In re First City Mortg. Co.
| Decision Date | 28 January 1987 |
| Docket Number | Bankruptcy No. 385-32296-A-11. |
| Citation | 69 BR 765 |
| Parties | In re FIRST CITY MORTGAGE COMPANY, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
John Exline, Matthews, Kroemer, Johnson & Turner, Dallas, Tex., for debtor.
John Flowers, John H. Reid, Locke, Purnell, Boren, Laney & Neely, Dallas, Tex., for plaintiff.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
On September 4, 1985, First City Mortgage Company ("FCMC") filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Thereafter, FCMC has operated as a business and managed its assets as a Debtor in Possession. FCMC is in the business of servicing, originating, and warehousing mortgages.
In late 1981, FCMC and RepublicBank Dallas executed a document titled "Collateral Assignment of Mortgage Servicing Income Rights and Other Contract Rights" (the "Assignment Document"). The mortgage servicing duties and income rights covered by the Assignment Document encompass all or nearly all of the mortgage servicing income of the debtor. Listed as an appendix to the Assignment Document are the various mortgage servicing contracts with which it is concerned (the "Servicing Agreements").
Although default has occurred under the lending agreement between RepublicBank and FCMC, the debtor continues to provide the services and receive the income provided for by the Servicing Agreements. RepublicBank is not a party to the Servicing Agreements, but it appears to have complied with the contractual requirement contained in the Servicing Agreements for the taking of a security interest therein. RepublicBank had made no objection to FCMC's continued performance of the Servicing Agreements, although it had knowledge of it, until it filed its cash collateral motion on May 5, 1986. It must be noted that RepublicBank has not filed a financing statement naming FCMC as a debtor.
In its cash collateral motion, RepublicBank asserted that the income from the Servicing Agreements constitutes cash collateral to which it has a right and that its rights were not adequately protected. FCMC countered with the assertion that RepublicBank's interest is unperfected and subject to avoidance. The focus of this controversy is on the income.
This is a proceeding involving issues under 11 U.S.C. §§ 363, 552 and 544. At issue is whether the Assignment Document effects an absolute assignment or merely provides for a security interest, whether the income of FCMC is cash collateral, and the nature of the debtor's rights in the Servicing Agreements for purposes of applying 11 U.S.C. § 544(a)(1), (2). The Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2) and § 1334. This memorandum shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
The Assignment Document states in part:
Because Bankruptcy Code §§ 363 and 552(b) are subject to § 544, we take up the § 544 issues first. Applying Texas law1, this Court looks first to the documents to determine whether an absolute assignment or a security interest was intended by the parties to the Assignment Document. Taylor v. Brennan, 621 S.W.2d 592 (Tex.1981); see also note 4 infra.
RepublicBank cites the Court to Matter of Village Properties, Ltd., 723 F.2d 441 (5th Cir.1984), and argues that the Assignment Document is analogous to the collateral assignment of rentals under a deed of trust considered in that case by the Court of Appeals. RepublicBank then argues that its cash collateral motion supplies the necessary obtaining possession of the property, impounding the rents, securing the appointment of a receiver, or other "similar action" required to perfect the assignment under Texas law.2
This Court holds that the requirements for protecting RepublicBank's interest under the Assignment Document are set out in Chapter 9 of the Texas Business and Commerce Code (Article 9), which applies to any transaction that is intended to create a security interest.3 By the clear and unambiguous terms of its own agreement, RepublicBank has limited its interest in the Servicing Agreements to that of a security interest.4 RepublicBank contends that Tex.Bus. & Comm.C. § 9.104(6) (Vernon Supp.1986) excludes the assignment from Article 9 coverage and therefore, that Village Properties states the applicable law. However the claimed exclusion applies only to transactions which by their nature have nothing to do with commercial financing transactions.5 The assignment in this case clearly does not fit within this exception. It is of a substantial portion, if not all, of the Debtor's accounts and it was made in conjunction with an existing debtor/creditor relationship. Moreover, RepublicBank never assumed any of the risks attendant with the Servicing Agreements. Nor does the assignment fit within the exception to the rule requiring that a financing statement be filed in order to perfect a security interest found in Tex.Bus. Comm.C. § 9.302(a)(5) (Vernon Supp.1986). There is nothing "casual or isolated" about the transfer at issue here. Cf. Abramson v. Printer's Binding, Inc., 440 S.W.2d 326 (Tex.Civ.App. — Dallas 1969, no writ).
