In re Berry

• Citation: 189 BR 82
• Decision Date: 07 November 1995
• Docket Number: Bankruptcy No. 95-72876. Adv. No. 95-8138.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re David C. BERRY, Debtor. Wm. Keenan STEPHENSON, Jr., Trustee, and David C. Berry, Debtor, Plaintiffs, v. FIRST UNION NATIONAL BANK OF SOUTH CAROLINA, Defendant.

189 B.R. 82 (1995)

In re David C. BERRY, Debtor.

Wm. Keenan STEPHENSON, Jr., Trustee, and David C. Berry, Debtor, Plaintiffs, v. FIRST UNION NATIONAL BANK OF SOUTH CAROLINA, Defendant.

Bankruptcy No. 95-72876. Adv. No. 95-8138.

United States Bankruptcy Court, D. South Carolina.

November 7, 1995.

COPYRIGHT MATERIAL OMITTED

John L. McCants, Ellis, Lawthorne, Davidson & Sims, P.A., Columbia, SC, for plaintiffs.

Richard R. Gleissner, Finkel, Goldberg, Sheftman & Altman, P.A., Columbia, SC, for defendant.

MEMORANDUM AND ORDER

J. BRATTON DAVIS, Chief Judge.

This adversary proceeding¹ was commenced by the trustee, Wm. Keenan Stephenson (the "Trustee"), and the debtor, David C. Berry ("Berry"), (1) to determine the validity or extent of a lien or interest in property, and (2) to avoid, pursuant to 11 U.S.C. § 544² & ³, the debtor's transfer of an interest in property of the debtor to the defendant.

JURISDICTION

The adversary proceeding arises out of and relates to Berry's Chapter 13 case filed under the United States Bankruptcy Code. (11 U.S.C. § 101 et seq.) It is a core proceeding, 28 U.S.C. § 157(b)(2)(K), over which this Court has jurisdiction. 28 U.S.C. §§ 157 and 1334, and 11 U.S.C. § 544.

FACTS

Berry, as an insurance agent for Colonial Life and Accident Insurance Company, Inc. ("Colonial Life"), receives compensation based upon the insurance policies that he sells and the insurance policies that are sold by the sales representatives whom he supervises on behalf of Colonial. Berry also receives compensation, known as renewal commissions, when policies that he has previously sold are renewed.

On July 26, 1993, Berry executed a negotiable promissory note (the "Note") to First Union National Bank of South Carolina ("First Union") wherein Berry promised to repay First Union the sum of $51,963.36, plus interest, on a monthly basis in accordance with the terms and conditions of the Note. The Note, reflecting that Berry was giving a security interest in an "assignment of renewals," provides, in part:

Security. I am giving a security interest in:

____ the goods being purchased.

X other (describe):

ASSIGNMENT OF RENEWALS.

* * * * * *

PROPERTY AS SECURITY

To secure payment of this Note, I grant you a security interest in the collateral described below or in the Mortgage as indicated by the date below or on Schedule A, plus all additions, replacements or accessions to, and proceeds of the collateral. This collateral will secure any other loans with you, now or in the future unless the collateral is used as a principal dwelling or household goods. Any additional collateral is listed on the attached Schedule A.

ASSIGNMENT OF RENEWALS FROM COLONIAL LIFE INSURANCE COMPANY

* * * * * *

In conjunction with the Note, Berry assigned his renewal commissions by entering into an agreement with First Union which states that Berry:

. . . does hereby sell, assign, transfer, set over and deliver to First Union National Bank all of the right, title and interest of the undersigned in and to any of the renewal commissions . . . This assignment is made as security for a loan this day made by the Bank to the undersigned, and is security for any and all renewals or extensions of said loan, or any part thereof.

First Union did not file a UCC financing statement with the South Carolina Secretary of State or other registry. The agreement was forwarded to Colonial Life which began making the monthly payments directly to First Union.

On May 10, 1994, Berry refinanced the Note with First Union by increasing the amount and extending the terms of payment, and signed another agreement assigning his renewal commissions. The language regarding security did not appear in the new agreement although the Note's language regarding security did remain the same. Again, First Union did not file a UCC financing statement. The May 10, 1994 agreement was forwarded to Colonial Life which began making the monthly payments directly to First Union.

On June 1, 1995, Berry filed his Chapter 13 case.

Thereafter, this adversary proceeding was commenced by the Trustee and Berry in which they contend that, although the assignment of the renewal commissions afforded First Union a security interest therein subject to Article 9 of the Uniform Commercial Code ("Article 9"), First Union's failure to file a UCC financing statement rendered the assignment unperfected, ergo, avoidable by the trustee under § 544.

