Softalk Pub. Co., Inc., In re

• Decision Date: 07 September 1988
• Docket Number: No. 86-6335,86-6335
• Parties: 6 UCC Rep.Serv.2d 1365 In re SOFTALK PUBLISHING CO., INC., Debtor. The WEBB COMPANY, a Minnesota Corporation, Plaintiff-Appellee, v. FIRST CITY BANK, et al., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1328

856 F.2d 1328

6 UCC Rep.Serv.2d 1365

In re SOFTALK PUBLISHING CO., INC., Debtor.

The WEBB COMPANY, a Minnesota Corporation, Plaintiff-Appellee, v. FIRST CITY BANK, et al., Defendant-Appellant.

No. 86-6335.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 6, 1987.

Decided Sept. 7, 1988.

Jonathan A. Tillman, Saltzburg, Ray & Bergman, Los Angeles, Cal., for defendant-appellant.

Gary E. Klausner, Robinson, Wolas & Diamant, Los Angeles, Cal., for plaintiff-appellee The Webb Co.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before FLETCHER, FARRIS and HALL, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

Defendant-Appellant First City Bank ("First City") appeals the opinion of the Bankruptcy Appellate Panel ("BAP") affirming a bankruptcy court's money judgment in favor of Plaintiff-Appellee The Webb Company ("Webb"). The bankruptcy court held, and the BAP agreed, that Webb's security interest in certain collateral of a bankrupt company is superior to that of First City. We are of substantially the same mind as the BAP, and we therefore affirm.

I

On November 3, 1983, First City (then known as "California Citizens Bank") loaned $125,000 to the Softalk Publishing Company ("Softalk"). In exchange, Softalk gave its promissory note and a security interest in certain of its assets, including its accounts receivable. On November 16, First City filed with the California Secretary of State a UCC-1 financing statement, signed by Softalk, to perfect First City's security interest in Softalk's assets.

First City used a preprinted UCC-1 form for its financing statement. Where the form provided a blank space under the heading, "The FINANCING STATEMENT covers the following types or items of property," First City wrote, "See Attached." It then attached a separate sheet upon which was typed:

As security for and in consideration of all present and any future advances or other obligations debtor hereby grants California Citizens Bank a security interest in all of the following types or items of property ("Collateral" herein) in which the debtor now has or hereafter acquires any right, title, or interest, or rights present and future, wheresoever located and whether in the possession of the debtor, a warehouseman, bailee, trustee or any other person, and all increases therein and products and proceeds thereof. Proceeds include but are not limited to inventory, returned merchandise, accounts, accounts receivable, chattel, paper, general intangibles, insurance proceeds, documents, money, goods, equipment, instruments, and any other tangible or intangible property arising under the sale, lease or other disposition of collateral:

Nothing followed the colon.

Softalk continued to maintain a checking account at First City, into which it deposited proceeds of accounts receivable.

Four months later, on March 1, 1984, Webb, having extended nearly $1 million in credit to Softalk, obtained a security agreement covering Softalk's accounts receivable, accounts, contract rights, and proceeds. Webb filed a financing statement on April 12, the validity of which is uncontested here. At all material times, Softalk owed Webb not less than $400,000.

On August 17, 1984, First City withdrew $78,343.14 from Softalk's account and applied the funds to an outstanding obligation of Softalk to First City. The funds included proceeds of Softalk's accounts receivable.

Softalk filed for bankruptcy under Chapter 7 on August 22, 1984. Webb filed a complaint in the bankruptcy court, contending that Webb had an interest superior to First City's in the money withdrawn by First City because First City's interest was unperfected. Webb argued that First City's financing statement failed to meet the requirements of California Commercial Code sections 9402 and 9110 because it did not provide an adequate description of the collateral. The bankruptcy court granted a partial summary judgment holding that First City's security interest was unperfected and entered a money judgment in favor of Webb for $78,343.14 plus interest from August 17, 1984 at 10 percent per annum.

First City appealed to the BAP, which affirmed the bankruptcy court. In re Softalk Pub. Co., 64 B.R. 523 (9th Cir. BAP 1986). This appeal followed.

