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In re Bristol Associates Inc.

decided: November 5, 1974; As Corrected, November 25, 1974.

IN THE MATTER OF BRISTOL ASSOCIATES, INC., DEBTOR; GIRARD TRUST BANK, APPELLANT


On Appeal from the United States District Court for the Eastern District of Pennsylvania; Cause No. 72-276.

Aldisert, Adams and Rosenn, Circuit Judges.

Author: Adams

Opinion OF THE COURT

ADAMS, Circuit Judge:

The Court is here asked to determine whether a Pennsylvania lender, who takes as collateral for a loan a security interest in a lessor-borrower's lease and in the rents thereunder, must comply with the filing provisions of Article 9 of the Uniform Commercial Code*fn1 to perfect its interest against attack by a Receiver in bankruptcy.

In 1969, Bristol Associates, Inc. as lessor, entered into an Agreement of Lease, letting certain store premises for a period of 10 years to the Commonwealth of Pennsylvania, agent for the Pennsylvania Liquor Control Board. Two years later, in 1971, in consideration for a loan, Bristol gave Girard Trust Bank a promissory note and, as security, assigned to Girard its interest in the lease. Girard did not record its security interest in the real estate lease by filing a financing statement under Article 9 or make any other public record of the assignment of the lease.

The following year, in 1972, Bristol filed a petition under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. (1966), and a Receiver was appointed. Apart from the first month's rent from the Commonwealth inadvertently paid to Girard, the Receiver retained all rentals and applied them to Bristol's business operations. Girard thereupon filed a reclamation petition with the Bankruptcy Court to recover the rentals paid to the Receiver under the lease that had been assigned. The Bankruptcy Court denied the petition, and the denial was affirmed by the district court. 369 F. Supp. 1 (E.D. Pa. 1973).

Under section 70(c) of the Bankruptcy Act, 11 U.S.C. § 110, and section 9-301(3) of the Code, the Receiver assumes the rights of a lien creditor. In this status, the Receiver takes priority over those other creditors of the insolvent debtor who hold unperfected security interests. Unperfected secured parties are relegated to the pool of general creditors.

If the assignment of the lease to Girard is a transaction within the scope of Article 9 and if Girard's interest has not been perfected, then Girard cannot successfully assert its security interest against the Receiver. If, however, the assignment of a lease is excluded from Article 9, the filing and perfection provisions of that Article are not applicable, and Girard's security interest in the lease and in the rents from the lease would not be subordinated to the Receiver.

The apposite statutory provisions and official Comment*fn2 provide:

§ 9-102 Policy and Scope of Article.

(1) Except as otherwise provided . . . in Section 9-104 on excluded transactions, this Article applies so far as concerns any personal property and fixtures within the jurisdiction of this State

(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property . . . .

(3) The application of this Article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or ...


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