Summary of a Recent
Judicial
Development in
Bankruptcy
Jointly Payable Check Constituted an
"Authenticated Record" for Perfection Purposes
Jeffrey A. PetersonNational AgLaw Center Graduate Assistant
In In re Clayson, 341 B.R. 137 (Bankr. W.D.N.Y. 2006), debtor Hiram E. Clayson ("Debtor") owned and operated a dairy farm. See id. at 138. In July of 2000, the Debtor borrowed funds from Conesus Milk Producers Cooperative Association, Inc. ("Cooperative") and pledged a security interest in the Debtor's cattle. See id. The Cooperative never filed a financing statement to perfect its lien. See id. In February of 2002, the Debtor began liquidating his herd with the assistance of Empire Livestock Marketing LLC ("Auctioneer"). See id. The cattle were sold and the Auctioneer remitted a check payable to both the Debtor and the Cooperative that was never negotiated. See id. However, in March of 2003 the Auctioneer remitted a substitute check payable only to the Cooperative that the Cooperative negotiated. See id.
The Debtor filed a Chapter 7 bankruptcy petition in June of 2003. See id. The Chapter 7 trustee sought the proceeds of the substitute check as a preferential payment. See id. The Cooperative argued its lien was perfected when the Auctioneer had both knowledge of the lien and possession of the collateral – all of which occurred outside the 90-day preference period. See id.
Revised U.C.C. § 9-313(c) states the following:
With respect to collateral other than certificated securities and goods covered by a document, a secured party takes possession of collateral in the possession of a person other than the debtor, the secured party, or a lessee of the collateral from the debtor in the ordinary course of the debtor's business, when: (1) the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party's benefit; or (2) the person takes possession of the collateral after having authenticated a record acknowledging that it will hold possession of collateral for the secured party's benefit. Id. at 139 (emphasis added).
The court explained that rather than mere notification under former Article 9, the person must acknowledge possession of the proceeds on behalf of the secured creditor and that the acknowledgement must be recorded. See id. at 140. The court held that the jointly payable check constituted an authenticated record and, therefore, the lien was perfected upon the issuance of the jointly payable check and the payment to the Cooperative was not preferential. See id.
The case was decided on March 24, 2006; this summary was posted Nov. 6, 2006.