Although conceding that it did not file a UCC Financing statement, First Union contends that, because the assignment is an absolute assignment which did not create a security interest, First Union is not required by Article 9 to file a financing statement. In support of this contention First Union says that "an assignment is an immediate, complete and irrevocable change of ownership in which the assignor loses all control over the fund. The total relinquishment of all rights is required for a true assignment and if the transfer is less than absolute, the transfer is a not an assignment . . . Assignments are not security interests and perfection is not required."

ISSUE

The issue is whether vel non the debtor's assignment of renewal commissions created a security interest for First Union which is avoidable by the trustee. And that has raised three questions:

I

May the Assignment of the Renewal Commissions Create a Security Interest Covered by Article 9 of the Uniform Commercial Code?

The objective of the Uniform Commercial Code is "to bring all phases of commercial transactions under one statute and to simplify, clarify, modernize and make uniform this law." S.C.Code Ann.Title 36, Commercial Code, Background and Introduction, p. 2.⁴ The "fundamental objective" of Article 9 of the Uniform Code "is to provide uniform and simplified rules governing chattel security which meets modern commercial needs." S.C.Code Ann.Title 36, Commercial Code, Background and Introduction, p. 14. ". . . Article 9 rejects any distinction based on form or designation of the device employed. . . . Consistent with this general functional rather than formal and conceptual approach, Article 9 states substantive rules without regard to the ancient controversy over whether the secured party acquires `title' to collateral or a `mere lien'." S.C.Code Ann.Title 36, Commercial Code, Background and Introduction, p. 14.

Although an assignment at common law divested an assignor of all rights and title to property, the Uniform Commercial Code brings assignments for security within the coverage of Article 9 regardless of title. Bank of Cave Spring v. Gold Kist, Inc., 173 Ga.App. 679, 327 S.E.2d 800 (1985).

(1) Except as otherwise provided in Section 36-9-104 on excluded transactions, this chapter applies:

(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents. . . . accounts . . .

(2) This chapter applies to security interests created by contract including pledge, assignment, chattel mortgage. . . .

S.C.Code Ann. § 36-9-102.

This court has noted that Article 9 applies to assignments of account. See In re Carolina Utilities Supply Co., Inc., 118 B.R. 412 (Bankr.D.S.C.1990) and In re Flowers, 78 B.R. 774 (Bankr.D.S.C.1986).

Berry and the Trustee contend that the assignment of the renewal commissions is an assignment of accounts. See In re Rankin, 102 B.R. 439 (Bankr.W.D.Pa.1989); § 36-9-106. If it is a security interest, § 36-9-302⁵ a financing statement must, for perfection, be filed, and if not filed, the Trustee may avoid the assignment. § 544. First Union does not take issue with that conclusion.

First Union's citation of Matter of Armando Gerstel, Inc., 65 B.R. 602 (S.D.Fla. 1986)⁶ and In re Moskowitz, 14 B.R. 677 (S.D.N.Y.1981) for the proposition that "assignments are not security interests and perfection is not required" is of no avail here. Neither case supports First Union's cause; they are distinguishable on the facts. In each case there was an assignment of an insurance claim. Such an assignment is specifically excluded from Article 9 by § 36-9-104(g).⁷ In Gerstel, the debtor, who had suffered a theft loss, assigned the proceeds from his insurance policy to a creditor in payment of an antecedent debt. In Moskowitz, an insurance carrier, pursuant to an assignment clause in the policy, paid the claim of a hospital which had provided care directly to the carrier's insured who later filed for relief under the Bankruptcy Code. The trustee in each of those cases, with the "strong arm" power afforded by § 544, attempted to avoid the transaction, but was denied relief because the relevant state law excluded the assignment of insurance proceeds from the purview of Article 9.

To the extent that a transfer of an interest in personal property for security is not specifically excluded, Article 9 is intended to cover the transfer. S.C.Code Ann. § 36-9-102 and S.C.Code Ann.Title 36, Background and Introduction, p. 14. One's realization that an assignment may be subject to Article 9, is made easier when one focuses on the statutory exclusions to Article 9 relevant to assignments of an interest in accounts.⁸ Section 36-9-104(f) excludes from Article 9 "an assignment of accounts for the purpose of collection only . . . and a transfer of a single account to an assignee in whole or partial satisfaction of a preexisting debt." Those exclusions of Article 9 do not cover the item extant in this adversary proceeding: an assignment of accounts for security.

Thus, it reasonably may be deduced that an assignment of accounts for security, not being specifically excluded by the statute, may create a security interest which is governed by Article 9 of the UCC.

II

Did Berry's Assignment of the Renewal Commissions to First Union Create for First Union a Security Interest in Berry's Accounts?

Having concluded that an assignment of an account for security may be subject to Article 9, we now conclude...