Retenbach Constructors, Inc. v. CM Partnership, 639 S.E.2d 16 (N.C. App. 2007)
Forsyth Drywall and Fireproofing, L.L.C. (“Forsyth Drywall”) is a
North Carolina corporation; defendants are secured creditors of Forsyth
Drywall. The relevant facts are summarized as follows: In 1999 LSB loaned money
to Forsyth Drywall, secured by Forsyth Drywall's inventory, accounts,
equipment, and other collateral. LSB filed a UCC financing statement on 12
February 1999. In 2001 United Capital Funding Corp. (“UC”) was interested in
factoring some of Forsyth Drywall's accounts receivable. When UC's
investigation revealed that Forsyth Drywall's accounts receivable were part of
the collateral for LSB's loan to Forsyth Drywall and thus were subject to a
prior lien, UC requested a “first lien position” before it would factor Forsyth
Drywall's accounts. On 24 September 2001 LSB filed an amendment to its
financing statement, purporting to make a partial assignment to UC of its
“security interest” in certain of Forsyth Drywall's accounts receivable.
Thereafter, UC advanced Forsyth Drywall money in exchange for certain of
Forsyth Drywall's accounts receivable.
On 20 June 2002
Forsyth Drywall entered into a separate factoring agreement with CM, in which
CM agreed to buy Forsyth Drywall's accounts receivable, including the account
at issue herein. CM advanced money to Forsyth Drywall, which then repaid the
money it had borrowed from UC. Forsyth Drywall and CM executed a security
agreement setting out the terms of their factoring agreement. However, CM did
not file a UCC financing statement until January 2003.
On 26 June 2002 LSB
executed a second loan to Forsyth Drywall, consolidating its debt to LSB. This
loan was also secured by Forsyth Drywall's assets, inventory, accounts
receivable, and other collateral, including the account at issue in the present
case. LSB perfected its security interest in this collateral by reliance on its
1999 financing statement. In February 2003 UC executed a “reassignment” of the
first lien position to LSB.
Forsyth Drywall
later defaulted on its obligations to both LSB and CM, and filed a Chapter 7
bankruptcy petition in March 2003. Thereafter, defendants each claimed a first
priority, perfected security interest in approximately $72,500 that plaintiff
Rentenbach Constructors, Inc., owes to Forsyth Drywall. Plaintiff, which is not
a party to this appeal, filed an interpleader action in November 2004.
Defendants interpled their respective claims, and each filed a summary judgment
motion. On 26 September 2005 the trial court granted LSB's motion for summary
judgment, from which order CM appeals.
* * *
Priority
among competing security interests is governed generally by N.C. Gen.Stat. §
25-9-322 (2005), which states in relevant part that:
(a) ... Except as
otherwise provided in this section, priority among conflicting security
interests ... in the same collateral is determined according to the following
rules:
(1) Conflicting
perfected security interests ... rank according to priority in time of filing
or perfection. Priority dates from the earlier of the time a filing covering
the collateral is first made or the security interest ... is first
perfected, if there is no period thereafter when there is neither filing nor
perfection.
N.C. Gen.Stat. §
25-9-322(a)(1) (2005) (emphasis added). The “filing covering the collateral” is
a UCC-1 financing statement:
Pursuant to §§
25-9-302(1) and 25-9-303, therefore, a financing statement that identifies the
debtor, covers the collateral at issue, and contains the debtor's signature
must be filed in order to perfect a security interest of the kind at issue in
this case. Because filing is a necessary element of perfection, § 25-9-303, the
priority provision discussed above, § [25-9-322(a)(1)], essentially creates a
rule in which the first creditor to file a sufficient financing statement
has priority. [Citations omitted.]
Thus, the first
party to perfect its security interest in collateral by filing a UCC financing
statement generally will have priority over subsequent lenders who rely on the
same collateral to secure a loan.
The financing
statement may be filed before the security agreement is drafted. See N.C.
