UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
decided: June 2, 1972.
UNITED STATES OF AMERICA, APPELLANT,
SAMEL REFINING CORPORATION ET AL.
Kalodner, Staley and Adams, Circuit Judges. Kalodner, Circuit Judge (dissenting).
Opinion OF THE COURT
STALEY, Circuit Judge.
The United States of America brought this action to foreclose Federal tax liens upon a sum of money deposited with the defendant, First Federal Savings and Loan Association.
The facts are not in dispute and were stipulated in the district court. In 1961, Samel Refining Corporation ("Samel"), the taxpayer, entered into a five-year lease with Bernstein & Bernstein Realty Corporation for certain premises in Philadelphia, Pennsylvania. Pursuant to a provision in the lease, the sum of $9,000 was deposited in a special escrow account with the First Federal Savings and Loan Association.
On March 12, 1965, Samel entered into a security agreement with E. F. Drew & Co., Inc. ("Drew"). Drew undertook to purchase raw materials for Samel's operations, upon Samel's undertaking to repurchase such raw material and granting to Drew a continuing security interest in all of Samel's existing accounts receivable and contract rights, together with the proceeds thereof as security for Samel's obligation to pay Drew the purchase price of the raw materials.
In April of 1965, following the execution of the security agreement, Drew perfected its security interest by filing financing statements with the various appropriate state and county officers. These statements covered, inter alia, all existing and hereafter acquired accounts receivable and contract rights, together with the proceeds thereof.
In July and August of 1965, the Government filed tax liens against Samel.
In December of 1965, Samel defaulted in the performance of its obligations under the lease; however, Bernstein was able to make a new lease for the premises without any loss and has disclaimed any right to the $9,000 security deposit. This fund is claimed by both Drew and the United States. Each claim exceeds $9,000, and the successful party will consume the entire fund.
Since the facts were not in dispute, the parties filed cross-motions for summary judgment. The district court, 313 F. Supp. 684, ruled in favor of Drew, and the Government brought this appeal.
In the district court the sole issue presented and discussed involved the determination of whether the $9,000 deposit under the lease was a "contract right" to which Drew's security interest had attached. The security agreement between Drew and Samel specified that "contract rights" would have the meaning contained in Article 9 of the Uniform Commercial Code. The district court held that the deposit was within the purview of that term as defined by the Code. As initially briefed and argued on this appeal, the sole issue was again the determination of whether or not the lease deposit was a "contract right." The Government conceded that if we found that it was within the Code's definition of that term, then the deposit is subject to Drew's security interest, a lien prior in time to the Federal tax liens.
The problem presented in this appeal, therefore, turns on the issue of whether the $9,000 deposit under the lease agreement was a "contract right" as that term is defined by the Uniform Commercial Code. A ruling that the deposit was not a contract right would dispose of the entire case since no lien in favor of Drew could then have been created. This is a state law question, In re Halprin, 280 F.2d 407 (C.A.3, 1960), and since all relevant transactions took place in Pennsylvania, we must look to that state's law.
As defined by the U.C.C. and adopted by Pennsylvania, see 12A Purdon's Pa.Stat.Ann. § 9-106, a "contract right" means any right to payment under a contract not yet earned by performance and not evidenced by an instrument or chattel paper.
The Pennsylvania courts have had no occasion to rule on the question of whether a security deposit under a lease constitutes a contract right as that term is defined in the U.C.C. It is clear, however, that under Pennsylvania law a lease is considered a contract for possession of land in consideration of rent to be paid therefor. In re Wilson's Estate, 349 Pa. 646, 37 A.2d 709 (1944). Since it is clear that a lease is a contract, the question is therefore whether the right to return of the security deposit was a "right to payment under a contract not yet earned by performance."*fn1 The district court ruled that from the language of the lease itself*fn2 and from the nature of the lease agreement, it was necessary for the lessee, Samel, to faithfully perform all the obligations imposed upon it under the lease agreement before its right to payment of the unused portion of the security deposit would mature.*fn3 The district court therefore concluded that the right to payment of the unused portion of the security deposit was a contract right within the definition and intention of the Uniform Commercial Code.
The Government argues that the $9,000 was, in actuality, a simple common law pledge; a bailment of security of an intangible character with the lessor to insure against the lessee's default and protect the lessor's right to performance under the lease. This contention, however, is directly contra to the holding of the Supreme Court of Pennsylvania in Handle, to Use of Keswick Theatres Corp. v. Real Estate-Land Title & Trust Co., 316 Pa. 116, 173 A. 313 (1934). There the court clearly held that under Pennsylvania law the relationship of a tenant to the landlord with respect to a security deposit is that of creditor and debtor.
We, therefore, rule that the security deposit was a contract right within the meaning of the Code and was thus covered by the perfected security agreement of appellee Drew. Drew's lien, having been perfected prior in time to the Government's tax liens, is superior to those of the Government.*fn4
The judgment of the district court will be affirmed.
KALODNER, Circuit Judge (dissenting).
I disagree with the majority's ruling that in the instant case "the security deposit was a contract right within the meaning of the Code and was thus covered by the perfected security agreement of appellee Drew."
I am of the opinion that the right of return of a security deposit under a real estate lease is not a "contract right" within the meaning of the Uniform Commercial Code, as defined in Section 9-106. That being so, I would, without more, reverse the Order of the District Court granting summary judgment in favor of the appellee E. F. Drew & Co., Inc. and remand the cause with directions to enter summary judgment in favor of the United States.