Perfection for Perfection – Object Lesson Regarding Perfection of Security Interest in Note and Trust Deed Assignment

4/1/2017

First published in the Oregon State Bar Debtor-Creditor Newsletter Vol. XXXVI, No. 1 (Spring 2017) and No. 2 (Fall 2017)

Huffman v. Gollersrud (In re Westby) 2017 Bankr. LEXIS 423, 2017 WL 1365999 (Bankr. D.Or. Feb. 13, 2017)

Debtor Tyler Westby was a real estate investor and speculator. Westby obtained loans from various lenders or “investors” and secured those with “assignments” of his interest in promissory notes and trust deeds he obtained by selling real property to third parties. A dispute arose regarding one such lender’s (the “Lender”) interest in one such piece of property (the “Property”). The chapter 7 trustee liquidated the Property and a trial was held over the Lender’s interest in the sale proceeds.

The Property changed hands multiple times. Pre-petition, Debtor sold the Property to Tony and Rosalinda Swanson (“Swansons”), and took back a note and trust deed (collectively, the “Swanson Note and TD”). In turn, the Lender loaned Debtor $100,000 (“Loan”) secured by an assignment of Debtor’s interest in the Swanson Note and TD (“First Assignment”). Under the First Assignment, Debtor also retained an interest in the Swanson Note and TD. The Swanson Note and TD, and First Assignment were duly recorded in the real property records. After the Swansons defaulted, they quitclaimed the property back to Debtor. Eventually, Debtor resold the property to Cheryl Guenther (“Guenther”), and in consideration received a note and secured trust deed (“Guenther Note and TD”). A second assignment was executed by Debtor providing Lender with an interest in the Guenther Note and TD (“Second Assignment”). The Second Assignment, Guenther Note and TD were recorded in the real property records.

Both Guenther and Debtor defaulted on their respective obligations. Guenther quitclaimed her interest in the Property to Debtor without Lender’s knowledge. Debtor subsequently filed for bankruptcy relief under chapter 7. Trustee argued that Lender did not have a security interest in the Property or sale proceeds because the First Assignment did not describe the debt it secured. The Court rejected that argument. The Court explained that the Second Assignment was an enforceable security agreement. Under ORS 79.0203(1), a security agreement attaches to collateral when it becomes enforceable against the debtor. Such an agreement becomes enforceable against a debtor and third parties when: (1) value has been given, (2) the debtor has rights in the collateral, (3) the agreement describes the collateral, and (4) the debtor has “authenticated” (e.g., signed) the security agreement. See, e.g., ORS 79.0203(2)(a)-(c); ORS 79.0102(1)(g)(A). The security agreement did not need to describe the debt it secured. Parol evidence provided evidence of the same.

The court next considered whether the Lender’s security interest was perfected. Lender argued that it was perfected by virtue of the fact that the assignments were recorded in the real property records. Under Oregon’s version of Article 9 of the Uniform Commercial Code an “assignment” of a note and trust deed is treated as personal property. Lender could only perfect his interest in the Guenther Note by filing a financing statement or taking possession of said note. The Lender did neither. The court held for the Trustee, finding that the lien was unperfected and, thus, could be avoided under 11 USC 544(a)(1). Lastly, the court rejected the Lender's argument that he was entitled to an equitable lien on the Property under an unjust enrichment theory.

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