New York Law Review

Tag: security interest

  • Berkowitz v. Chavo International, Inc., 74 N.Y.2d 144 (1989): Perfecting Security Interests in Promissory Notes

    74 N.Y.2d 144 (1989)

    To perfect a security interest in a promissory note, a secured party must take possession of the note unless the note constitutes part of chattel paper, in which case perfection can occur either by possession or filing.

    Summary

    This case addresses whether a creditor’s judgment lien on a promissory note has priority over a prior security interest claimed by a financing company. Chavo International, Inc. (Chavo) assigned its receivables to Congress Talcott Corp. (Talcott) under a factoring agreement. Later, Chavo received a promissory note from Forest Lake Ltd. (Forest Lake) as payment for assets. Susan Berkowitz obtained a judgment against Chavo and sought to enforce it against the Forest Lake note. The court held that the promissory note was an ‘instrument’ under UCC Article 9, requiring Talcott to take possession to perfect its security interest. Because Talcott did not possess the note, Berkowitz’s judgment lien had priority.

    Facts

    Susan Berkowitz won an arbitration against Chavo for unpaid sales commissions and obtained a judgment in California, which was then filed in New York. Prior to Berkowitz’s claim, Chavo had a factoring agreement with Talcott, assigning all present and future receivables to Talcott as security. Subsequently, Chavo sold assets to Forest Lake, receiving a promissory note in return. The note directed payments to Talcott to reduce Chavo’s debt under the factoring agreement. Berkowitz then served a restraining notice on Forest Lake to enforce her judgment against the note’s proceeds.

    Procedural History

    Berkowitz sought to enforce her judgment against the promissory note. Talcott moved to vacate Berkowitz’s restraining notice, claiming a superior security interest. The Supreme Court granted Talcott’s motion, holding that Talcott had a perfected security interest prior to Berkowitz’s lien. The Appellate Division reversed, holding that the promissory note was an ‘instrument’ requiring possession for perfection, which Talcott lacked. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the promissory note from Forest Lake to Chavo constitutes an ‘instrument’ under UCC Article 9?

    2. Whether the promissory note constitutes ‘chattel paper’ which could be perfected by filing instead of possession?

    3. Whether Talcott’s factoring agreement gave them a security interest in the note.

    Holding

    1. Yes, because the promissory note is a writing that evidences a right to payment of money and is of a type that is transferred in the ordinary course of business.

    2. No, because the promissory note and purchase agreement, taken together, do not evidence a monetary obligation and a security interest in specific goods.

    3. Yes, because the factoring agreement between Talcott and Chavo assigned to Talcott all of Chavo’s receivables, including “all obligations of every kind at any time owing to [Chavo]”.

    Court’s Reasoning

    The court reasoned that the promissory note met the definition of an ‘instrument’ under UCC 9-105(1)(i) because it was a writing evidencing a monetary obligation. The court addressed and rejected Talcott’s argument that the note constituted chattel paper. “Chattel paper” is defined as writings that evidence both a monetary obligation and a security interest in specific goods or a lease of specific goods. The court found that the purchase agreement, taken together with the promissory note, did not create a security interest in the assets sold. Chavo retained no residual interest in the assets. The court stated, “[C]hattel paper and non-negotiable instruments lie somewhere on the spectrum between the negotiable instrument on the one hand and the account on the other; for the former possession is everything, for the latter it is nothing.” Since Talcott didn’t possess the instrument, they did not have a perfected security interest, so Berkowitz’s lien had priority. The court emphasized the importance of possession for perfecting a security interest in instruments, stating that if possession were not required, Talcott’s security interest would have prevailed. The court found that the factoring agreement was broad enough to encompass the promissory note because it included “all obligations of every kind at any time owing to [Chavo].”

  • Marine Midland Bank v. United States, 46 N.Y.2d 758 (1978): Establishing “Buyer in Ordinary Course” Status

    Marine Midland Bank v. United States, 46 N.Y.2d 758 (1978)

    A party claiming to be a “buyer in the ordinary course of business” under UCC § 9-307(1) must present evidentiary material demonstrating that the seller was in the business of selling goods of that kind.

    Summary

    Marine Midland Bank sought summary judgment against the United States, claiming priority as a buyer in the ordinary course of business. The New York Court of Appeals affirmed the Appellate Division’s decision denying the bank’s motion. The court held that the bank failed to provide sufficient evidence that the seller was actually in the business of selling the type of goods purchased, a requirement to qualify as a buyer in the ordinary course of business under UCC § 9-307(1). The court also noted that it could not grant summary judgment to the defendant (United States) because the defendant had not filed a cross-appeal.

    Facts

    Marine Midland Bank purchased goods from a seller. The bank then claimed priority over the United States’ security interest in the goods, arguing it was a buyer in the ordinary course of business. The bank moved for summary judgment based on this claim. The seller involved in the case was also the seller in the prior case, Tanbro Fabrics Corp. v. Deering Milliken.

