In re Numeric Corp.

• Decision Date: 17 October 1973
• Docket Number: No. 73-1103.,73-1103.
• Citation: 485 F.2d 1328
• Parties: In the Matter of NUMERIC CORP., Bankrupt. Appeal of Russell E. BLANK.
• Court: U.S. Court of Appeals — First Circuit

485 F.2d 1328 (1973)

In the Matter of NUMERIC CORP., Bankrupt Appeal of Russell E. BLANK.

No. 73-1103.

United States Court of Appeals, First Circuit.

Heard September 5, 1973.

Decided October 17, 1973.

Frederic N. Halstrom, Boston, Mass., with whom William A. Cotter, Jr., Leo V. Boyle, and Parker, Coulter, Daley & White, Boston, Mass., were on brief, for appellant.

Sidney J. Kagan, Boston, Mass., with whom Richmond, Rosen & Kagan, Boston, Mass., was on brief, for appellee.

Before COFFIN, Chief Judge, McENTEE, Circuit Judge, and KILKENNY, Senior Circuit Judge^*.

McENTEE, Circuit Judge.

This appeal arises out of bankruptcy proceedings and involves interpretation of the term "security agreement" employed in the Uniform Commercial Code (UCC) as adopted by Massachusetts. Mass.Gen.Laws Ann. ch. 106, § 9-203(1) (b) (1958).¹ The issue arises from the following circumstances.

In 1962 the appellant, Russell E. Blank, and one Robert Dean organized Numeric Corporation for the purpose of engaging in a general machine shop and engineering business. Numeric was formally incorporated under Massachusetts law on April 13, 1962, at which time Dean became the company's president, treasurer, and one of its directors. Blank held no position with Numeric but owned fifty of the 100 shares of stock issued by the corporation. It appears from the testimony before the referee in bankruptcy that Blank was the principal source of Numeric's working capital in the early days of the venture, while Dean's main contribution was his practical experience in the field. Prior to its formal date of incorporation, Blank engaged in two transactions with the company. He agreed to loan Numeric $16,000 in cash and also sold the company numerous items of machinery for $18,300. Blank subsequently received separate promissory notes for each transaction. It is with regard to the sale of the machinery that the current dispute arose.

Blank contends that in addition to the promissory note, he received a security interest in the machinery. The trustee in bankruptcy rejected that claim on the ground that the debtor (Numeric) failed to sign a "security agreement" containing a description of the collateral. Mass.Gen.Laws Ann. ch. 106, § 9-203(1)(b) (1958).

The transfer of the machinery to Numeric occurred by bill of sale, dated March 2, 1962. In this document Blank listed the various items of machinery in terms of quantity, description, and, in most cases, serial number. The bill of sale recited that consideration for the transfer was one dollar and "other good and valuable consideration." There was no express mention of a security interest.

On April 13 a special meeting of the directors was held. Among the resolutions unanimously approved at this meeting was the following:

"VOTED: That the Clerk of the corporation prepare standard form, Uniform Commercial Code financing statements on behalf of the corporation as debtor, to Russell Blank, as the secured party, in such manner and form as to cover Russell Blank\'s security interest in the property of this corporation as set forth in a Bill of Sale dated March 2, 1962, from said Russell Blank to the corporation, and as hereafter acquired, and as evidence of his security interest in the same. That the treasurer, Robert Dean, be and hereby is authorized to execute and deliver the same to said Russell Blank on behalf of the corporation."

On the same day Numeric gave Blank a promissory note for $18,300, without interest. There was no express mention of a security interest in this note.

Also on April 13 Numeric prepared a financing statement which referred to Blank as the "secured party" and listed as property "covered" by this statement the same items of machinery detailed in the March 2 bill of sale, with one exception. While the bill of sale referred to "2 Harding Hand Screws," the financing statement was later changed to read "Harding Hand Screw." As so changed, this statement was filed with the state on June 15, 1962, in accordance with the UCC. Mass.Gen.Laws Ann. ch. 106, §§ 9-401 to 9-403 (1958).

