UNI Imports, Inc. v. Aparacor, Inc.
1992 U.S. App. LEXIS 28371, 978 F.2d 984, 18 U.C.C. Rep. Serv. 2d (West) 993 (1992)
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Rule of Law:
A perfected security interest has priority over a subsequent judgment lien for future advances made within 45 days of the lien's attachment, or if made without knowledge of the lien, or pursuant to a commitment entered into without knowledge of the lien; however, "non-advance" obligations (such as interest, collection expenses, or attorneys' fees) that relate to a prior perfected security interest generally retain priority over a subsequent judgment lien, provided they are incurred reasonably and in good faith under the terms of a pre-existing agreement.
Facts:
- On August 12, 1987, Exchange National Bank and Aparacor, Inc. executed a Security Agreement granting Exchange a security interest in Aparacor's assets at Exchange.
- On October 9, 1987, Exchange and Aparacor executed a note establishing a revolving line of credit of up to $7.2 million, which expired on April 30, 1988.
- After the note expired, Exchange continued to make advances of funds to Aparacor without an additional written agreement.
- On November 18, 1988, UNI obtained a $66,000 judgment against Aparacor.
- On January 12, 1989, UNI attempted to enforce its judgment against Aparacor's assets at Exchange by delivering a writ of execution to the U.S. Marshals Service, which was served on Exchange the following day.
- On February 3, 1989, Exchange and Aparacor executed a "Modification Note" that purported to modify the October 1987 note and reduced Aparacor's revolving credit to $5.4 million.
- Between February 26, 1989 (45 days after Exchange was served with the writ) and March 2, 1989, Exchange advanced an additional $274,000 to Aparacor.
- On March 2, 1989, Aparacor executed an assignment for the benefit of creditors, after which Exchange made additional payments of over $2 million and credited over $4 million from Aparacor's assets against its outstanding balance.
Procedural Posture:
- UNI obtained a $66,000 judgment against Aparacor in the United States District Court for the Central District of California.
- UNI registered the judgment in the United States District Court for the Northern District of Illinois.
- UNI attempted to enforce the judgment by delivering a writ of execution to the U.S. Marshals Service, which served it on Exchange National Bank.
- Exchange National Bank refused to turn over Aparacor's assets, contending it had priority status.
- On September 27, 1990, UNI petitioned the U.S. District Court for the Northern District of Illinois for turnover of Aparacor's assets in Exchange's possession.
- The district court granted UNI's petition and ordered Exchange to turn over assets sufficient to satisfy UNI's lien, finding that the February 3, 1989 "Modification Note" was a new commitment entered into with knowledge of UNI's lien, thus not protecting advances made after the 45-day period.
- Exchange National Bank, as appellant, appealed the district court's decision to the United States Court of Appeals for the Seventh Circuit.
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Issue:
Does a perfected security interest, when facing a subsequent judgment lien, retain priority for "non-advance" expenditures (like interest and collection expenses) not explicitly covered by the 45-day rule or the commitment rule for "advances" under UCC § 9-301(4), particularly when the original underlying loan agreement has expired and a new agreement was made after knowledge of the lien?
Opinions:
Majority - Crabb, Chief District Judge
Yes, a perfected security interest can retain priority for certain "non-advance" expenditures over a subsequent judgment lien, provided they relate to the original, unexpired agreement and were incurred reasonably and in good faith, but a "modification note" entered into after the original agreement expired and after knowledge of the lien does not protect new advances made after the 45-day grace period. The court affirmed the district court's finding that the February 3, 1989 "Modification Note" was a new commitment, not a mere modification of the original expired agreement, and was entered into with full knowledge of UNI's lien. Therefore, any advances made by Exchange after February 26, 1989 (45 days after UNI's lien attached) were not protected under UCC § 9-301(4) because they were not made pursuant to a commitment entered into without knowledge of the lien. However, the court addressed the question of "non-advances" (expenses like interest, collection costs, or attorneys' fees) not directly constituting sums put at the borrower's disposal. Citing Dick Warner Cargo Handling Corp. v. Aetna Business Credit and the Permanent Editorial Board for the UCC Commentary No. 2, the court concluded that Illinois courts would likely hold that UCC § 9-301(4) does not apply to "non-advances." Such obligations are treated as retaining their unitary character, relating back to the original agreement, and thus can have priority over a later judicial lien if undertaken before the lien attached, even if they mature later. The court clarified that Exchange's right to priority for "non-advances" would be limited to those rights arising under its original, expired agreement with Aparacor, as the "modification note" was deemed a new agreement entered into post-lien. The case was remanded to determine which specific "non-advance" payments and expenditures relate to the original agreement and were incurred reasonably and in good faith.
Concurring - Ripple, Circuit Judge
Yes, a perfected security interest can retain priority for certain "non-advance" expenditures over a subsequent judgment lien, and the court's reliance on Dick Warner is sound. Judge Ripple joined the majority's judgment and its thoughtful opinion, with the sole exception of the majority's gratuitous suggestion that Dick Warner Cargo Handling Corp. v. Aetna Business Credit was "not wholly convincing." Judge Ripple respectfully declined to endorse this "unnecessary and, in my view, inaccurate estimation."
Analysis:
This case clarifies the interplay between perfected security interests and subsequent judgment liens under UCC Article 9, particularly concerning revolving lines of credit and "non-advance" obligations. By distinguishing between "advances" (covered by the 45-day rule or commitment rule in 9-301(4)) and "non-advances" (like interest or collection expenses that can relate back to the original agreement), the court provides crucial guidance for lenders. The decision emphasizes the importance of carefully structured loan agreements and timely modifications, as new commitments made with knowledge of an intervening lien will not grant the same priority protections for subsequent advances. This nuanced approach aims to balance the needs of secured creditors providing revolving credit with the protection of judgment lien creditors, albeit with a recognized "squeeze-out" risk for the latter regarding non-advances.