    Procedural History

    The lower court denied Marine Midland Bank’s motion for summary judgment. The Appellate Division affirmed that decision. Marine Midland Bank appealed to the New York Court of Appeals.

    Issue(s)

    Whether Marine Midland Bank presented sufficient evidence to demonstrate that the seller was in the business of selling goods of the kind purchased, thereby entitling the bank to the status of a “buyer in the ordinary course of business” under Uniform Commercial Code § 9-307(1), and thus priority over a prior security interest.

    Holding

    No, because Marine Midland Bank failed to provide evidentiary material supporting its claim that the seller was in the business of selling goods of the kind purchased. The court also could not grant summary judgement for the defendant as it had not filed a cross-appeal.

    Court’s Reasoning

    The court emphasized that to succeed on a motion for summary judgment, the moving party must present evidentiary proof to support its allegations. In this case, Marine Midland Bank presented only a conclusory assertion that the seller was in the business of selling such goods, which was insufficient to establish its status as a buyer in the ordinary course of business under UCC § 9-307(1). The court referenced UCC § 1-201, subd [9] and § 9-307, subd [1] regarding the definition of “buyer in ordinary course of business.” The court distinguished this case from Tanbro Fabrics Corp. v. Deering Milliken, noting that the finding that the seller was a seller in the ordinary course in Tanbro was a factual finding supported by sufficient evidence in that specific case. The court stated, “In this motion for summary judgment there is no evidentiary material in the record to support plaintiff’s allegation, and conclusory assertion, that the seller from whom he purchased the goods was in the business of selling goods of that kind (Uniform Commercial Code, § 1-201, subd [9]; § 9-307, subd [1]), or that the defendant was unjustly enriched. This alone is sufficient to sustain the Appellate Division’s determination that the plaintiff is not entitled to summary judgment.” The court also noted it could not grant summary judgement to the defendant because it had not filed a cross-appeal, citing precedent: “Finally we note that we are unable to grant summary judgment to the defendant because the defendant has not taken a cross appeal to this court (City of Rye v Public Serv. Mut. Ins. Co., 34 NY2d 470, 474; People v Consolidated Edison Co. of N. Y., 34 NY2d 646, 648; Kelly’s Rental v City of New York, 44 NY2d 700, 702).”

  • Tanbro Fabrics Corp. v. Deering Milliken, Inc., 39 N.Y.2d 632 (1976): Defining ‘Buyer in Ordinary Course’ Under UCC § 9-307

    Tanbro Fabrics Corp. v. Deering Milliken, Inc., 39 N.Y.2d 632 (1976)

    A buyer in the ordinary course of business, as defined by UCC § 9-307(1), takes goods free of a security interest created by the seller, even if the buyer knows of the security interest, provided the buyer does not know that the sale violates the terms of the security agreement.

    Summary

    Tanbro Fabrics, a textile converter, sued Deering Milliken, a textile manufacturer, for conversion after Deering refused to release goods Tanbro had purchased from Mill Fabrics, another converter. Deering claimed a perfected security interest in the goods due to Mill Fabrics’ outstanding debt. The New York Court of Appeals held that Tanbro was a buyer in the ordinary course of business because Mill Fabrics occasionally sold excess goods to other converters, a practice known in the trade. Therefore, Tanbro took the goods free of Deering’s security interest. The court emphasized that the key is whether the sale is of the variety reasonably expected in the regular course of an ongoing business.

    Facts

    Deering Milliken manufactured textile fabrics and sold them to Mill Fabrics on a “bill and hold” basis, retaining a security interest in the goods to secure Mill Fabrics’ account balance.
    Mill Fabrics resold some of these goods to Tanbro Fabrics, also on a “bill and hold” basis, while the goods remained in Deering’s warehouse.
    Deering executives recommended that Tanbro purchase a specific blended fabric from Mill Fabrics, knowing Mill Fabrics had an excess supply.
    Tanbro purchased the fabric from Mill Fabrics and paid in full, but Deering refused to deliver the remaining fabric to Tanbro due to Mill Fabrics’ outstanding debt to Deering.

    Procedural History

    Tanbro sued Deering in the Supreme Court and received a favorable verdict, including compensatory and punitive damages.
    The Appellate Division modified the judgment, striking the punitive damages but otherwise affirming the lower court’s decision.
    Both parties appealed to the New York Court of Appeals.

    Issue(s)

    Whether Tanbro’s purchase of the goods from Mill Fabrics was a purchase “in the ordinary course of business” under UCC § 9-307(1), thereby freeing the goods from Deering’s security interest.

    Holding

    Yes, because the sale was of a variety reasonably expected in the regular course of an ongoing business, and Tanbro did not know the purchase violated Deering’s security agreement. Therefore, Tanbro took the goods free of Deering’s security interest.

