1 The original loan amount was at least $166,000 because that amount, exclusive of interest and

attorneys fees is still owed to West Loop. United States Court of Appeals,

Fifth Circuit.

No. 92-2644.

In the Matter of Bobby Lynn NEWMAN, Debtor.

Gary KNOSTMAN, trustee of the estate of Bobby Lynn Newman, Appellee,

v.

WEST LOOP SAVINGS ASSOCIATION, Appellant.

June 14, 1993.

Appeal from the United States District Court For the Southern District of Texas.

Before, REYNALDO G. GARZA, WILLIAMS and JONES, Circuit Judges.

REYNALDO G. GARZA, Circuit Judge:

West Loop Savings Association ("West Loop") appeals from an adverse summary judgment

entered by the district court, which held that West Loop held an unperfected security interest in an

annuity contract assigned by the debtor Bobby Lynn Newman ("Newman"). The court held that the

annuity contract was a general intangible and, as a result, a financing statement was required to be

filed with the secretary of state in order to complete perfection. West Loop contends that the annuity

contr act is not a general intangible, but an instrument and, therefore, its security interest was

perfecte d upo n delivery. We agree with the district court that the annuity contract is a general

intangible and, therefore, the case is in all respects AFFIRMED.

BACKGROUND

West Loop is a creditor in Newman's bankruptcy. West Loop had loaned Newman an amount

in excess of $166,000. 1 As security for the loan West Loop received an assignment of an annuity

contract issued by Manufacturer s Life Insurance Company ("MLIC"). However, West Loop

neglected to file a financing statement with the Texas Secretary of State.

This action started when appellee Knostman, the trustee, filed an adversary proceeding in the2 Section 544 confers strong avoidance powers upon the trustee, and creditors who hold

unsecured interests are subordinated to the trustee. 11 U.S.C. § 544.

3 The official comment issued at the time Section 9.106 was adopted provides that:

[t]he term "general intangibles" brings under this Article miscellaneous types of

contractual rights and other personal property which are used or may be

customarily used as commercial security. bankruptcy court under Section 544 of the Bankruptcy Code. 2 While it was undisputed that West

Loop held a security interest in the annuity, it was disputed as to whether West Loop had perfected

its security interest in the annuity.

West Loop argued that the certificate was an i nst rument , which is automatically perfected

upon delivery. However, the court held that the certificate was a general intangible, and West Loop

had failed to perfect its assigned interest. The court noted the definition of a general intangible, which

reads: "any personal property (including things in action) other than goods, contracts, chattel paper,

documents, instruments and money." Tex.Bus. & Com.Code § 9.106. 3

The bankrupt cy co urt reasoned that the annuity contract is not "of a type which is in the

ordinary course of business" transferred by delivery. Tex.Bus. & Com.Code § 9.105(a)(9) (one of

the requirements for "instrument" status). The annuity contract states:

[an] assignment does not bind us until we receive it at one of our offices; we are no t responsible for its validity or its effects; it should be filed with us in duplicate; we will return

a copy.

The court determined that this language preclu des delivery of the writing together with an

assignment as an effective transfer of rights and, thus, it concluded that the certificate was not an

instrument. Because the certificate was found to be a general intangible, and West Loop did not file

a financing statement it held an unperfected security interest, which was trumped by the trustee under

Section 544(a)(1). West Loop appealed to the district court.

On appeal, the district court properly narrowed the issue as to whether the annuity contract

was an instrument or a general intangible. The court noted that the definition of instrument in this

case came down to two elements. The annuity contract must: (i) evidence a right to the payment of

money; and (ii) be of the type which is in the ordinary course of business transferred by delivery with4 The court also noted in a footnote that "[e]ven if the annuity contract were an instrument, it is

questionable whether West Loop had possession of the proper document to perfect its security

interest. West Loop had possession of the annuity certificate, not the annuity contract." an endorsement or assignment. Tex.Bus. & Com.Code 9.105(a)(9).

The district court reasoned that the annuity contract did not evidence a right to payment of

money to the person in possession of the certificate. The court focused on the contractually specified

met ho d of changing the beneficiary. It found that possession of the certificate alone witho ut

following the method of changing the beneficiary did not entitle the transferee to receive annuity

payments.

