In re Vigil Bros. Const., Inc., BAP No. AZ-94-2562-JHAs. Bankruptcy No. 90-11948-PHX-SSC.

• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit
• Writing for the Court: JONES
• Citation: In re Vigil Bros. Const., Inc., 193 B.R. 513 (B.A.P. 9th Cir. 1996)
• Decision Date: 15 March 1996
• Docket Number: BAP No. AZ-94-2562-JHAs. Bankruptcy No. 90-11948-PHX-SSC.
• Parties: In re VIGIL BROS. CONSTRUCTION, INC., Debtor. CONCRETE EQUIPMENT CO., INC., Appellant, v. James D. FOX; Vigil Bros. Construction, Inc., Appellees.

193 B.R. 513 (1996)

In re VIGIL BROS. CONSTRUCTION, INC., Debtor CONCRETE EQUIPMENT CO., INC., Appellant, v. James D. FOX; Vigil Bros. Construction, Inc., Appellees.

BAP No. AZ-94-2562-JHAs. Bankruptcy No. 90-11948-PHX-SSC.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted February 23, 1996.

Decided March 15, 1996.

Paul S. Harter, Phoenix, AZ, for Appellant.

David A. Damore, Scottsdale, AZ, for James D. Fox.

Charles L. Firestein, Phoenix, AZ, for Vigil Bros.

Before: JONES, HAGAN, and ASHLAND, Bankruptcy Judges.

OPINION

JONES, Bankruptcy Judge:

I. FACTS

Joe E. Woods, Inc., ("Woods") a general contractor, entered into a construction contract with Arizona State University. In order to fulfill the terms of the contract, Woods subcontracted with Vigil Bros. Construction, Inc. ("Vigil"). Vigil in turn subcontracted with Concrete Equipment Co., Inc. ("CECO") whereby CECO was obligated to provide equipment and labor necessary for pumping concrete. CECO fulfilled its obligations under the contract and billed Vigil. On June 25, 1989, Vigil executed a promissory note to CECO for $49,385.56 with interest accruing at a specified prime rate plus three percent (3%) per annum. On that same day, Vigil executed an assignment to CECO of the Woods' accounts receivable not to exceed $49,385.56. CECO did not file a financing statement.

On November 13, 1990, an involuntary chapter 7 petition¹ was filed against Vigil and an Order of Relief was entered on February 11, 1991. CECO filed a proof of claim in the amount of $49,385.56. The trustee objected to the claim on the grounds that CECO failed to produce evidence of a security agreement and failed to perfect its security interest. CECO responded by claiming that the assignment was an absolute assignment or in the alternative a valid security interest. Before trial, the trustee collected $35,000 on the Woods account in a full settlement between Vigil and Woods. The bankruptcy court approved this settlement by order dated September 8, 1992.

The bankruptcy court conducted an initial hearing on the trustee's objection to CECO's proof of claim on April 4, 1994, after which the court entered a pre-trial order on July 15, 1994. In the pretrial order, the court made findings of fact and conclusions of law that: the assignment was not an outright assignment, but rather a security interest governed by Article 9 of the Uniform Commercial Code ("U.C.C.") as adopted by the State of Arizona; CECO did not perfect its interest in the Woods account receivable by filing a financing statement; and perfection of a security interest required the filing of a financing statement except for an assignment of accounts which does not transfer a significant portion of the outstanding accounts of the assignor.

Trial was held on August 2, 1994 on the issue of whether Vigil assigned only an insignificant portion of its accounts, thereby excusing CECO from the requirement to file a financial statement. When asked the intention of the assignment, Steve Vigil, the President of Vigil at the time of the assignment, testified that Vigil "planned on continuing work" and that at the time Vigil did not have any money to pay CECO. Steve Vigil also testified as to the amount of accounts receivable at the time of the assignment. In a published memorandum decision² dated December 9, 1994 (amended April 19, 1995), the bankruptcy court found that Vigil had approximately $125,000 in accounts receivable and assigned $49,385.56 to CECO. In its decision, the court found that Vigil assigned a significant amount (40%) of its accounts to CECO and thus CECO was required to file a financing statement. CECO appeals this decision.

II. ISSUES

1. Did the bankruptcy court err by holding that Article 9 of the Uniform Commercial Code as adopted by the state of Arizona governs the assignment of an account receivable?

2. Did the bankruptcy court err by holding that the assignment assigned a significant part of Woods' outstanding accounts and

thus required a filed financing statement for perfection?

III. STANDARD OF REVIEW

Factual findings of the bankruptcy court are reviewed under the clearly erroneous standard. In re Bloom, 875 F.2d 224, 227 (9th Cir.1989). Clear error exists when, after examining the evidence, the reviewing court is left with a definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541-42, 92 L.Ed. 746 (1948). The determination as to whether Article 9 governs the assignment of accounts receivable and whether an exception to the filing requirement is met are legal conclusions interpreting statutory construction which is reviewed de novo. See In re Mayer, 167 B.R. 186, 188 (9th Cir. BAP1994).

