Article 9 Security Interests in Commercial Tort Claims

Article 9 Security Interests in Commercial Tort Claims

Security interests in commercial tort claims require special attention to ensure that they are properly created and perfected under UCC Article 9. This is demonstrated by two recent Court of Appeals decisions. Ultimately, both Courts of Appeal held that the secured party's security interest did not extend to the debtor's commercial tort claims. Potential pitfalls in securing interests in commercial tort claims are reviewed in this article.

Excerpt:

Article 9 of the Uniform Commercial Code generally makes creation and perfection of security interests in a debtor's personal property or fixtures fairly straightforward. By and large a pro-creditor statute, Article 9 encourages creditors to engage in secured transactions by simplifying the legal requirements for their creation and enforcement. Security interests in commercial tort claims, however, do not fall within this relaxed framework and require special attention to ensure that they are properly created and perfected, as demonstrated by two recent Court of Appeals decisions. City Sanitation, LLC v. Allied Waste Servs. of Mass., LLC (In re Am. Cartage, Inc.), No. 10-2284, 2011 U.S. App. LEXIS 18115 (1st Cir. Aug. 31, 2011) [hereafter City Sanitation] [an enhanced version of this opinion is available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law]; Helms v. Certified Packaging Corp., 551 F.3d 675 (7th Cir. 2008) [hereafter Helms] [enhanced version / unenhanced version].

In both City Sanitation and Helms, the secured party held a perfected security interest in the debtor's equipment. In City Sanitation, the creditor also had a security interest in other assets of the debtor, including inventory, accounts, chattel paper, and general intangibles. In both cases, the debtor ended up in bankruptcy, and the trustee contested the secured party's asserted interest in certain tort claims that the debtor had against third parties. Ultimately, both Courts of Appeal held that the secured party's security interest did not extend to the debtor's commercial tort claims.

In general, Article 9 does not cover security interests in tort claims, other than commercial tort claims. UCC § 9-109(d)(12). Commercial tort claims include any "claim arising in tort with respect to which . . . the claimant is an organization." UCC § 9-102(a)(13)(A). They also include tort claims asserted by individuals if the claim "arose in the course of the claimant's business or profession; and . . . does not include damages arising out of personal injury to or death of an individual." UCC § 9-102(a)(13)(B). Thus commercial tort claims would include actions for conversion or destruction of business property, commercial disparagement, and breach of fiduciary duty.

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