Davis v. Brown (In re Brown)
Davis v. Brown (In re Brown)
Opinion of the Court
These are cross-motions for summary-judgment filed by the trustee, Carl B. Davis, and the defendant Legacy Bank on the Trustee’s complaint to avoid the Bank’s security interest in Michelle Brown’s ownership interest in the Kansas Medical Center, L.L.C.
Jurisdiction
The trustee’s complaint to determine the validity of the Bank’s lien in the debtor’s LLC units and to avoid that lien under 11 U.S.C. § 544 is a core proceeding over which this Court may exercise subject matter jurisdiction.
Summary Judgment Standards
Fed.R.Civ.P. 56(c), incorporated in adversary proceedings by Fed. R. Bankr.P. 7056, directs the entry of summary judgment in favor of a party who “shows that there is no genuine dispute as to any material fact and that the movant is entitled to a judgment as a matter of law.” The Court’s function in reviewing a motion for summary judgment is to first determine whether genuine disputes as to material facts exist for trial. In making this determination, the Court may not weigh the evidence nor resolve fact issues.
Facts
The following facts are undisputed and are established by the documentary evidence submitted. Dr. Michelle Brown borrowed $315,000 from the Bank in July of 2010. She gave the Bank a note and executed two security documents: an Assignment of Investment Property/Securities (Assignment) and an Uncertificated Securities Control Agreement (Control Agreement).
Paragraph 2 of the Assignment reads “To secure the payment ... of the [note], I assign and grant a security interest to you in all of the Property described in this Agreement that I own....” Paragraph 3 defines the “Property” as “Investment Property/Securities: 7.000 shares of Preferred Stock in KANSAS MEDICAL CENTER, LLC, held by KANSAS MEDICAL CENTER, LLC, 1124 W 21st Street, Andover, KS 67002 recorded in my name.” Other than proceeds and replacements, no other property is described in the Assignment. The Control Agreement was signed by the Bank, Dr. Brown, and a representative of Kansas Medical Center, Steven Hadley. Kansas Medical Center is referred to as the Issuer and, in the agreement, the Issuer agrees “to comply with the instructions originated by the Secured Party without further consent by the Debtor.” The property that is subject to the agreement “includes the following Investment Property and all proceeds and products ...” and describes the “7.000 shares of Preferred stock” referenced in the Assignment. Dr. Brown executed and the Bank filed a financing statement that refers to “Margin Stock/Securities (uneer-tificated): 7.000 shares of preferred stock in KANSAS MEDICAL CENTER, LLC, held by KANSAS MEDICAL CENTER, LLC, 1124 W 21st Street, Andover, KS 67002 recorded in Debtor’s [Brown’s] name.”
Dr. Brown owned 7 units in the LLC.
Included among the exhibits in support of the Bank’s summary judgment motion
Analysis
1. The LLC units are general intangibles, not investment property.
Both parties focus their arguments on whether the LLC units are adequately described in the security documents, both assuming for purposes of that discussion that the collateral is “investment property.” In doing this, they both skip a critical step in the Article Nine analysis: determining into what collateral “type” or category the LLC units fall.
The Bank’s documents refer to the units variously as “investment property,” “un-certificated securities,” or “margin stock.” The units are none of these things. The term “investment property” is defined in § 84-9-102(a)(49) of the UCC as “a security, whether certificated or uncertificat-ed.... ” A “security” is defined in Article Eight at § 84-8-102(a)(15) and its definition applies in Article Nine by virtue of § 84-9-102(b). A “security” is defined as an “obligation of an issuer or a share, participation or other interest in an issuer or in property or an enterprise of an is
(c) An interest in a partnership or limited liability company is not a security unless it is dealt in or traded on securities exchanges or in securities markets, its terms expressly provide that it is a security governed by this article, or it is an investment company security. However, an interest in a partnership or limited liability company is a financial asset if it is held in a securities account.17
None of the conditions listed in § 8-103(c) are met by the units in question here. The units are not traded on any market and the operating agreement makes no provision for Article Eight to apply to them. KMC is a hospital, not an investment company. Because these units are not securities under Article Eight, they cannot be investment property under Article Nine.
Instead, these units are general intangibles. That term is defined at § 84-9-102(a)(42) as—
any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.18
As these units fit none of the enumerated exclusions, particularly investment property, they fall into the catch-all category of personal property and are general intangibles.
2. The Bank’s Assignment and Control Agreement suffice (just barely) to attach a security interest in general intangibles.
In order for a security interest to attach to collateral, it must be enforceable. Section 9-203(b) sets out three requirements for enforceability. First, the secured party must give value.
Attachment occurs if one of four conditions is met. They are: (1) the debtor signs a security agreement that describes the collateral;
The Bank documents, taken together, amount to “a security agreement that provides a description of the collateral.”