In short, RepublicBank has a standard Article 9 security interest in accounts and general intangibles of the Debtor, and that security interest is perfected by filing a financing statement naming the debtor with the Secretary of State of Texas. RepublicBank has not filed the required financing statement and accordingly the security interest evidenced by the Assignment Document is not perfected.6
RepublicBank next argues that their security interest is not subject to avoidance under Bankruptcy Code § 544(a)(1)(2), because the property rights of the Debtor in Possession in the Servicing Agreements are not interests in realty and are not of a character that is susceptible to levy or execution under state law. The point is based on the premise that: "In Texas, contract rights which may not be transferred freely by a judgment debtor are not subject to execution." (Brief of RepublicBank p. 9.) The Servicing Agreements contain certain restrictions on assignment by the debtor which, RepublicBank asserts, prevent their free transfer by the debtor. The case of Moser v. Tucker, 87 Tex. 94, 26 S.W. 1044 (1894), is cited in support of this argument. Moser dealt with an assignment of a lease by a lessee and a statutory prohibition of such assignments absent the lessor's consent. The case is illustrative of a special circumstance, but it is distinguishable from the case at bar. The rule applicable to the instant case was set out in Gregg v. First National Bank, 26 S.W.2d 179, 181 (Tex. Comm.App.1930, judgm't adopted). An interest in property of a judgment debtor is subject to execution when the interest is such that the debtor might have assigned it. (emphasis supplied) In Gregg, the Court found that the interest of the beneficiary of a trust, where all that remained for the trustee to do was to identify the interests, was property subject to execution. The rule was further explained in Jensen v. Wilkinson, 133 S.W.2d 982 (Tex.Civ.App. — Galveston 1939, writ ref'd). In Jensen the Court held that a possibility of reverter in a working interest in an oil and gas lease could be sold at an execution sale. The possibility of reverter was a greater interest than a mere expectancy or a mere equity, and hence, subject to execution. Likewise, in Lozano v. Guerra, 140 S.W.2d 587 (Tex.Civ.App. — San Antonio, 1940, no writ), it was held that a beneficiary's interest in an estate directed to be managed by the independent administrator could be sold at an execution sale, subject to the administration and the terms of the will.
RepublicBank's reliance on an often quoted excerpt from the Moser opinion is misplaced. The Court in Moser stated: "No property or interest in property is subject to sale under execution or like process unless the debtor, if sui juris, has power to pass title to such property or interest in property by his own act. . . ." It is not necessarily the Servicing Agreements in toto that are the subject of this proceeding, it is any interest of FCMC in the Servicing Agreements. The income and the right to that income might have been assigned by FCMC. That such an assignment is possibly subject to an act of another party to the Servicing Agreements is of no consequence in this proceeding. Though the debtor's rights may be subject to a contingency, no right possessed by a party other than the debtor is involved here.
It can thus be readily seen that the rights of FCMC in the income produced under the Servicing Agreements are such as would be subject to execution under Texas law.7 The Court holds that FCMC's right to income under the Servicing Agreements are such as might be assigned and, to that extent, under 11 U.S.C. sec. 544(a), the unperfected security interest of RepublicBank is subject to avoidance by the Debtor in Possession.8 Sommers v. International Business Machines, 640 F.2d 686 (5th Cir.1981); In re S.O.A.W. Enterprises, Inc., 32 B.R. 279 (Bankr.W.D.Tex.1983); Matter of Joseph Kanner Hat Co., 482 F.2d 937 (2d Cir.1973).
Earlier in the proceedings, the Court entered an order granting RepublicBank a replacement lien to protect its asserted...
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