CFB-5, INC. v. Cunningham
2007 WL 2050902, 2007 U.S. Dist. LEXIS 51171, 371 B.R. 175 (2007)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the Texas Uniform Commercial Code, a creditor does not obtain an enforceable security interest in collateral simply by lending funds for its purchase and later taking possession; creation of a security interest requires evidence of an agreement by the debtor to grant such an interest.
Facts:
- Vernon Hulme borrowed money from Greg Cunningham, the president of Appellant corporation CFB-5, Inc., to purchase three paintings, known as the 'Holland paintings'.
- Cunningham recorded the purchase price as a personal loan to Hulme.
- In 2002, Hulme executed a promissory note to a separate entity, Surf City-USA, Dallas, Ltd. ('Surf City'), which was secured by a pledge of Hulme's personal assets including a '50% interest in art collection.'
- At the time Hulme's bankruptcy was initiated, Greg Cunningham was in possession of some of Hulme's paintings.
- Hulme claimed the Holland paintings were property of a 'loosely framed partnership' that had existed between himself and Cunningham, a claim Cunningham denied.
- No written security agreement ever existed between Hulme and Cunningham or CFB-5, Inc. granting a security interest in the paintings.
Procedural Posture:
- Appellant, CFB-5, Inc., filed an involuntary bankruptcy petition against Vernon Hulme in the U.S. Bankruptcy Court for the Northern District of Texas.
- The case was converted to a Chapter 7 proceeding, and Appellee, James Cunningham, was appointed as the Trustee.
- The Trustee successfully moved the Bankruptcy Court for an order compelling the turnover of paintings held by Appellant's president.
- Appellant filed a claim asserting various interests (ownership, security, partnership, lien) in the paintings.
- The Trustee objected to Appellant's claim of interest.
- The Bankruptcy Court entered an 'Order Sustaining Trustee’s Objection to Claim of Interest in Artwork,' finding Appellant had no legally recognized interest.
- The Bankruptcy Court also entered an 'Order Approving Trustee’s Settlement with Surf City-USA, Dallas, Ltd.,' another creditor, over Appellant's objection.
- Appellant appealed both final orders of the Bankruptcy Court to the U.S. District Court for the Northern District of Texas.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a creditor who provides funds for a debtor to purchase assets, and later takes possession of those assets without a security agreement, have an enforceable purchase money security interest, ownership interest, or equitable lien on those assets?
Opinions:
Majority - Solis, District Judge
No. A creditor who lends purchase money and later takes possession of the resulting assets does not have an enforceable security interest, ownership interest, or equitable lien without an underlying security agreement. To create a security interest under Texas law, three elements are required: the debtor must have rights in the collateral, the secured party must give value, and there must be an evidenced security agreement. While CFB-5, Inc.'s president, Cunningham, gave value, the debtor Hulme never executed a security agreement. The court clarified that possession under Tex. Bus. & Com. Code § 9.313 only perfects a pre-existing security interest; it does not create one. Likewise, the court rejected the ownership claim because the evidence showed Cunningham made a loan to Hulme, who then purchased and owned the paintings. Finally, an equitable lien was denied because it also requires a clear intent to create a security interest, which was absent here, and the court found the debtor's testimony denying such an agreement to be credible.
Analysis:
This decision reinforces the strict formal requirements for creating a security interest under Article 9 of the Uniform Commercial Code. It serves as a strong cautionary tale for creditors, illustrating that informal arrangements, such as lending purchase money and later holding the collateral, are insufficient to establish secured status in bankruptcy. The court's distinction between the creation of a security interest (which requires an agreement) and its perfection (which can sometimes be done by possession) is a critical takeaway. This ruling underscores the necessity of clear, documented security agreements for creditors seeking to protect their interests against other creditors and the bankruptcy trustee.
