modifier which divides title-retention contracts into two types. The phrase does not exclude the rare situations where the goods are not moved. Read in the context of the first sentence, which defines "security interest" broadly and admittedly sweeps in the present agreement, we do not think that UIP's reading is tenable. As the drafters of the Code have made clear, the creation of a security interest depends primarily on the parties' intent. See § 9-102 (Official Comment 1). Whether the goods were moved or not would usually, if not always, be irrelevant to whether the parties intended to create a security interest. Such is the case here. The title-retention clause was plainly intended to secure CTR's payments. The fact that UIP was to "retain title" to the $15,000 crane until the whole $76,000 was paid reinforces the conclusion that the parties intended that the cranes secure the transaction. Just because CTR happened to possess the cranes already under the sublease cannot have been relevant to the parties when they signed the agreement.
We cannot think of, nor does UIP offer, any UCC policy reason why the creation of a security interest should hinge on whether the goods were physically moved or not. To the contrary, policies behind the Code counsel against such a distinction. One other court besides the Bankruptcy court below has addressed this issue, reaching the same result we do. See In re Happy Jack's Restaurant, 29 UCC Rep.Serv. 653 (Bankr.Me.1980) ().7 This holding is rooted in part in the policy underlying Article 9 that "secret liens" are to be avoided. 29 UCC Rep.Serv. at 657;8see also Harney, 113 Ill.App.2d at 466; 251 N.E.2d at 26 (). UIP's interpretation of § 1-201(37) would create the odd situation that secret liens would be damned when the goods are physically delivered but blessed when goods did not have to be moved. We decline to construe the Code to generate this anomaly which would frustrate one of the policies underlying it. See § 1-201(1) ().
UIP argues that our reasoning would gut § 2-401(3). We disagree. We have held that because UIP's title-retention clause created a security interest, Article 9 commanded that title was immaterial to the outcome; thus, § 2-401 by its very terms does not apply to this case.9 Contrary to UIP's warning, just because § 2-401 does not control this case does not mean it would be impotent elsewhere. It merely does not apply where, as here, a security interest has been created.10 Sections 2-401(2), (3) can apply to numerous other situations, usually involving the rights of third parties. See, e.g., In re Emergency Beacon Corp., 665 F.2d 36, 40-42 (2d Cir. 1981) (...
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