The court further elaborated that delivery of the certificate alone is insufficient to confer rights

in the assignee until, MLIC receives notice of the assignment. Therefore, it concluded that "this is

not the type of writing which is transferred by delivery with an assignment in the ordinary course of

business." Therefore, the district court affirmed the bankruptcy court on the ground that the annuity

contract was a general intangible. 4 West Loop appeals.

DISCUSSION

The only issue to be confronted on appeal is: did West Loop perfect its security interest in

the annuity contract it received from the debtor, Newman. This issue reduces to the classification of

the annuity cont ract . If the contract is a general intangible, then West Loop perfected its security

interest in the annuity; however, if the contract is an instrument, then West Loop did not perfect its

security interest. We find that the contract is a general intangible and, thus, West Loop had to file

a financing statement with the secretary of state in order to perfect its security interest. As a result

of West Loop's failure to file a fin ancing statement, they now hold an unsecured interest in the

annuity.

Standard of Review

Classification of collateral under the UCC is a question of law. S ee In re Coral Petroleum,

Inc., 50 B.R. 830, 837 (Bankr.S.D.Tex.1985). The reason that classification is a question of law is

based upon the purpose of the UCC, which is to "simplify, clarify, and modernize the law governing

commercial transactions." I d. ( citing U.C.C. § 1-102(2)(a); F irst Nat'l Bank in Grand Prairie v.5 Section 9.106 "defines" a general intangible as follows: "any personal property other than

goods, accounts, chattel paper, documents, instruments and money." Tex.Bus. & Com.Code §

9.106.

The term "general intangibles" brings under this Article miscellaneous types of

contractual rights and other personal property which are used or may become customarily

used as commercial security. Note that this catch-all definition does not apply to money

or other types of intangibles that are specifically excluded from the coverage of the Article

under Section 9.104.

Section 9.104, Uniform Commercial Code provision 9-104, excludes twelve types

of transactions from the scope of Article 9. Section 9.104's exclusions fall generally under

three main categories: (i) transactions that are subject to overriding governmental

interests; (ii) transactions that are nonconsensual; and (iii) transactions that are out of the

mainstream of commercial financing. See W. Hawkland, R. Lord, and C. Lewis, Uniform

Commercial Code Series § 9-104:01 (1988). Lone Star Life Ins. Co., 524 S.W.2d 525, 533 (Tex.Civ.App.—Dallas 1975, writ ref'd n.r.e. )). We

review questions of law de novo

. F .D.I.C. v. Ernst & Young, 967 F.2d 166, 169 (5th Ci r.1992);

Christopherson v. Allied-Signal Corp., 939 F.2d 1106, 1109 (5th Cir.1991) (en banc), cert. denied,

--- U.S. ----, 112 S.Ct. 1280, 117 L.Ed.2d 506 (1992).

General Intangible or Instrument

The UCC defines a general intangible merely by stating what is not a general intangible. 5 A

general inta ngible is essentially a bundle of rights such as those inherent in a franchise, a chose in

action, a copyright, or an annuity. S ee Flanigan's Enterps., Inc. v. Barne tt Bank of Naples, 614

So.2d 1198, 1201 (Fla.Ct.App. 5th Dist.1993) (dicta) ( citing 73 C.J.S. Property § 15 (1983)); s ee

also In re Holiday Intervals, Inc., 931 F.2d 500, 503 (8th Cir.1991) (land sale installment contract

general intangible); I

n re Nix, 864 F.2d 1209, 1211 (5th Cir.1989) (Keogh plan general intangible);

In re Hartman, 102 B.R. 90 , 93 (Bankr.N.D.Tex.1989) (one-half partnership interest general

intangible); In re Bell Fuel Corp., 99 B.R. 602, 604 (Bankr.E.D.Pa.) (contractual right to receive

insurance constitutes chose in action and thus general intangible), aff'd, 891 F.2d 281 (3d Cir.1989);

Gold Medal Prods., Inc. v. Love Enterps., Inc., 766 S.W.2d 759, 761 (Mo.Ct.App.1989) (assignment

of right to proceeds from pending lawsuit general intangible); cf Smith v. Mark Tw ain Nat'l Bank,

805 F.2d 278, 285 (8th Cir.1986) (repurchase agreement and certificate of deposit instruments); I n

re Staff Mortgage & Inv. Corp., 625 F.2d 281, 284 (9th Cir.1980) (promissory note secured by deeds6 Incidentally, the appropriate classification of an annuity appears to be an issue of first

impression.