    Court’s Reasoning

    The court reasoned that UCC § 9-307(1) protects buyers who purchase goods from a seller’s inventory in the ordinary course of business. The key inquiry is whether the sale was of the variety reasonably expected in the regular course of an ongoing business. The court noted that it was customary for converters like Mill Fabrics to sell off excess goods to other converters, making the sale to Tanbro within the ordinary course of Mill Fabrics’ business, even if such sales were infrequent. The court distinguished this case from situations involving bulk sales, distress sales, or sales of commodities outside the seller’s usual inventory.

    The court cited the official comment to § 9-307, stating that a sale by Mill Fabrics was impliedly authorized under the code if its indebtedness to Deering was to be liquidated. The court stated, “All subdivision (1) of section 9-307 requires is that the sale be of the variety reasonably to be expected in the regular course of an on-going business”.

    Regarding punitive damages, the court found no evidence that Deering acted with wanton or willful obstruction to Tanbro’s rights, or with fraud or high moral turpitude. Deering could have believed in good faith that its security interest survived the sale. Therefore, the court upheld the Appellate Division’s decision to strike the punitive damages award.

  • Albany Discount Corp. v. Mohawk Nat. Bank, 28 N.Y.2d 222 (1971): Mobile Homes as Motor Vehicles Under UCC

    Albany Discount Corp. v. Mohawk Nat. Bank, 28 N.Y.2d 222 (1971)

    Under UCC § 9-302(1)(d), a mobile home that is required to be licensed or registered as a motor vehicle under state law is considered a motor vehicle, thus requiring a financing statement to be filed to perfect a purchase money security interest, even if the home is primarily used as a residence.

    Summary

    Albany Discount Corporation (ADC) sought to recover a mobile home from Mohawk National Bank, which had seized it after a default by a subsequent possessor who mortgaged it. ADC had an earlier retail installment contract, properly filed but not refiled as required by pre-UCC law. The court addressed whether a mobile home is a “motor vehicle” under UCC § 9-302(1)(d), which would require filing a financing statement to perfect a security interest. The court held that the mobile home was a motor vehicle because it was required to be licensed or registered under the Vehicle and Traffic Law, and thus ADC’s failure to properly refile its financing statement resulted in the bank having a superior lien.

    Facts

    The La Pumees purchased a mobile home in April 1962 for personal use. The mobile home was 50 feet long and 10 feet wide, containing five furnished rooms. They executed a retail installment contract, which was assigned to Albany Discount Corporation (ADC) on the same day. ADC filed the contract on April 30, 1962, but did not refile it in May 1965, as required by the then-applicable Personal Property Law. A subsequent possessor mortgaged the mobile home to Mohawk National Bank in February 1966. After a default, the bank seized the mobile home, prompting ADC to sue for conversion.

    Procedural History

    The lower court ruled in favor of Mohawk National Bank, finding that ADC had not maintained its lien against subsequent lienors due to its failure to refile the financing statement. The Appellate Division affirmed this decision. ADC appealed to the New York Court of Appeals.

    Issue(s)

    Whether a mobile home is a “motor vehicle” required to be licensed or registered under state law, as contemplated by UCC § 9-302(1)(d), such that a financing statement must be filed to perfect a purchase money security interest.

    Holding

    Yes, because the Vehicle and Traffic Law requires house trailers to be licensed or registered if operated on highways, a mobile home falls within the definition of “motor vehicle” under UCC § 9-302(1)(d), thereby requiring the filing of a financing statement to perfect a purchase money security interest.

    Court’s Reasoning

    The court reasoned that under UCC § 9-302(1)(d), a purchase money security interest in consumer goods is automatically perfected without filing, unless the goods are “motor vehicles” required to be licensed or registered. The court looked to the Vehicle and Traffic Law, which includes house trailers (mobile homes) as vehicles requiring registration when operated on the highway. The court emphasized a functional approach, noting that the Vehicle and Traffic Law focuses on public safety and revenue, while Article 9 of the UCC concerns credit transactions. The court stated that the filing requirement for motor vehicles under the UCC reflects pre-code experience that motor vehicles are chattels of greater value, more likely to be refinanced or resold, and thus likely to remain in the stream of commerce. The court also highlighted that most states with title certification statutes include house trailers. The court explicitly stated, “Consequently, the code test is satisfied if the mobile home may be registered as a motor vehicle and the mobile home need not in fact have been registered.” While acknowledging commentary suggesting that larger, less frequently moved mobile homes might warrant different treatment, the court concluded that legislative action would be necessary to establish clear distinctions based on size, equipment, or weight. The court specifically agreed with the holding in In re Vinarsky and disagreed with Recchio v. Manufacturers & Traders Trust Co. The court affirmed the lower courts’ decisions, holding that the bank was entitled to summary judgment because ADC failed to maintain its lien against subsequent lienors by not refiling its financing statement.