Chase Manhattan Bank, N.A. v. J & L General Contractors, Inc.
832 S.W.2d 204, 1992 WL 175592 (1992)
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Rule of Law:
A financing statement that describes collateral as including items "listed" is insufficient to perfect a security interest under the Uniform Commercial Code if no list is actually attached or included, as such ambiguity is construed against the party seeking to perfect the lien.
Facts:
- The McWaters family owned J & L General Contractors, Inc. (J & L), a lumber hauling company.
- On October 16, 1981, the McWaters family sold their stock in J & L to Delta Oilfield Services, Inc. (Delta), and the sale agreement permitted Delta to pledge J & L's assets.
- In December 1981, Oilfield Enterprises, Inc. (OEI), a subsidiary of Delta, borrowed $8.5 million from Chase Manhattan Bank (Chase) and other banks.
- As part of the loan agreement, J & L guaranteed OEI's debt and granted the banks a security interest in its assets, though James McWaters, J & L's president, was not informed of this.
- In March 1984, OEI defaulted on the loan, and J & L failed to honor its guaranty.
- In April 1984, Delta defaulted on its payments to the McWaters family, who foreclosed and regained ownership of the now-insolvent J & L.
- The McWaters family then formed a new entity, McWaters Trucking Company.
- J & L transferred its equipment to McWaters Trucking Company in exchange for the new company assuming some of J & L's debts, but not the debt to the banks. The McWaters family was unaware of the banks' claimed security interest at the time of the transfer.
Procedural Posture:
- Chase Manhattan Bank, N.A. (Chase) sued J & L General Contractors, Inc. (J & L), McWaters Trucking Company, and James McWaters in the 253rd Judicial District Court of Liberty County, Texas, a state trial court.
- Chase alleged, among other things, that McWaters Trucking Company converted property in which Chase had a perfected security interest.
- After a bench trial, the trial court entered judgment finding that Chase's security interest was not properly perfected and denied Chase recovery against McWaters Trucking Company and James McWaters.
- Chase's Motion to Modify, Correct or Reform the Judgment was denied by operation of law.
- Chase, as appellant, appealed the judgment to the Texas Court of Appeals, an intermediate appellate court. J & L, McWaters Trucking Company, and James McWaters are the appellees.
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Issue:
Is a security interest in equipment properly perfected under the Texas Business & Commerce Code when the financing statement describes the collateral as 'All fixed assets including all equipment and fixtures listed,' but no list is attached or otherwise included with the filing?
Opinions:
Majority - Walker, Chief Justice
No. A security interest is not properly perfected when the financing statement creates ambiguity by referring to a non-existent list. The description 'All fixed assets including all equipment and fixtures listed' is insufficient because the word 'listed' implies that the security interest is limited to only specified items, and the absence of that list makes it impossible for a third party to determine what collateral is covered. The court reasoned that the burden is on the secured party to describe collateral in an unambiguous and clear manner. Any confusion arising from a deficient description must be construed strictly against the party attempting to perfect the lien. Because Chase's security interest was unperfected, it was subordinate to the rights of McWaters Trucking Company, which qualified as a buyer not in the ordinary course of business who gave value and received the collateral without knowledge of the unperfected interest.
Analysis:
This decision underscores the critical importance of precision in drafting collateral descriptions in UCC financing statements. It establishes that language of limitation, such as the word 'listed,' without the corresponding referenced document, can render a security interest unperfected. The ruling serves as a strong precedent against secured creditors who file ambiguous or incomplete financing statements, reinforcing the principle that the notice-filing system must provide clear and reliable information to subsequent creditors and purchasers. For future cases, this holding places the risk of ambiguity squarely on the filer, protecting third parties who rely on the public record.
