Source: https://m.openjurist.org/993/f2d/90/newman-knostman-v-west-loop-savings-association
Timestamp: 2019-05-20 07:36:57
Document Index: 465506451

Matched Legal Cases: ['§ 9', '§ 1', '§ 15', '§ 9', '§ 9', '§ 9']

993 F2d 90 Newman Knostman v. West Loop Savings Association | OpenJurist
993 F. 2d 90 - Newman Knostman v. West Loop Savings Association
993 F2d 90 Newman Knostman v. West Loop Savings Association
993 F.2d 90
62 USLW 2048, 20 UCC Rep.Serv.2d 1377
In the Matter of Bobby Lynn NEWMAN, Debtor.
Gary KNOSTMAN, trustee of the estate of Bobby Lynn Newman, Appellee,
WEST LOOP SAVINGS ASSOCIATION, Appellant.
The bankruptcy court 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:
The court determined that this language precludes 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 with an endorsement or assignment. Tex.Bus. & Com.Code 9.105(a)(9).
Classification of collateral under the UCC is a question of law. See 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." Id. (citing U.C.C. § 1-102(2)(a); First Nat'l Bank in Grand Prairie v. 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 Cir.1992); Christophersen 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).
The UCC defines a general intangible merely by stating what is not a general intangible.5 A general intangible is essentially a bundle of rights such as those inherent in a franchise, a chose in action, a copyright, or an annuity. See Flanigan's Enterps., Inc. v. Barnett Bank of Naples, 614 So.2d 1198, 1201 (Fla.Ct.App. 5th Dist.1993) (dicta) (citing 73 C.J.S. Property § 15 (1983)); see also In re Holiday Intervals, Inc., 931 F.2d 500, 503 (8th Cir.1991) (land sale installment contract general intangible); In 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 Twain Nat'l Bank, 805 F.2d 278, 285 (8th Cir.1986) (repurchase agreement and certificate of deposit instruments); In re Staff Mortgage & Inv. Corp., 625 F.2d 281, 284 (9th Cir.1980) (promissory note secured by deeds 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. See, 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 intangible). 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. See 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").
In a vacuum, if left to formulate our own test for distinguishing between a general intangible and an instrument, our benchmark 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 of business transferred by delivery with any necessary indorsement or assignment." Tex.Bus. & 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.
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."
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, p 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 p 1.03
We note that the annuity contract is not a "good, account[ ], chattel paper, document ... or money." Tex.Bus. & Com.Code § 9.106