The collateral description serves the purpose of identifying that part of the debtor’s property which the secured party’s lien encumbers. UCC § 9 — 108(b) provides the yardstick for judging whether a description is adequate to the task. If it “reasonably identifies” the collateral, it is. Collateral is reasonably identified if it is identified by a “specific listing,” category, UCC collateral type, quantity, computational formula, or “any other method, if the identity of the collateral is objectively determinable.” The Bank’s description is “specific” but inaccurate because it refers to 7 shares of preferred stock in a LLC— LLCs don’t issue stock. The Bank chose the wrong category and UCC collateral type-word — LLC units aren’t securities, preferred stock or investment property. The Assignment does identify the correct quantity of ownership units, though it calls them shares of preferred stock. It is silent as to computational method. The Control Agreement’s property reference “includes” investment property, opening the possibility that KMC might be retaining something other than securities. That leaves the question under § 9 — 108(b)(6): whether the identity of the units is “objectively determinable.” Does the description “do the job assigned to it: make possible the identification of the collateral described?”
Kansas case law in this area is sparse, but on point. The Bank relies heavily on John Deere Co. v. Butler Co. Implement, Inc., where the Kansas Supreme Court considered whether a lender’s security agreement that referred to a John Deere dealer’s inventory and new and used equipment as listed on certain exhibits included after-acquired property.
Professor Clark comments that the John Deere court “may have gone too far in holding that a misclassification of farm machinery held by a dealer for sale as equipment rather than inventory was not a fatal error in description” and that “another court might conclude that an error in generic description is fatal, given the separate Article 9 categories and the ease with which the creditor could avoid the problem ....”
If the point of a reasonable description in the security documents is to make what part of the debtor’s property is encumbered “objectively determinable,” the facts in this case support my concluding that this description suffices to attach the security interest. Dr. Brown owned no stock, but she did own 7 units in the LLC. The security instrument described the number of units and identifies the issuing entity as a limited liability company. As LLCs typically do not issue “stock,” a reader could reasonably conclude that the “preferred stock” was, in fact, a membership interest. The Trustee admits that KMC issued and maintained the membership units and did not controvert that KMC wrote a letter to the Bank stating as much. And, there is no doubt that these units are what Dr. Brown offered and what the Bank received as security for the repayment of its note.
The Assignment, the Control Agreement, and the correspondence allow me to conclude that Dr. Brown granted an interest in her 7 “shares” of Kansas Medical Center, LLC. The reference to stock is incorrect, but not fatally misleading. It suggests that Dr. Brown owns, and has pledged, her 7 units of “equity” interest in the company — the nature of that interest is “objectively determinable.” By an admittedly thin margin, the Bank’s descrip
3. The Bank’s financing statement perfected its security interest in the LLC units.
A security interest in general intangibles may only be perfected by filing a financing statement.
Conclusion
The Bank’s security documents successfully attached and perfected its security interest in Michelle Brown’s membership units in Kansas Medical Center, LLC. There are no issues of material fact and the Bank is entitled to judgment as a matter of law. The Trustee’s motion for summary judgment is therefore DENIED and the Bank’s motion for summary judgment is GRANTED. Partial judgment for the Bank on Counts I and IV of the Trustee’s complaint will be entered. A judgment on decision will issue forthwith.
The Trustee is directed to prepare and submit an agreed final pretrial order on Counts II, III, and V of his complaint not later than 28 days from the entry of this order and the Clerk is directed to set this proceeding for final pretrial conference and trial thereafter.
. On July 10, 2012, the Court heard oral argument on the motions. The trustee Carl Davis appeared by counsel Kenneth Jack. Legacy Bank appeared by counsel Creath Pollack.
. Unless otherwise indicated all statutory references are to the Uniform Commercial Code [UCC] as adopted in Kansas, specifically Kansas Statutes Annotated (2011 Supp.), chapter 84, articles 8 and 9.
. 28 U.S.C. § 157(b)(1) and (b)(2)(K) and § 1334(b).
. First Sec. Bank of New Mexico, N.A. v. Pan Am. Bank, 215 F.3d 1147, 1154 (10th Cir. 2000) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)); Concrete Works of Colo., Inc. v. City and Cnty. of Denver, 36 F.3d 1513, 1518 (10th Cir. 1994) (Court may not resolve disputed questions of fact at the summary judgment stage).
. E.E.O.C. v. Lady Baltimore Foods, Inc., 643 F.Supp. 406, 407 (D.Kan. 1986) (Even if there are no genuine issue of material fact, the movant still has the burden to show it is entitled to judgment as a matter of law.).
. Adv. Dkt. 21-1 (Note); 21-2 (Assignment); and 21-4 (Control Agreement)
. Adv. Dkt. 21-1, ¶ 10.
. Adv. Dkt. 21-6.
. Adv. Dkt. 21-3, p. 2.
. Adv. Dkt. 21-3, Ex. C.
. Adv. Dkt. 21, p. 2, ¶ 3.
. Adv. Dkt. 21, p. 2, ¶ 6.
