Opinion ID: 703932
Heading Depth: 1
Heading Rank: 2

Heading: The Transfer to Elmer and Ella Reeves.

Text: 13 In the second action, the trustee seeks to compel Marlin's parents, Elmer and Ella Reeves, to turn over a $200,000 payment as a voidable preference under Sec. 547 of the Bankruptcy Code. The issue is whether the transaction was a preferential repayment of Marlin's antecedent debt to his parents. 14 In March 1982, Marlin acquired an interest in a $426,000 promissory note, referred to in this litigation as the Fuchs Note. Later in 1982, Elmer and Ella lent Marlin $260,000 to finance unrelated transactions. After the Fuchs Note went into default, Marlin executed an Assignment purporting to convey all of his right, title, and interest in the Fuchs Note to his parents. The Assignment was backdated April 3, 1982. Despite the Assignment, Marlin personally pursued litigation to collect the Fuchs Note and ultimately received $325,976 in a complex settlement. In January 1987, Marlin transferred $200,000 of the settlement proceeds to his parents, within one year of his bankruptcy. See Sec. 547(b)(4)(B). Elmer's books reflected this as a partial payment of Marlin's $260,000 debt. Nevertheless, Elmer and Ella argue that the Assignment transferred ownership of the Fuchs Note to them, so that their interest in the $200,000 proceeds is superior to that of Marlin's creditors under Ark.Code Ann. Secs. 4-58-102, -105. We disagree. 15 1. The parties' intent determines whether a document purporting to effect an absolute assignment of a note will be treated instead as creating a security interest in that note. See, e.g., Major's Furn. Mart, Inc. v. Castle Credit Corp., 602 F.2d 538 (3d Cir.1979); Wambach v. Randall, 484 F.2d 572 (7th Cir.1973). The bankruptcy court and the district court found that the parties to the Assignment did not intend an absolute transfer of the Fuchs Note, but merely the creation of a security interest. In other words, Marlin's interest in the Fuchs Note became collateral securing the antecedent debt to his parents. Ample evidence supports this finding. 2 Elmer and Marlin both repeatedly referred to the Assignment as collateral or security for the $260,000 loan to Marlin. The parents conceded in the district court that the Assignment gave them a right to recover only the unpaid balance of their loan to Marlin, not Marlin's entire interest in the Fuchs Note. Marlin collected on the note by settling litigation brought in his own name. Marlin alone directed disbursement of the settlement proceeds. Thus, the Assignment of the Fuchs Note merely created a security interest. 16 2. Because Elmer and Ella had only an unperfected security interest in the Fuchs Note, Marlin's $200,000 payment to them was a preference. Article 9 of the Arkansas UCC applies to any transaction (regardless of its form) which is intended to create a security interest and includes security interests created ... by assignment. Ark.Code Ann. Secs. 4-9-102(1)(a), 4-9-102(2). A security interest in a promissory note may only be perfected by possession, and remains perfected only so long as possession is retained. See Ark.Code Ann. Secs. 4-9-105(1)(i), -304, -305; McIlroy Bank v. First Nat'l Bank of Fayetteville, 252 Ark. 558, 480 S.W.2d 127 (1972). The bankruptcy court found that Elmer and Ella did not possess the Fuchs Note when Marlin filed suit to collect the note, or when he transferred the $200,000 to his parents. Thus, they did not have a perfected security interest in the note or its proceeds, and the trustee was entitled to avoid the preferential transfer of $200,000 under Sec. 547 of the Code. 17