Lender’s Security Interest Did Not Attach to Settlement Proceeds Due to Absence of Specific Identification A security interest in substantially all
Lender’s Security Interest Did Not Attach to Settlement Proceeds Due to Absence of Specific Identification A security interest in substantially all
of the debtor’s assets, including “all tangible and intangible personal property [...] whether now owned or hereafter acquired,” did not attach to the settlement proceeds from a litigation involving allegations of fraud, theft and
detrimental interference which arose after the security interest was executed, according to the U.S. Bankruptcy and District Courts for the District of Delaware.
Under § 108(e) of the UCC, commercial tort claims must be specifically identified in the security agreement, in contrast to other kinds of collateral, which can be broadly identified by type as long as the description reasonably identifies what is described. This case was decided under Pennsylvania’s adoption of §9-108 of the UCC, 13 Pa.CS.A. § 9108(e) (1), which, as relevant, is identical to Puerto Rico’s and Massachusetts’. See P.R.
Laws Ann. tit. 19 §2218(e)(1) and Mass. Gen.
Laws ch. 106, § 9-108(e)(1). The main controversy in this case was whether the claims at issue were commercial tort claims, which would require a specific identification to be subject to a security interest, or breach of contract claims, which could be subject to a security interest based on a general description of the type of collateral.
Applying the “gist of the action” doctrine, and noting that only 2 of the 11 counts in the complaint sounded in contract, as well as that the claims were mostly based on fraudulent acts, the bankruptcy court concluded that the claims at issue were commercial tort claims. The district court agreed. A similar analysis has been employed by the U.S.
Bankruptcy Court for the District of Massachusetts. See In re JMF CAB, Inc., 614 B.R. 648, 651 (Bankr. D.
Mass. 2020). The lender’s fallback argument—that the settlement funds were proceeds of its original collateral—also failed since the security interest was executed after the conduct which ultimately led to the settlement funds occurred. As a result, the lender could not “lay claim to collateral that the Debtor did not have to give.” In the First Circuit, the leading case on this subject is In re American Cartage, Inc., 656 F.3d 82, 89 (1^(st).
Cir. 2011), which was recently discussed at length by Judge Lamoutte. See In re Puerto Rico Hospital Supply, Inc., 617 B.R. 181, 195 (Bankr. D.P.R. 2020).