. See Kan Stat. Ann § 84-9-102(a)(12) (defining collateral as the property subject to a security interest). Types of collateral include goods, § 84-9-102(a)(44); inventory, § 84-9-102(a)(48); farm products, § 84-9-102(a)(34); equipment, § 84-9-102(a)(33); general intangibles, § 84-9-102(a)(42); accounts, § 84-9-102(a)(2); chattel paper, § 84-9-102(a)(ll); investment property, § 84-9-102(a)(49); consumer goods, § 84-9-102(a)(23); and payment intangibles, § 84-9-102(a)(61).
. Barkley and Barbara Clark, 1 The Law of Secured Transactions Under the Uniform Commercial Code, ¶ 2.04[7] (3rd ed. 2011); See also In re Turley, 172 F.3d 671 (9th Cir. 1999) (stock that auto racer had to buy as member of auto racing franchise was general intangible under UCC, not a certificated security); In re Mintz, 192 B.R. 313 (Bankr.D.Mass. 1996) (debtor’s interest in limited partnership and corresponding distribution rights were not uncertificated securities, but instead were general intangibles); In re Dreiling, 2007 WL 172364, No. 05-64189 (Bankr.W.D.Mo. Jan. 18, 2007) (Debtors’ interest in a Kansas limited liability company was a general intangible).
. Kan. Stat. Ann. § 84-8-102(a)(15).
. See Official UCC Comment. 4, § 84-8-103(c).
. Kan. Stat. Ann. § 84-8-103 (emphasis added).
. Kan. Stat. Ann. § 84-9-102(a)(42) (emphasis added).
. § 84 — 9—203(b)(1).
. § 84-9-203(b)(2).
. § 84-9-203(b)(3).
. § 84-9-203(b)(3)(A).
. § 84-9-203(b)(3)(B).
. § 84 — 9—203(b)(3)(C).
. § 84-9-203(b)(3)(D).
. See § 8-102(a)(4) defining a "certificated security" as a security that is represented by a certificate and § 8-102(a)(18) defining an "uncertificated security” as a security without a certificate.
. § 9-102(a)(72) defines a "security agreement” as an agreement that creates or provides for a security interest while § 1-201(a)(35) states that a "security interest” means an interest in personal property that secures payment or performance of an obligation.
. Adv. Dkt. 21-1, p. 2, ¶ 10.
. Adv. Dkt. 21-2, p. 1, ¶ 3.
. Adv. Dkt. 21-1, p. 3, ¶ 12; Adv. Dkt. 21-2, p. 2, ¶ 10.
. Adv. Dkt. 21-4, p. 1, ¶ 2.
. The title of the Control Agreement also misdescribes Brown’s interest in the LLC as "Uncertificated Securities.”
. § 84-9-108, Official UCC Comment 2. 10
. 232 Kan. 273, 655 P.2d 124 (1982), partially superseded, by statute on other grounds, Bank of Kansas v. Hutchinson Health Serv., 246 Kan. 83, 785 P.2d 1349 (1990)(K.S.A. § 44-717(c) was amended after John Deere to bring interpleader actions within its reach; this statute and the portion of the John Deere decision addressing its applicability in that case has no bearing on the instant case before this Court.).
. Id. at 282, 655 P.2d 124.
. Id. See also, § 84-9-110 (1996), Kansas Comment, 1996. Official UCC Comment. 2 to current § 84-9-108 notes that the current statute "retains substantially the same formulation” as the former version, § 84-9-110.
. Barkley and Barbara Clark, 1 The Law of Secured Transactions Under the Uniform Commercial Code, ¶ 2.03[3][a] (3rd ed. 2011).
. Had the Bank used a common security agreement form and claimed a lien in Brown’s "general intangibles” or "all of debt- or’s interest in Kansas Medical Center, LLC” this would be a much simpler case.
. § 84-9-310(a). See also In re Turley, 172 F.3d 671 (9th Cir. 1999) (stock that auto racer had to buy as member of auto racing franchise was general intangible under UCC, not a certificated security, and could only be perfected by filing financing statement; bank’s possession of stock certificate did not perfect security interest and was without consequence); In re Mintz, 192 B.R. 313 (Bankr.D.Mass. 1996) (debtor's interest in limited partnership and corresponding distribution rights were not uncertificated securities and bank was not required to perfect security interest therein under Article 8 of the UCC, but by filing a financing statement for general intangibles under Article 9); In re Dreiling, 2007 WL 172364, No. 05-64189 (Bankr.W.D.Mo. Jan. 18, 2007) (Security interest in debtor’s interest in Kansas limited liability company was a general intangible and required to be perfected by filing a financing statement).
. § 84-9-502(a).
. § 84 — 9-504(a) (adopting § 9-108’s "reasonably identifies” description standard).
. Adv. Dkt. 21-6.
Reference
- Full Case Name
- In re Michelle R. BROWN, Debtor. Carl B. Davis, Trustee v. Michelle R. Brown, Legacy Bank and Kansas Medical Center, L.L.C.
- Cited By
- 6 cases
- Status
- Published