Gen.Stat. § 25-9-308(a) (2005) (A security interest is perfected if “it has
attached and all of the applicable requirements for perfection in G.S. 25-9-310
through G.S. 25-9-316 have been satisfied. A security interest is perfected
when it attaches if the applicable requirements are satisfied before the
security interest attaches.”).
“North Carolina's is
essentially a system of notice filing pursuant to which the notice provided by
a financing statement ‘indicates merely that the secured party who has filed
may have a security interest in the collateral described. Further inquiry from
the parties concerned will be necessary to disclose the complete state of
affairs.’ ‘The purpose of a notice-filing statute is to ... furnish[ ] to
others intending to enter a transaction with the debtor a starting point for
investigation which will result in fair warning concerning the transaction
contemplated.’ ” [Citations omitted.]
Accordingly, “the
financing statement's purpose is to merely alert the third party as to the need
for further investigation, never to provide a comprehensive data bank as to the
details of prior security arrangements. The notice system of the Code places
the burden of further inquiry upon anyone seeking additional information.” Thompson
v. Danner, 507 N.W.2d 550, 561 (N.D.1993) (citation omitted). In this
regard, the Commentary to N.C. Gen.Stat. § 25-9-502 states in pertinent part
that:
... This section
adopts the system of “notice filing.” What is required to be filed is ... only
a simple record providing a limited amount of information (financing
statement). The financing statement may be filed before the security interest
attaches or thereafter.... The notice itself indicates merely that a person may
have a security interest in the collateral indicated. Further
inquiry from the parties concerned will be necessary to disclose the complete
state of affairs....
Subject to certain
exceptions not at issue in the instant case, a financing statement is effective
for five years, N.C. Gen.Stat. § 25-9-515(a) (2005), during which time it may
be relied on to perfect multiple security interests, including those that
attach after the filing of the financing statement. Commentary to N.C.
Gen.Stat. § 25-9-502 states in pertinent part that:
Notice filing ...
obviates the necessity of refiling on each of a series of transactions in a
continuing arrangement[.] ... [A] financing statement is effective to encompass
transactions under a security agreement not in existence and not contemplated
at the time the notice was filed, if the indication of collateral in the
financing statement is sufficient to cover the collateral concerned.
In the above
described situation, the date of perfection relates back to the date the
financing statement was filed, provided there has been no gap during which the
financing statement had expired. See, e.g., Provident Finance Co. v.
Beneficial Finance Co., 36 N.C.App. 401, 245 S.E.2d 510 (1978) (upholding
reliance on financing statement to perfect a second loan after the first loan
was paid in full and terminated, as financing statement was not terminated and
had not expired); FN 2 In re K & P Logging, Inc., 272 B.R. 867, 876
(2001) (“financing statement which adequately describes collateral can serve to
perfect a security interest not contemplated by the parties at the time of the
filing of the financing statement”).
FN 2. CM asserts, based on dicta in this case, that the
result should be different under N.C. Gen.Stat. § 25-9-322 as it exists today.
However, the statute has been amended several times since the 1977 Provident
Finance Co. opinion, and our reading of the present version does not
indicate that a different result is required.
_________________________
In the instant case,
LSB perfected its security interest in the accounts receivable prior to CM, and
thus has a superior security interest. The record on appeal includes the
financing statement filed by LSB in 1999 listing accounts receivable as part of
the collateral covered by the financing statement, as well as the security
agreement executed by LSB and Forsyth Drywall on 26 June 2002, both of which
identify accounts receivable as collateral for LSB's loan to Forsyth Drywall.FN
3 LSB relied on the financing statement it filed in 1999 to perfect its
security interest in collateral for its 2002 loan to Forsyth Drywall.
Accordingly, its security interest was perfected upon execution of the security
agreement on 26 June 2002. The record also includes the factoring agreement
executed by CM and Forsyth Drywall on 20 June 2002, and the financing statement
filed by CM in January 2003. These documents establish that LSB perfected its
security interest on 26 June 2002, while CM did not perfect its security
interest until six months later. Consequently, LSB's security interest in the
accounts receivable has priority over that of CM.
FN 3. No party has suggested or argued that the financing
statement concerning LSB's secured interest was not properly continued or
renewed.
