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In re Bollinger Corp. - 614 F.2d 924 (3d Cir. 1980)

Rule:

Some courts adopt the American Card rule holding that a financing statement cannot operate as a security agreement when there is no language granting a security interest to a creditor. Other courts hold that as the financing statement contains a description of the collateral signed by the debtor, the financing statement may serve as the security agreement, while other courts are less liberal and hold that a financing statement coupled with other documents executed by the parties revealing an intent to create a security interest are sufficient to act as a security agreement. The U.S. Court of Appeals for the Third Circuit concludes that Pennsylvania courts would accept the logic behind the liberal approaches and reject the American Card rule imposing the requirement of a formal grant of a security interest before a security agreement may exist.

Facts:

 A third party made a loan to the debtor, the Bollinger Corporation. As evidence of the loan, the debtor executed a promissory note and signed a security agreement with the third party giving it a security interest in certain machinery and equipment. Subsequently, Bollinger entered into a loan agreement with appellee Zimmerman & Jansen, Inc. (Z&J), who paid off the remaining balance to the third party in return for the third party's assignment of the original note and security. The debtor Bollinger executed a promissory note to appellee Z&J containing a provision that the note was secured by a security agreement. No formal security agreement was ever executed. Appellee Z&J recorded a new financing statement signed by the debtor, which was subsequently adjudicated bankrupt.

Z&J asserted a secured claim against the bankrupt in the amount of $150,000, arguing that although it never signed a security agreement with Bollinger, the parties had intended that a security interest in the sum of $150,000 be created to protect the loan. Appellant trustee in bankruptcy conceded that the assignment to Z&J of the original security agreement with Bollinger gave Z&J a secured claim in the amount of $65,000, the balance owed by Bollinger to the third party at the time of the assignment. The trustee, however, refused to recognize Z&J's asserted claim of an additional secured claim of $85,000 because of the absence of a security agreement between Bollinger and Z&J. The bankruptcy court agreed and entered judgment for Z&J in the amount of $55,000, representing a secured claim in the amount of $65,000 less $ 10,000 credit received by Z&J. Appellee Z&j appealed to the United States District Court for the Western District of Pennsylvania, which reversed the bankruptcy court and entered judgment for Z&J in the full amount of the asserted $150,000 secured claim. Appellant trustee in bankruptcy sought further appellate review. 

Issue:

Was the appellee entitled to the full amount of its secured claim?

Answer:

Yes

Conclusion:

The decision was affirmed. The minimal formal requirements of a security agreement were met by the financing statement and the promissory note, and the course of dealing between the parties indicated the intent to create a security interest. Subsequent to the execution of the promissory note, Bollinger sent to the third party a list of the equipment and machinery intended as collateral under the security agreement which was to be, but never was, delivered to the third party. The parties exchanged letters clarifying whether Bollinger could substitute or replace equipment in the ordinary course of business without the third party’s consent. Such a clarification would not have been necessary had a security interest not been intended by the parties.

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