There is conflicting testimony as to whether on April 13 a document formally labelled "security agreement" was also drawn up. It does appear that such a document, although unsigned, was in existence during the next month. On June 21 Blank received a letter from David Baye, attorney for Numeric, which referred to a formal document called the security agreement.²

It appears that nothing more was ever done with regard to the formal security agreement referred to in Baye's letter to Blank. In his testimony, Dean maintained that in fact he never signed a document of that nature. No party has come forward with the document in either signed or unsigned form and no one has explained its disappearance.

On June 26, 1963, Numeric was adjudged bankrupt. Blank filed a petition on November 26, 1965, to establish a security interest in the machinery he sold to Numeric. Following an evidentiary hearing the referee denied the petition, finding that no security agreement was given to Blank by Numeric, and on March 14, 1973, the district court dismissed Blank's petition for review.

Blank's right to enforce a security interest in the machinery that he sold to Numeric is dependent upon his showing that "the debtor has signed a security agreement which contains a description of the collateral . . .." Mass. Gen.Laws Ann. ch. 106, § 9-203(1) (b) (1958). The UCC defines "security agreement" as "an agreement which creates or provides for a security interest." Mass.Gen.Laws Ann. ch. 106, § 9-105(h) (1958). The UCC further defines "agreement" as "the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this chapter." Mass. Gen.Laws Ann. ch. 106, § 1-201(3) (1958).

The referee in bankruptcy found that no formal security agreement had ever been signed by Numeric. Blank has conceded that point on appeal. Instead, he contends that whether or not a formal security agreement was executed, the documents set forth above establish that a security agreement which complies with § 9-203(1) (b) was already in existence.

Thus, two questions are before this court. First, is a formal security agreement required by § 9-203(1) (b) of the UCC? Second, assuming that it is not, did a security agreement in compliance with § 9-203(1) (b) exist upon the particular facts of this case? We answer both questions in favor of the appellant and reverse the judgment of the district court.

The courts of Massachusetts have not as yet had occasion to discuss the issues raised here. However, in answering these questions, we feel free to draw upon the decisions of other jurisdictions that have adopted the UCC. As an introductory point, we note the continuing tension in all cases in this area between the need for development of uniform commercial practices among the various jurisdictions, see Mass.Gen.Laws Ann. ch. 106, § 1-102(2) (c) (1958), and the desire to recognize and effectuate the intentions of the parties in particular situations. This case seems to embody that conflict.

As to the first question posed, we have little difficulty concluding that a separate formal document entitled "security agreement" is not always necessary to satisfy the signed-writing requirement of § 9-203(1) (b). The draftsmen of the UCC ascribed two purposes to that requirement. One purpose was evidentiary, to prevent disputes as to precisely which items of property are covered by a secured interest. See Uniform Commercial Code § 9-203, Comment 3; J. K. Gill Co. v. Fireside Realty Inc., 262 Or. 486, 488, 499 P.2d 813 (1972). The second purpose of the signed-writing requirement is to serve as a Statute of Frauds, preventing the enforcement of claims based on wholly oral representations. See Uniform Commercial Code § 9-203, Comment 5.

Given these two limited purposes of § 9-203(1) (b), and the flexible definitions of "security agreement" and "agreement" found elsewhere in the Code, there seems to be no need to insist upon a separate document entitled "security agreement" as a prerequisite for enforcement of 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. See Nunnemaker Transp. Co. v. United Cal. Bank, 456 F.2d 28, 31-32 (9th Cir. 1972) ; In re United Thrift Stores, Inc., 363 F.2d 11, 14 (3d Cir. 1966) ; In re Carmichael Enterprises, Inc., 334 F. Supp. 94, 105 (N.D.Ga.1971), aff'd per curiam, 460 F.2d 1405 (5th Cir. 1972) ; In re Fibre Glass Boat Corp., 324 F. Supp. 1054, 1055-56 (S.D.Fla.), aff'd per curiam, 448 F.2d 781 (5th Cir. 1971) ; Evans v. Everett, 279 N.C. 352, 359-360, 183 S.E.2d 109 (1971).

The decidedly more difficult issue is whether, in the absence of a separate formal document, an agreement which satisfies § 9-203(1) (b) has been shown to exist on the facts of this case. A considerable body of case law has developed to the effect that a...