7 If collateral is classified as an instrument, then the only way to perfect is to take possession

via a pledge. Tex.Bus. & Com.Code § 9.304(e)(1). On the other hand, if collateral is classified

as a general intangible, then the only way to perfect is to file a financing statement. See Barkley

Clark The Law

of Secured Transactions Under the Uniform Commercial Code, ¶ 7.03 (2d

Ed.1988) (hereinafter "Clark Secured Transactions "). This case painfully illustrates the problems

that creditors encounter when they fail to account for Article 9 problems. The best practice in

cases where a precise categorization is elusive, would be to comply with both requirements.

Creditors who foresee Article 9 problems when acquiring collateral are "handsomely rewarded for

their knowledge of the breadth of Article 9." Id. at ¶ 1.03. of trust instrument).

There is a dearth of case law on the classification of general intangibles. 6 In fact, most of the

cases focus on the difference between an account and a general intangible. S ee, e.g., In re Slippery

Rock Forging, Inc., 99 B.R. 679, 681 (Bankr.W.D.Pa.1989) (settlement of preference action found

not to be account and by default general intan gible). In two of the cases that were faced with the

issue of general intangible versus instrument, the courts in each instance tersely concluded that the

bundle of rights in question were general intangibles. S ee In re ESM Government Secs., Inc., 812

F.2d 1374, 1377 (11th Cir.1987) (right to payment of funds from repurchase of GNMAs was not an

account or instrument and thus general intangible); Union Inv., Inc. v. Midland-Guardian Co., 30

Oh.App.3d 59, 506 N.E.2d 271, 273 n. 2 (1986) ("Without a detailed explanation of our reasons, we

find that the [promissory] note ... is a general intangible").

Perhaps the only substantive confrontation w i th the instrument versus general intangible

classification occurred in Coral Petroleum. See Coral Petroleum, 50 B.R. at 837-39. In C oral

Petroleum, Bankruptcy Judge Manuel Leal concluded that a promissory note was an instrument. S ee

id. at 838. Interestingly, the creditor in C oral Petrol eum so ught to have the note classified as a

general intangible in order to have a perfected security interest because it did not possess the note,

but had filed a financing statement. S ee id. at 835. Conversely, herein West Loop seeks to have the

annuity classified as an instrument because it has possession, but did not file a financing statement. 7

Coral Petroleum approached the problem in a pragmatic manner. The court concluded that

the test for determining whether a writing is transferable in the ordinary course of business hinges on8 In Clark, Secured Transactions, at ¶ 7.03, p. 7-8, the author discusses Coral Petroleum, and

states:

In short, the definition of "instrument' in the UCC is broad and intentionally

incorporates standard banking practice. The fact that the note was nonnegotiable

and of limited transferability did not prevent it from being an instrument that could

be pledged as collateral and for which possession was the only proper method of

perfection.

Id.

9 We note that the annuity contract is not a "good, account[ ], chattel paper, document ... or

money." Tex.Bus. & Com.Code § 9.106. what professionals would ordinarily do to transfer such an i nterest. I d. at 838 ( citing Harris,

Non-negotiable Certificates of Deposit: An Article 9 Problem, 29 U.C.L.A.L.Rev. 330, 372 (1981)).

The court reasoned that if professionals would attach significance to possession of the writing and

treat certain collateral as an instrument, then the law should likewise treat the collateral similarly. S ee

id. 8

After carefully reviewing the record, we find no indication that this or any other annuity is

transferred in the regular course of business by endorsement. In an inst ance such as this, where

precise categorization is unclear, it seems to this court that a finding of general intangible is

warranted. The cases indicate that collateral such as certificates of deposit and promissory notes are

instruments because professionals attach significance to their possession. However, interests such

as K eo gh Plans and the contractual right to receive insurance are treated as general intangibles

because they are not custo marily transferred by delivery with endorsement. These annuities are

general intangibles because bas ed upo n the "reasonable professional standard" outlined in C oral

Petroleum there is no indication that they are regularly traded by delivery or that possession of the

annuity certificate confers the right to payment.