IV. DISCUSSION

A. The Assignment of the Woods Account was not an Absolute Conveyance, but Instead Created a Security Interest in CECO.

CECO claims that the assignment of the Woods account acted as an absolute conveyance which divested Vigil of all right to the account and immediately vested CECO with all rights, title and interest to the account. CECO claims that because Vigil no longer owned the account, the account was not an asset of the bankruptcy estate and the bankruptcy court lacked jurisdiction to enter orders regarding the account. We hold that the assignment was not an absolute conveyance, but instead created a security interest in CECO. Thus, the account remained as property of the estate and the bankruptcy court had jurisdiction to enter orders regarding the account.

1. An assignment of accounts is governed by the Uniform Commercial Code as adopted by the State of Arizona.

Prior to Arizona's adoption of the U.C.C., an assignment of account divested the assignor of all interest in the account and created a vested interest in the assignee of all right, title and interest in the account. See Valley Nat'l Bank of Arizona v. Byrne, 101 Ariz. 363, 419 P.2d 720, 722 (1966). Pre-U.C.C., Arizona enacted the Assignment of Accounts Receivable Act, which would allow an assignee to obtain priority over present and future creditors if the assignee filed a notice of assignment. Ariz.Rev.Stat.Ann. ("A.R.S.") § 44-801 et seq. (repealed 1967). Arizona adopted the Uniform Commercial Code in 1967, effective January 1, 1968,³ which acted to repeal the assignment of accounts statute. Black, Robertshaw, Frederick, Copple & Wright, P.C. v. United States, 130 Ariz. 110, 634 P.2d 398, 400 (Ct.App. 1981). Assignment of accounts, with certain exceptions, is now governed by Article 9 of the U.C.C.A.R.S. § 47-9102 (1988).

CECO claims that the assignment did not create a security interest, but rather was an outright assignment of the Woods account. CECO cites to Arizona case law in which assignments were treated as outright assignments. The case law cited by CECO however, is not controlling. The Arizona case law cited by CECO either dealt with assignment of choses of action, which are not the same as assignment of accounts and are not governed by the U.C.C., see Martinez v. Bucyrus-Erie Co., 113 Ariz. 119, 547 P.2d 473 (1976); State Farm Mutual Ins. Co. v. St. Joseph's Hospital, 107 Ariz. 498, 489 P.2d 837 (1971), or assignment of account case law dated before Arizona's adoption of the U.C.C. in 1968. See Valley Nat'l Bank of Arizona v. Byrne, 101 Ariz. 363, 419 P.2d 720 (1966); Millsap v. Sparks, 21 Ariz. 317, 188 P. 135 (1920). The only Arizona case law on point is Black, Robertshaw, Frederick, Copple & Wright, P.C. v. United States, 130 Ariz. 110, 634 P.2d 398, 400 (Ct.App.1981), in which the court held that all assignments of accounts, with certain exceptions listed in what is now A.R.S. § 47-9104, are now governed by Article 9.

2. All assignments of accounts are governed by the U.C.C., even if the transaction was not intended to have effect as security.

CECO claims that the assignment did not create a security interest because the parties did not intend for it to have such effect. Section 47-9102 of the U.C.C. as adopted by Arizona provides:

Except as otherwise provided in § 47-9104 on excluded transactions, this chapter applies:

1. To any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts; and also

2. To any sale of accounts or chattel paper.

A.R.S. § 47-9102 (1988). This section is identical to § 9-102 of the official U.C.C. Thus, we can look to the official comments to the official text of the U.C.C. for guidance. The official comments to the 1962 and 1972 official text state "except for sales of accounts, contract rights and chattel paper, the principal test whether a transaction comes under this Article is: is the transaction intended to have effect as security." The official comment goes on to say that because "commercial financing on the basis of accounts . . . is often so conducted that the distinction between a security transfer and a sale is blurred, sale of such property is therefore covered by subsection (1)(b) whether intended for security or not. . . ." The official comment states that "the buyer then is treated as a secured party, and his interest as a security interest."

CECO argues that it was the mutual intent of the parties to have the assignment act as an absolute conveyance rather than a security interest. CECO's argument is in error. Any assignment of an account falls under the purview of Article 9 of the U.C.C.

The clear rule in Arizona is that an assignment of accounts is governed by Article 9. Black, Robertshaw, Frederick, Copple & Wright, P.C. v. United States, 130 Ariz. 110, 634 P.2d 398, 400 (Ct.App.1981). The concept that Article 9 provisions apply to any assignment of accounts has also been developed in case law in states whose commercial codes substantially parallel provisions of U.C.C. Article 9. See Major's Furniture...