II

Because we are in as good a position as the BAP to review the bankruptcy court, we review the bankruptcy court's decision independently. See Kupetz v. Elaine Monroe Assoc., Inc. (In re Wolf & Vine, Inc.), 825 F.2d 197, 199 (9th Cir.1987) (appeal from district court review of bankruptcy court). We review the bankruptcy court's conclusions of law de novo, and its factual findings under the clearly erroneous standard. Renner v. State of Ariz. Dep't of Economic Sec., 822 F.2d 878, 879 (9th Cir.1987). We review a summary judgment de novo, Ferguson v. Greater Pocatello Chamber of Commerce, Inc., 848 F.2d 976, 979 (9th Cir.1988).

III

A security interest ordinarily arises upon the parties' execution of a security agreement. Cal.Comm.Code Secs. 9201 & 9203. But to perfect a security interest, a creditor generally must file a financing statement. Cal.Comm.Code Sec. 9203. A perfected security interest gives the holder priority over holders of unperfected or subsequently perfected security interests in the same collateral. Cal.Comm.Code Secs. 9301(1)(a) & 9312(5).

Section 9402 states that a financing statement is sufficient if it provides the names and addresses of the debtor and the secured party, is signed by the debtor, and "contains a statement indicating the types, or describing the items, of collateral." Cal.Comm.Code Sec. 9402(1). The statute mandates no particular language, nor does it insist on a strict format for compliance. "A financing statement substantially complying with the requirements of [section 9402] is effective even though it contains minor errors which are not seriously misleading." Cal.Comm.Code Sec. 9402(8). Section 9110 sets forth the requirements for an adequate description. "For the purposes of [the Code] any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described." Cal.Comm.Code Sec. 9110.

The financing statement serves to give notice to other creditors or potential creditors that the filing creditor might have a security interest in certain assets of the named debtor. In contrast, the security agreement is a contract between a creditor and a debtor, pursuant to which the debtor encumbers its assets, granting a lien to the creditor in the specific items listed, upon the terms specified in the agreement. The differing purposes of the two documents often leads to descriptions of far less specificity in financing statements than in security agreements. The security agreement, the contract between the parties, setting forth the terms of a debt and creating legal obligations, must be adequate to its purpose. A higher degree of specificity might be necessary to define the rights of the parties. Accordingly, the Code requires that it include a "description of collateral." Cal.Comm.Code Sec. 9203(1)(a). The financing statement, on the other hand, serves merely to alert third parties to inquire further; it therefore need not offer exhaustive details. "[T]he policy of [the Code is] to simplify formal requisites and filing requirements and is designed to discourage the fanatical and impossibly refined reading of such statutory requirements in which courts have occasionally indulged themselves." U.C.C. Sec. 9-402 Comment 9; Cal.Comm.Code Sec. 9402 Comment 9. Under section 9110, a description suffices if it reasonably identifies the item described. "The test of sufficiency," the drafters wrote, "is that the description do the job assigned to it--that it make possible the identification of the thing described." U.C.C. Sec. 9-110 Comment; Cal.Comm.Code Sec. 9110 Comment.

A

First City's principal argument is "that its financing statement is not seriously misleading if at all, because it contains sufficient information to put a third party on notice that the described property may be subject to a lien and that a further search is needed to determine whether a particular asset is covered by a security agreement." According to First City, compliance with the literal commands of the Code is irrelevant to the adequacy of a financing statement; a financing statement is adequate if it puts a third party on inquiry notice regardless of the extent to which it does or does not comply with the statutory requirements. We disagree.

Although we read section 9402 liberally, see Biggins v. Southwest Bank, 490 F.2d 1304, 1307 (9th Cir.1973), the statute does spell out a few minimal requisites. One of the section 9402 requisites provides that a financing statement must contain a statement identifying or describing the collateral. See Cal.Comm.Code Sec. 9402(1). This statement need not be specific, see Cal.Comm.Code Sec. 9110, and it may contain minor errors that are not seriously misleading, see Cal.Comm.Code Sec. 9402(8), but its existence is mandatory, see Cal.Comm.Code Sec. 9402(1). As the BAP observed, "[s]ince the UCC has reduced the formal requisites of a financing statement to a minimum, there can be no acceptable excuse for failure to comply with its provisions." 64 B.R. at 525. We agree, and conclude that a financing statement is insufficient to perfect a security interest unless it contains a statement identifying or describing the collateral.

Subsection 9402(8) does not alter the result. That provision allows a financing statement to contain minor errors that are not seriously misleading. Before subsection 9402(8) will save a financing statement that contains errors, however, that financing statement must substantially comply with the remainder of section 9402. Cal.Comm.Code Sec. 9402(8). A financing statement that ignores even the few minimal mandatory requisites of section 9402 (here, by omitting the...