By: Micaela L. Neal
Ron Miller Enterprises, Inc. v. Lobel Fin. Corp., Inc.,No. F076205, 2019 WL 1199523 (Cal. Ct. App. Feb. 15, 2019).
A frequent source of heartburn for lenders who find it necessary to collect upon a debt is the realization that the loan documents, including specifically the security agreement, are less than perfect – not all of the “t’s” are crossed, and not all of the “i’s” are dotted. Often a question arises as to whether the lender actually has the secured interest in collateral that it thought it had. A recent decision out of California’s Fifth District Court of Appeal should alleviate some of that anxiety.
In its February 2019 decision, the Court found that a lender does not need to have one, perfect “security agreement” in order to have a valid security interest in the personal property or fixtures serving as collateral for a debt. Instead, a security agreement and the parties’ intent to create a security interest can be ascertained through consideration of several different documents.
In order to create a security interest with respect to specific collateral, the Uniform Commercial Code requires: (1) the debtor signed/authenticated a security agreement adequately describing the collateral; (2) value has been given; and (3) the debtor has rights in the collateral. The Court noted that no special wording or language is necessary to evidence an intent to create a security interest, but rather the creation of the interest depends on whether the parties intended to the transaction to have effect as security. Additionally, to prove that a security interest exists, the lender can rely upon a number of documents, including the loan application, financing statement, promissory note, and other documents.
In the case at hand, the Court found that the lender (which had filed suit) and the car dealerships to which the lender loaned money had intended to create a security interest in certain vehicles. Each time the lender made a loan advance, the dealership signed a separate collateral agreement identifying a specific vehicle, stating the advance was “for” that particular vehicle, requiring repayment of the advance upon sale of that same vehicle or by a date certain, and noting that if the vehicle is returned to lender for non-payment, the dealership would pay the deficiency balance when the lender disposed of the vehicle. The Court found that all of this together indicated an intent to create a security interest.
Additionally, the lender took physical possession of the title certificates for the vehicles identified, which the Court found bolstered the evidence of an intent to create a security interest (although it was not necessary for the creation of a security interest). Further, while the UCC-1 Financing Statements filed by the lender were insufficient alone to create a security interest, the Court found them to constitute further evidence of the intent to create a security interest. (As a side note, the Court found that UCC-1 Financing Statements are proper and sufficient where they only generally describe collateral, including describing categories of items.)
While it remains important for lenders to properly document their loan transactions and associated security interests, lenders can rest a little easier knowing that the totality of loan documents may be considered in determining whether a security interest exists.
___________________________
Micaela L. Neal is an attorney with Wanger Jones Helsley PC and practices in Fresno and Sacramento. Her practice includes frequent lender representation, with an emphasis on disputes involving contracts, debt collection, creditor’s rights, bankruptcy, partnership dissolution, breach of fiduciary duty, and indemnity. This article is intended to notify our clients and friends of changes and updates to the law and provide general information. It is not intended, nor should it be used, as legal advice, and it does not create an attorney-client relationship between the author and the reader.