We have considered and rejected CM's arguments to the contrary.
Preliminarily, we note that the Official Comment to N.C. Gen.Stat. § 25-9-513
(2005) explains the implications of CM's failure to immediately perfect its
security interest:
4. Buyers of
Receivables.... While the security interest of a buyer of accounts ... (B-1) is
perfected, the debtor is not deemed to retain an interest in the sold
receivables and thus could transfer no interest in them to another buyer
(B-2)[.] ... However, for purposes of determining the rights of the debtor's
creditors and certain purchasers of accounts or chattel paper from the debtor,
while B-1's security interest is unperfected, the debtor-seller is deemed to
have rights in the sold receivables, and a competing security interest or
judicial lien may attach to those rights. See sections 9-109 and 9-318 and
[C]omment 5.
This is underscored
by the Official Commentary to N.C. Gen.Stat. § 25-9-109:
5. ... Following a debtor's outright
sale and transfer of ownership of a receivable, the debtor-seller retains no
legal or equitable rights in the receivable that has been sold. See section
9-318(a). This is so whether or not the buyer's security interest is
perfected.... However, if the buyer's interest in accounts ... is unperfected,
a ... perfected secured party, or qualified buyer can reach the sold receivable
and achieve priority over (or take free of) the buyer's unperfected security
interest under section 9-317. This is so ... for the simple reason that
sections 9-317, 9-318(b), and 9-322 make it so, as did former sections 9-301
and 9-312. Because the buyer's security interest is unperfected, for purposes
of determining the rights of creditors of and purchasers for value from the
debtor-seller, under section 9-318(b) the debtor-seller is deemed to have the
rights and title it sold. Section 9-317 subjects the buyer's unperfected interest
in accounts and chattel paper to that of the debtor-seller's lien creditor and
other persons who qualify under that section.
CM concedes that it
did not perfect its security interest until January 2003, well after LSB filed
its financing statement. Although CM executed a security agreement with Forsyth
Drywall prior to the date of LSB's 26 June 2002 loan to Forsyth Drywall, LSB
nonetheless has priority because it was the first to file a financing
statement.
CM bases its claim
to a superior security interest on the existence of an amendment to the 1999
financing statement filed by LSB. Therefore, we next consider the legal
significance of this amendment. As discussed above, the amendment states that
it is a partial assignment of LSB's “security interest” in certain accounts
receivable. CM argues that, with the mere filing of this amendment, LSB thereby
“assigned away its security interest” and “assigned its rights under its
financing statement.”FN4 CM further asserts that after LSB filed the amendment
to its original financing statement, “LSB's security interest was undisputedly
unperfected.”
FN 4. CM does not argue, and we therefore do not address, whether
the assignment by LSB of its security interest could constitute a contractual
agreement by LSB to subordinate its security interest, N.C.G.S. § 25-9-339
(2005).
LSB's amendment to the February 1999 financing statement does not
purport either to (1) assign a “bare” financing statement not associated with
any perfected security interest; or (2) to assign its priority position, freed
from any security interest. Accordingly, we do not address the parties'
arguments as to whether such assignments are possible under North Carolina
statute and common law.
In the instant case,
the financing statement amendment states that it is a partial assignment of
“any security interest” that LSB had in certain accounts receivable that were
collateral for LSB's loan to Forsyth Drywall. Under N.C. Gen.Stat. §
25-1-201(37) (2005), a security interest is “an interest in personal property
or fixtures which secures payment or performance of an obligation.”
(emphasis added). Thus, a security interest in collateral cannot be transferred
unless the underlying debt is also assigned:
A security interest
cannot exist, much less be transferred, independent from the obligation which
it secures. The security interest follows the debt. If the debt is not
transferred, neither is the security interest.
In re Leisure Time
Sports,
194 B.R. 859, 861 (9th Cir. BAP 1996) (citing Matter of DiSanto & Moore
Associates, Inc., 41 B.R. 935, 938 (N.D.Cal.1984)) (other citations
omitted). “This is not a mere technical legal requirement: To allow the
assignee of a security interest to enforce the security agreement [absent transfer
of the underlying debt] would expose the obligor to a double liability, since a
holder in due course of the promissory note clearly is entitled to recover from
the obligor.” In re Belize Airways, Ltd., 7 B.R. 604, 607
(Bankr.S.D.Fla.1980).
