Reliance Equities, Inc., In re

• Decision Date: 09 June 1992
• Docket Number: No. 90-1191,90-1191
• Citation: 966 F.2d 1338
• Parties: , Bankr. L. Rep. P 74,647, 17 UCC Rep.Serv.2d 1316 In re RELIANCE EQUITIES, INC., Debtor. H. Christopher CLARK, Chapter 7 Trustee of the Estate of Reliance Equities, Inc., Plaintiff-Appellee, v. VALLEY FEDERAL SAVINGS AND LOAN ASSOCIATION and Mid Valley Mortgage Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1338

966 F.2d 1338

60 USLW 2799, Bankr. L. Rep. P 74,647, 17

UCC Rep.Serv.2d 1316

In re RELIANCE EQUITIES, INC., Debtor.

H. Christopher CLARK, Chapter 7 Trustee of the Estate of Reliance Equities, Inc., Plaintiff-Appellee, v. VALLEY FEDERAL SAVINGS AND LOAN ASSOCIATION and Mid Valley

Mortgage Corporation, Defendants-Appellants.

No. 90-1191.

United States Court of Appeals, Tenth Circuit.

June 9, 1992.

A. Bradley Bodamer of Morrison, Hecker, Curtis, Kuder & Parrish, Overland Park, Kan. (Richard Silverstein of Galchinsky & Silverstein, Denver, Colo., with him on the brief) for plaintiff-appellee.

Elizabeth J. Greenberg (Debora D. Jones, with her on the brief) of Sherman & Howard, Denver, Colo., for defendants-appellants.

Before LOGAN and EBEL, Circuit Judges, and WINDER, District Judge ^*.

EBEL, Circuit Judge.

This case involves a funding facility agreement in which the appellants provided financing for certain mortgage loans. The mortgage loans were evidenced by promissory notes and secured by deeds of trust, and both the promissory notes and the deeds of trust were assigned to the appellants as security for the financing. Ultimately, the promissory notes and the deeds of trust were sold to a third party, and the appellants contend that they held a perfected security interest in the proceeds from such sale. The bankruptcy court disallowed the claim, finding that the appellants did not hold a perfected security interest in the proceeds and further that their unsecured claim had been filed too late. The District Court for the District of Colorado upheld the bankruptcy court's decision.

We address two issues on appeal. First, did the appellants have a perfected security interest in the proceeds from the sale of the promissory notes to a third party? Second, if the appellants did not have a perfected security interest in the proceeds, was the appellants' unsecured bankruptcy claim timely? We answer both questions in the negative and affirm the decision below.

I. BACKGROUND

In June 1987, Mid Valley Mortgage Corporation ("Mid Valley") and Reliance Equities, Inc. ("Reliance") entered into a funding facility agreement. Mid Valley agreed to provide Reliance with a warehouse line of credit for the purpose of funding certain mortgage loans to be originated by Reliance. Before Mid Valley would fund a loan, Reliance was required to provide Mid Valley with an executed assignment of the promissory note evidencing the loan to be originated, which assignment (together with the funding facility agreement) served as a security instrument. When the promissory notes were sold to a third-party investor, the investor was to transfer the proceeds from that sale directly to an account designated by Mid Valley.

On July 27, 1987, within 21 days of their funding by Mid Valley, Reliance sold and transferred the promissory notes ¹ in dispute in this case to Platte Valley Federal Savings and Loan Association ("Platte Valley"). Platte Valley was instructed to forward the purchase payments to Mid Valley. Instead, however, Platte Valley placed the payments for these promissory notes into various accounts over which it exercised control. Although the accounts were ultimately for the benefit of Reliance, Platte Valley sought to set off against such funds certain obligations owed by Reliance to Platte Valley.

After Reliance filed its Chapter 7 bankruptcy petition on July 30, 1987, Platte Valley placed an administrative freeze on the accounts containing the purchase payments. Mid Valley filed a proof of claim for $350,000 in the Reliance bankruptcy case, alleging that it originally held a security interest in the mortgage loans and that it then held a security interest in the proceeds derived from the loans. Unfortunately for Mid Valley, however, it did so one day late.

In October 1988, Valley Federal Savings and Loan Association ("Valley Federal") succeeded to all of Mid Valley's rights. In January 1989, the Trustee of the Estate of Reliance ("the Trustee") and Platte Valley entered into a settlement agreement by which Platte Valley retained $100,000 of the proceeds, $25,000 remained in the account to pay contingent claims, and the remainder went to the Trustee. In July 1989, Valley Federal objected to this settlement agreement and obtained an order for adequate protection, which prohibited the Trustee from using the proceeds pending determination of the validity of Valley Federal's claim. Soon thereafter, in September 1989, Valley Savings, a Federal Savings and Loan Association ("Valley Savings"), succeeded to all of Valley Federal's rights to the claim. ²

The bankruptcy court found that Mid Valley did not hold a perfected security interest in the proceeds from the sale of the promissory notes at issue and that its claim in the Reliance bankruptcy case had been filed too late. Accordingly, it disallowed the $350,000 claim. The District Court for the District of Colorado upheld the bankruptcy court's decision.

