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Paulman v. Gateway Venture Partners Iii, Ltd. P'ship (in Re Filtercorp, Inc.) - 163 F.3d 570 (9th Cir. 1998)

Rule:

After-acquired collateral is presumptively covered by a security agreement referencing "inventory" or "accounts receivable."

Facts:

Filtercorp, Inc., a Washington corporation which developed and distributed carbonated pads used in the food service industry to filter cooking oils, took out a series of loans from Paulman, an individual salesperson, to help fund further development and meet large orders. The loans were short term, ranging from two to three months, and memorialized by promissory notes drafted by Paulman's attorney. The parties never executed a separate security agreement. However, Paulman perfected his security interest by filing a UCC-1 financing statement on October 5, 1992. The UCC-1 statement identified the collateral as accounts receivable and materials inventory. Filtercorp defaulted on the note, and this prompted Paulman to initiate a suit in state court to enforce the same. Paulman prevailed and obtained judgment in the amount of $710,572. Meanwhile, Filtercorp also took out several loans from the Gateway Lenders, whereby Filtercorp granted Gateway Lenders a blanket security interest in all of its assets, specifically including after-acquired property. After some time, Paulman began efforts to collect on his judgment against Filtercorp. In response, Filtercorp filed voluntary Chapter 11 petitions and immediately moved for approval to use cash collateral to cover expenses. Thereafter, Filtercorp moved to sell most of its assets free and clear of liens. Paulman filed his opposition to Filtercorp’s motion for approval of the sale, claiming that the proposed sale was not an arm’s-length transaction. The court directed the parties to file summary judgment motions on their competing liens. The bankruptcy court granted summary judgment to Gateway Lenders, holding that Paulman had no security interest in any of Filtercorp’s assets because his liens did not attach to after-acquired property and none of the remaining assets could be traced to the assets in existence at the time that his security interest was created. Paulman did not seek a stay of the order of sale. Filtercorp completed the sale and transferred the assets to Gateway Lenders. Consequently, Paulman appealed the order of sale and the summary judgment order.

Issue:

Under Washington law, does a security agreement granting an interest in “inventory” or “accounts receivable” presumptively include after-acquired inventory or accounts receivable?

Answer:

Yes

Conclusion:

The Court held that Washington law would presume security interests in "inventory" and "accounts receivable" to include after-acquired property, absent evidence of intent to the contrary. Applying this rule to the security agreement at issue between Henry Paulman and Filtercorp, Inc., the Court held that Paulman had a security interest in after-acquired accounts receivable, but not in after-acquired inventory because the security agreement demonstrated an intent to limit the inventory collateral by referencing an attached inventory listing.

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