CM's argument rests
on assumptions drawn from the bare amendment to the financing statement.
“Obviously, absent an existing security agreement in some form or fashion, a
financing statement, without more, has no legal import or effect.” U.S. v.
Greenstreet, 912 F.Supp. 224, 228 (N.D.Tex.1996). “Furthermore, other
jurisdictions which have considered the question involved in this action have
held that it is the language in the security agreement, not the financing
statement, that determines what collateral is subject to a security
interest.... Accordingly, we hold that the security agreement, not the
financing statement, establishes the scope or the limits of the security
interest.” Dowell v. D.R. Kincaid Chair Co., 125 N.C.App. 557, 561-62,
481 S.E.2d 670, 673 (1997) (citation omitted).
In the instant case,
CM failed to include in the record either (1) any security agreement between
LSB and Forsyth Drywall other than the one executed 26 June 2002; or (2) any
security agreement between LSB and UC. Consequently, the record does not
establish the extent of LSB's security interest in the accounts receivable
under the first loan to Forsyth Drywall. Nor does it include any showing that a
portion of that first debt was assigned to UC. In the absence of a security
agreement showing an assignment of LSB's “security interest” in the accounts
receivable, there is no evidence that such an assignment took place. Indeed,
the record strongly suggests that the parties intended only to exchange their
respective priority positions with respect to the accounts receivable. For
example, the financing statement filed by LSB and the one terminated by UC bear
different file numbers, indicating that UC's loan to Forsyth Drywall was
separate from LSB's. The affidavit executed by UC executive Ivan Baker states
that the amendment was filed because UC “required that LSB assign its first
lien position in accounts receivable.” However, regardless of whether the
record proves that LSB and UC exchanged priority positions, it clearly fails
to include a security agreement showing an assignment of Forsyth Drywall's
original loan to UC, along with the corresponding security interest in certain
accounts receivable.
“In reviewing the propriety of summary
judgment, the appellate court is restricted to assessing the record before it.
Only those pleadings and other materials that have been considered by the trial
court for purposes of summary judgment and that appear in the record on appeal
are subject to appellate review. If on the basis of that record it is clear
that no genuine issue of material fact existed and that the movant was entitled
to judgment as a matter of law, summary judgment was appropriately granted.”
[Citations omitted.]
As discussed above,
CM has appealed a summary judgment order:
The moving party
bears the burden of showing that no triable issue of fact exists. This burden
can be met by proving: (1) that an essential element of the non-moving party's
claim is nonexistent; (2) that discovery indicates the non-moving party cannot
produce evidence to support an essential element of his claim; or (3) that the
non-moving party cannot surmount an affirmative defense which would bar the
claim.
Union v. Branch
Banking & Trust Co., 176 N.C.App. 711, 714 n. 2, 627
S.E.2d 276, 277-78 n. 2 (2006) (citation omitted). “ ‘Once the party seeking
summary judgment makes the required showing, the burden shifts to the nonmoving
party to produce a forecast of evidence demonstrating specific facts, as
opposed to allegations, showing that he can at least establish a prima facie
case at trial.’ ” Draughon v. Harnett Cty. Bd. of Educ., 158 N.C.App.
705, 708, 582 S.E.2d 343, 345 (2003) (quoting Gaunt v. Pittaway, 139
N.C.App. 778, 784-85, 534 S.E.2d 660, 664 (2000)), aff'd, 358 N.C. 137,
591 S.E.2d 520 (2004).
In the instant case,
LSB introduced evidence that it perfected its security interest in Forsyth
Drywall's accounts receivable several years before CM, and thus had a priority
lien on the proceeds at issue. CM has not produced any evidence to refute this showing.
Accordingly, we conclude that the trial court did not err by entering summary
judgment in favor of LSB and that the trial court's order must be
Affirmed.