Opinion ID: 2807852
Heading Depth: 2
Heading Rank: 2

Heading: Security Agreement

Text: Although not elaborating, the bankruptcy court concluded that Mr. Jenkins has “not sustained [his] burden of proof as to the validity and amount of [his] claims.” In re Alternate Fuels I, 2012 WL 6110429, at . The Trustee had objected to Mr. Jenkins’s claim, arguing that “[t]he Jenkins Claim lacks sufficient documentation or proof of a valid claim (i) in the amount of the claim asserted; (ii) the consideration received by AFI; and/or (iii) the secured nature of the claim asserted.” Appellants’ App., vol. 1, at 182.4 Unfortunately, the bankruptcy court did not explain in any detail whether or how Mr. Jenkins’s alleged “security” interest in AFI’s judgment proceeds was sufficient or insufficient. Unlike the majority, I believe that, by contesting the claim in these terms, the Trustee raised the issue sufficiently for us to consider the validity of the claimed security interest. I doubt whether any of Mr. Jenkins’s four promissory notes established a security agreement under Kansas law, and accordingly I doubt whether he can jump ahead of AFI’s unsecured creditors’ claims totaling about $5.7 million. Rather than decide the issue on appeal, I believe we should remand for the bankruptcy court to reach a reasoned underlying business.” Maj. Op. at 26. Few would doubt the social utility of reclaiming lands used for coal mining. Instead, what the analysis suggests is that a business owner funding a struggling business is more apt to intend to seek repayment on his advanced funds than a business owner like Mr. Jenkins who lent money to an otherwise moribund business with his own independent financial incentive without hope of the moribund business ever paying him back. 4 The bankruptcy court referenced the objection on the three bases asserted by the Trustee. Alternate Fuels I, 2012 WL 6110429, at . 13 decision on the issue, a decision we could later more meaningfully review. Because the majority prefers to press ahead, I will simply note my concerns and their bases. “Before a security interest may be enforced against the debtor, certain formal requirements must be met.”5 Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1297 (10th Cir. 1986) (applying Kansas law to determine whether a creditor in a bankruptcy proceeding had a secured interest). First, the debtor must have signed a written security agreement “that provides a description of the collateral.” Kan. Stat. Ann. § 84-9- 203(b)(3)(A). Second, the creditor must give value. Id. § 84-9-203(b)(1). Third, the debtor must have rights in the collateral. Id. § 84-9-203(b)(3)(A). Here, a remand would help us tell whether these conditions are met. Because the majority reverses the bankruptcy court’s holding that the loans should be recharacterized as investment equity and not debt, the unsecured creditors have a great interest in knowing whether AFI is a secured or unsecured creditor. In my view, based on the record, the fourth promissory note likely does not meet the requirements of a security agreement under Kansas law. I note that Mr. Jenkins did not even include this “renewal” note as part of his proof of claim. Nor do I see why he would 5 Section 101 of the Bankruptcy Code defines “security agreement” (agreement that creates or provides for a security interest), “security interest” (lien created by agreement), and “lien” (charge against or interest in property to secure payment of a debt or performance of an obligation). 11 U.S.C. § 101(50), (51), and (37), respectively. The definitions section of the Kansas secured transactions statutes defines “secured party” as a “person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding.” Kan. Stat. Ann. § 84-9-102(a)(71)(A). And it has the same definition for “security agreement” as the Bankruptcy Code. Id. § 84-9-102(a)(72). 14 have done so—in my view, the fourth promissory note does not describe as collateral either the Cabanas lawsuit’s possible judgment proceeds or the $3 million Cabanas lawsuit assignment. Instead, as I read its terms, the renewal note simply adds an additional time before five years have elapsed at which payment might become due. By my reading, the note sets an outer limit of five years in which to pay, and provides two possible earlier payment due dates—“upon reclamation bond release by the State of Missouri” or “upon . . . proceeds from the [Cabanas] lawsuit. . . .” This fourth note (March 1, 2003) contains the stock language of the three earlier notes, but it adds the language I italicize below: Principal balance plus accrued interest shall be due and payable on or before five (5) years from the date shown above at Route 2 Box 97 Adrian, Missouri 64720. This note shall be paid in full upon reclamation bond release from the State of Missouri or proceeds from lawsuit filed in Federal Court case no 02CV1182 said bonds currently being used to secure reclamation liability for Alternate Fuels, Inc. at the Blue Bound Mine. Appellants’ App., vol. VI, at 1151 (emphasis added). I cannot see how this language creates a security interest in “collateral” of the certificates of deposit or of assignment of the Cabanas lawsuit proceeds. First, for the certificates of deposit, any such reading would make no sense. As the majority notes, Mr. Jenkins, and not AFI, personally owns the $1.4 million dollars in certificates of deposit. Maj. Op. at 5. Surely AFI was not to pay its substantial debt to Mr. Jenkins from his own property. Second, as with the certificates of deposit, this language does not say that Mr. Jenkins is entitled to repayment from the “proceeds from lawsuit.” Instead, Mr. Jenkins’s note—and we should remember he wrote it—provides that the note was due upon 15 “proceeds from lawsuit.” In my view, Mr. Jenkins’s word choice of “upon” instead of “from” fails to identify collateral in a security agreement. Instead, it simply identifies an alternative, earlier moment in time when payment might become due. Nor does the 2003 renewal note identify as collateral the $3 million assignment AFI made to Mr. Jenkins that same day. Similarly, the assignment does not mention the renewal note. This complicates any effort to combine the two instruments to fashion or find a security interest in the identified collateral. I see nothing in any promissory note describing collateral sufficiently to satisfy Kan. Stat. Ann. § 84-9-203(b)(2). Because the 2003 renewal note and the Cabanas assignment are distinct, Mr. Jenkins must attempt to recover from them separately. Even with the majority’s decision not to recharacterize the loans as equity, Mr. Jenkins still should be left to recover from his promissory notes as part of the group of unsecured creditors. As for the Cabanas lawsuit assignment, “[t]he general rule is that an assignee of a nonnegotiable chose in action acquires no greater right than was possessed by his assignor, and simply stands in the shoes of the latter.” Carson v. Chevron Chem. Co., 635 P.2d 1248, 1260 (Kan. Ct. App. 1981); see also 6 Am. Jur. 2d. Assignments, § 108 (2d ed. 2015) (“As a general rule, an assignee takes the subject of the assignment with all the rights and remedies possessed by or available to the assignor.”). For these reasons, I respectfully dissent. 16