In a vacuum, if left to formulate our own test for distinguishing between a general intangible

and an instrument, our bench mark would begin with the definition of an instrument. 9 Section

9.105(a)(9) defines an "instrument" as "any other writing which evidences a right to the payment of

money and is not itself a security agreement or lease and is of a type of which is in the ordinary course

o f business transferred by delivery with any necessary indorsement or assignment." Tex.Bus. &10 CURRENCY AND PLACE OF PAYMENT:

All payments to or by use will be in the lawful currency of the United States of

America. We will make payments at any of our offices in the United States. We may

require proof that the person claiming any payment is entitled to it.

An assignment does not bind us until we receive it at one of our offices; we are

not responsible for its validity or its effects.... Com.Code § 9.105(a)(9). Because the annuity contract in question: (i) does not evidence a right to

payment on its face; and (ii) is not ordinarily transferred by delivery, it is not an instrument.

Further, it appears from the face of the contract that possession alone is not enough to confer

the right to payment. The Certificate reads:

Protecti on of Payments. If you choose someone other than yourself to receive payments, that

payee cannot commute, assign, or encumber the payments unless that right was granted when

the payee was chosen. The same is true if the beneficiary chooses someone else to receive

the payments.

The trustee contends, and we agree, that based upon this language possession is irrelevant to

the right to receive payments. The trustee also asserts that the certificate expressly contemplates that

persons other than the owner of the annuity contract, or the possessor of the certificate, may receive

payments. This contention is buttressed by reading the provision entitled "currency and place of

payment," wh ich co nspicuously omits any requirement of possession. 1 0 We agree with the lower

court and conclude that possession of the certificate alon e does not convey the right to receive

payments.

Further, the court below noted that the annuity contract provided that any assignment was

not binding on MLIC until it received a copy of the assignment. Consequently, the court concluded

that "the delivery of the writing together with the assignment is not sufficient to transfer the rights

conferred by the annuity certificate. Rather, the extra step of notice and delivery is required."

West Loop argues that the language in the annuity contract merely governs the rights of

MLIC vis a vis Newman. They argue that "the language quoted by the bankruptcy court has nothing

to do with the transfer of what the law requires, but only with MLIC's claimed rights." West Loop

also contends that the steps of notice and delivery apply equally in the event that a financing statement

was required and that failure in that instance would not impair their perfection.The principal case that West Loop relies on is First Nat'l. To be sure, F irst Nat'l does lay out

a tripartite test need ed fo r inst rument status. The test reads as follows: (i) a writing; (ii) that

evidences a right of payment; and (iii) is t ransferred by delivery with assignment. The appellants

tersely contend that the test is met in the instant case.

First Nat'l, however, involved a certificate of deposit. There is extensive case law holding

that a certificate of deposit is an instrument. S ee, e.g., Smith, 805 F.2d at 285. F irst Nat'l held that

the certificate of deposit was an instrument despite the fact that on its face it was "non-negotiable."

Really, the case does not appear to help here because it merely establishes the difference between a

negotiable instrument and an instrument. Rather, in the present case we are faced with a cho ice

between instrument and general intangible. In any event, West Loop has failed to prove that this

annuity contract is transferred by delivery with assignment in the ordinary course of business.

CONCLUSION

The annuity contract that Newman assigned to West L o o p was a general intangible. The

annuity contract is a general intangible principally because after applying the reasonable professional

test outli ned i

n C oral Petroleum we conclude that professionals do not attach significance to th e

possession of the annuity certificate itself. Moreover, the language of the annuity contract does not

cont emplate that the annuity is an instrument. Consequently, we find that West Loop holds an

unperfected security interest in the annuity contract, and we AFFIRM the district court's summary

judgment in favor of the trustee.