This Court has jurisdiction pursuant to 28 U.S.C. § 158(d). In reviewing a district court's decision affirming the decision of a bankruptcy court, the court of appeals must not disturb the bankruptcy court's findings of fact unless they are clearly erroneous, but conclusions of law are reviewed de novo. In re Mullet, 817 F.2d 677, 678-79 (10th Cir.1987).

II. DISCUSSION

A. Did Mid Valley Hold a Perfected Security Interest in Proceeds?

When Reliance sold the promissory notes in dispute in this case to Platte Valley, Platte Valley was instructed to forward the purchase payments to Mid Valley. Platte Valley did not do so; instead, it placed the payments into various accounts over which it had control to be held for Reliance. We conclude that Mid Valley never perfected its security interest in those proceeds and was therefore relegated to the status of a general unsecured creditor.

The Uniform Commercial Code, as adopted by Colorado, defines "proceeds" broadly to include "whatever is received upon the sale, exchange, collection, or other disposition of collateral or proceeds.... Money, checks, deposit accounts, and the like are 'cash proceeds.' All other proceeds are 'noncash proceeds.' " Colo.Rev.Stat. § 4-9-306(1). The parties do not dispute that the funds that Platte Valley placed in its internal accounts to be held for Reliance constitute proceeds. See Hearing on Bankruptcy Appeal (May 25, 1990), R., Vol. IV, at 11, 19-20. We agree.

Mid Valley's security interest ³ in the promissory notes pledged as collateral for purposes of the funding facility agreement entitled Mid Valley to a security interest in these proceeds. See Colo.Rev.Stat. § 4-9-306(2) ("a security interest ... continues in any identifiable proceeds including collections received by the debtor"); Funding Facility Agreement p 7, R., Vol. V, Ex. 1. Section 4-9-306(2) is applicable despite the fact that Reliance never physically received the full purchase payments when it sold the promissory notes to Platte Valley because Platte Valley did place the payments into various accounts to be held for Reliance. Although Reliance's access to these accounts was restricted and they were subject to setoff, the bankruptcy court and the district court found that they were nonetheless the debtor's accounts. We do not conclude that this finding was in error. ⁴

However the proceeds might be characterized, Reliance received such proceeds on the date of its transaction with Platte Valley--July 27, 1987. As the court stated in In re Frieze, 32 B.R. 194 (Bankr.W.D.Mo.1983):

If it is admitted that a sale took place, the consideration must necessarily have been received, as a matter of law, by the debtors.... In the absence of a specifically appearing intention in what is commonly understood as a "cash" transaction, both parties contemplate the passage of title and the payment therefor shall be simultaneous.... To argue that the debtor has not received the proceeds at a time when a sale has admittedly been consummated would permit the debtor, simply by delaying or refusing to take custody of the proceeds, or the buyer through ignoring the debtor's right to their immediate possession, to extend the time in which the creditor may perfect his security interest. It cannot be assumed that the Code intended for such artificial and potentially fraudulent extensions to take place.

Id. at 196 n. 4. Thus, Mid Valley acquired a security interest in the proceeds from the sale of the promissory notes on July 27, 1987.

In order to maintain its rights to these proceeds as against other creditors of the debtor and the Trustee in bankruptcy, Mid Valley had to perfect its interest. We conclude that it did not do so. "A security interest is perfected when it has attached and when all of the applicable steps required for perfection have been taken." Colo.Rev.Stat. § 4-9-303(1). The parties agree that a security interest had attached, but disagree as to whether Mid Valley took the requisite steps to perfect that security interest. Perfection is governed by very specific requirements that are generally designed to "furnish[ ] public notice of the secured party's interest in the collateral, thereby protecting third persons against the secret or undisclosed lien." In re Van Kylen, 98 B.R. 455, 464 (Bankr.W.D.Wisc.1989).

Ordinarily, a party desiring to perfect a security interest in instruments, such as the promissory notes involved here, is required to take possession of them. Colo.Rev.Stat. § 4-9-304(1). Here, Mid Valley admits that it never obtained possession of the promissory notes in which it claims a security interest. Instead, Mid Valley contends that its security interest was temporarily perfected under the automatic perfection provisions of Colo.Rev.Stat. §§ 4-9-304(4) and 4-9-306(3) and that its rights became fixed as of the date the bankruptcy proceedings were commenced. We agree that Mid Valley's security interest in the proceeds was temporarily perfected, but hold that this interest...