Law School Case Brief
In re Wood - 67 B.R. 321 (W.D.N.Y. 1986)
The casual and isolated transaction test requires the court to examine the circumstances surrounding the transaction, including the status of the assignee, to determine whether the assignment was, in fact, casual and isolated. It is not unreasonable to require a secured creditor to file if he regularly takes assignments of a debtor's accounts, but it would be unreasonable if this was not a usual practice. However, where the assignee is regularly engaged in commercial financing and routinely accepts assignments of accounts, perfection by way of filing under the Uniform Commercial Code is required regardless of the actual amount of the accounts assigned.
Edwin M. Larkin and Robert Wood were both practicing attorneys. They have had a continuing professional and personal relationship spanning a number of years. On or about March 15, 1977 Larkin loaned the sum of $10,000.00 to Wood and to the latter’s law firm (“debtors”). The debtors executed a demand promissory note at that time of execution, which included a provision for the payment of interest. No payment was made on the note by either of the debtors for a period of five years. By letter agreement dated on or about June 3, 1982, the debtors agreed to pay Larkin the sum of $1,000.00 within ten days of May 28, 1982 to be applied towards the payment of accrued interest. Subsequent payments would also be applied first to interest and then to reduction of the principal balance. In the agreement, the debtors also agreed to a limited assignment of the proceeds that might be due the debtors from two litigations in which the debtors were engaged. The litigations provided for contingency fee agreements between Wood and his clients. The assignment of the contingency proceeds contained restrictions on the assignee's right to disclose the existence of the assignment to any third parties, including the clients, or to participate in the prosecution of the underlying litigations or any settlement negotiations. On September 9, 1983, the debtors filed voluntary petitions pursuant to Chapter 11 of the Bankruptcy Code. In this proceeding, the debtors sought to avoid the security interest of Larkin and the proceeds subsequently received by the debtors from the settlement of the litigations. The bankruptcy court held that the security interest in the accounts assigned to Larkin by the debtors was unsecured due to the lack of perfection under U.C.C. § 9-302(1)(e) for failure to file a financing statement. Thus, Larkin was considered an unsecured creditor. Larkin appealed from the judgment of the Bankruptcy Court.
Was the security interest assigned to Larkin unsecured due to its failure to file a financing statement under U.C.C. § 9-302(1)(e)?
The Court held that Larkin had a perfected security interest in the accounts. The Court found that Larkin had met its burden with regard to the casual and isolated transaction test because he was not a commercial lender engaged in regularly accepting assignments from debtors. The Court noted that the record amply supported the conclusion that the transaction was between two individuals who maintained a personal and professional relationship. Such conclusion required a finding that Larkin was not regularly engaged in the business of taking accounts and, therefore, he clearly fell within the exemption from filing under § 9-302(1)(e). The Court ruled that it was error for the bankruptcy court to hold otherwise.
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