Opinion
No. BK-79-486
April 17, 1980
Former Bankruptcy Act — Title to Property — Unperfected Security Interest
A trustee was entitled to the creditor-seller's restaurant equipment and furnishings as a hypothetical lien creditor under Section 70c of the Bankruptcy Act since the creditor's reversal of the names of the "debtors" and the "secured parties" rendered the financing statement unperfected under the state's Uniform Commercial Code. Therefore, the transfer was a voidable preference under Section 60b of the Act. See Sec. 70c at ¶ 2692 and Sec. 541(e) at ¶ 9512, and Sec. 60b at ¶ 2562 and Sec. 547(b) at ¶ 9529.
[Digest of Opinion]
In this proceeding the trustee sought to recover restaurant equipment and furnishings which were in the possession of the creditor. The trustee alleged that the bankrupt transferred the property to the creditor shortly before the filing of its voluntary petition in bankruptcy under circumstances which made the transfer a voidable preference within the meaning of Section 60 of the Bankruptcy Act.
The creditors had operated a restaurant and entered into a contract for the sale of the total real and personal property comprising the restaurant business. A financing statement was filed with the Secretary of State which listed the creditors as "debtors" and the buyers as "secured parties."
The trustee argued that the contract reserved a security interest in the creditors which was unperfected because the financing statement did not correctly identify the parties. The creditors contended as follows: that they and the buyers knowingly, willingly and intentionally entered into an agreement whereby they were to retain not merely a security interest, but full legal title and all the incidents of title except mere possession; that the financing statement was filed in the form in which it was solely to put third parties on inquiry as to the nature of the creditor's obligation to deliver these documents in the future; and, that the contract made it clear that "title," was to be transferred to the buyer only by the delivery of documents of title in the future, and not by psosession of the real or personal property. Further, the creditor's contended that since this transaction would be governed by Article 2 of the Uniform Commercial Code, a security interest was created in their favor by operation of law, for which no security agreement was required, and no recording of a financing statement was necessary.
However, the court found, that any security interest which arose in favor of the creditors under the article on sales became subject to Article 9 of the U.C.C. upon delivery of the property to the buyers. Further, although the parties may have agreed that title not pass to the buyer and that it remain in the seller after delivery of the goods, such retention of title was "limited in effect to a reservation of a security interest" and since possession was in the buyer, the transaction was subject to Article 9.
To the creditor's argument that no security interest was intended, the court answered that it was clear nonetheless that title was retained by the creditors to secure payment of the buyer's obligation. This made it a "security interest" within the meaning of the state's Uniform Commercial Code. Hence, the court concluded that the attempted perfection by the creditors in filing the defective financing statement was ineffective. Reversal of the names of the "debtors" and the "secured parties" resulted in no notice to interested parties of the creditor's security interest in the goods lawfully in the buyer's possession. Hence, the creditor's unperfected security interest was subordinate to the rights of the trustee in bankruptcy, and he was entitled to the equipment and furnishings.