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All opinions are subject to modification and technical correction prior to official publication in the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of discrepancies between the electronic version of an opinion and the print version appearing in the North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is to be considered authoritative.
RENTENBACH CONSTRUCTORS, INC., Plaintiff, v. CM PARTNERSHIP and
LEXINGTON STATE BANK, Defendants
Filed: 2 January 2007
Uniform Commercial Code--security interest--accounts receivable
The trial court did not err by granting summary judgment in favor of defendant bank
based on its determination that the bank had a priority lien position with respect to monies owed
by plaintiff to Forsyth Drywall, because: (1) defendant bank perfected its security interest in the
accounts receivable several years prior to defendant CM, and thus had a superior security
interest; (2) although CM executed a security agreement with Forsyth Drywall prior to the date of
the bank's 26 June 2002 loan to Forsyth Drywall, the bank nonetheless has priority since it was
the first to file a financing statement; and (3) in the absence of a security agreement showing an
assignment of the bank's security interest in the accounts receivable, there was no evidence that
such an assignment took place and the record strongly suggested that the parties intended only to
exchange their respective priority positions with respect to the accounts receivable.
Appeal by defendant-appellant from judgment entered 26
September 2005 by Judge Lindsay R. Davis, Jr., in Guilford County
Superior Court. Heard in the Court of Appeals 24 August 2006.
Clark Bloss & Wall, PLLC, by John F. Bloss, for defendant-
Brinkley Walser, PLLC, by G. Thompson Miller, for defendant-
Carruthers & Roth, by Kenneth R. Keller.
Defendant-appellant, CM Partnership (CM), appeals from
summary judgment entered in favor of defendant-appellee Lexington
State Bank (LSB). We affirm.
Forsyth Drywall and Fireproofing, L.L.C. (Forsyth Drywall)
is a North Carolina corporation; defendants are secured creditors
of Forsyth Drywall. The relevant facts are summarized as follows:
In 1999 LSB loaned money to Forsyth Drywall, secured by ForsythDrywall's inventory, accounts, equipment, and other collateral.
LSB filed a UCC financing statement on 12 February 1999. In 2001
United Capital Funding Corp. (UC) was interested in factoring
some of Forsyth Drywall's accounts receivable. When UC's
investigation revealed that Forsyth Drywall's accounts receivable
were part of the collateral for LSB's loan to Forsyth Drywall and
thus were subject to a prior lien, UC requested a first lien
position before it would factor Forsyth Drywall's accounts. On 24
September 2001 LSB filed an amendment to its financing statement,
purporting to make a partial assignment to UC of its security
interest in certain of Forsyth Drywall's accounts receivable.
Thereafter, UC advanced Forsyth Drywall money in exchange for
certain of Forsyth Drywall's accounts receivable.
On 20 June 2002 Forsyth Drywall entered into a separate
factoring agreement with CM, in which CM agreed to buy Forsyth
Drywall's accounts receivable, including the account at issue
herein. CM advanced money to Forsyth Drywall, which then repaid
the money it had borrowed from UC. Forsyth Drywall and CM executed
a security agreement setting out the terms of their factoring
agreement. However, CM did not file a UCC financing statement
until January 2003.
On 26 June 2002 LSB executed a second loan to Forsyth Drywall,
consolidating its debt to LSB. This loan was also secured by
Forsyth Drywall's assets, inventory, accounts receivable, and other
collateral, including the account at issue in the present case.
LSB perfected its security interest in this collateral by relianceon its 1999 financing statement. In February 2003 UC executed a
reassignment of the first lien position to LSB.
Forsyth Drywall later defaulted on its obligations to both LSB
and CM, and filed a Chapter 7 bankruptcy petition in March 2003.
Thereafter, defendants each claimed a first priority, perfected
security interest in approximately $72,500 that plaintiff
Rentenbach Constructors, Inc., owes to Forsyth Drywall. Plaintiff,
which is not a party to this appeal, filed an interpleader action
in November 2004. Defendants interpled their respective claims,
and each filed a summary judgment motion. On 26 September 2005 the
trial court granted LSB's motion for summary judgment, from which
order CM appeals.
(See footnote 1)
Standard of Review
CM appeals the entry of summary judgment in favor of LSB.
Summary judgment is proper if the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that any party is entitled to a judgment as a
matter of law. N.C. Gen. Stat. § 1A-1, Rule 56(c) (2005). In the
Each party based its claim upon the same
sequence of events. . . . Neither party has
challenged the accuracy or authenticity of the
documents establishing the occurrence of these
events. Although the parties disagree on thelegal significance of the established facts,
the facts themselves are not in dispute.
Consequently, we conclude that 'there is no
genuine issue as to any material fact'
surrounding the trial court's summary judgment
order. We next consider whether the trial
court correctly determined that [LSB] 'is
entitled to a judgment as a matter of law.'
Adams v. Jefferson-Pilot Life Ins. Co., 148 N.C. App. 356, 359, 558
S.E.2d 504, 507 (2002) (quoting N.C. Gen. Stat. § 1A-1, Rule 56
The issue before the trial court was determination of which
defendant had a priority lien position with respect to monies owed
by plaintiff to Forsyth Drywall. We agree with the parties that
the relevant transactions are governed by the Uniform Commercial
Code, N.C. Gen. Stat. § 25-1-101 et. seq
N.C. Gen. Stat. § 25-9-109(a)(1) and (3) (2005). In our
analysis, we have also made use of the Official Comment to various
sections of the UCC:
This Court has noted that the commentary to a
statutory provision can be helpful in some
cases in discerning legislative intent. In
this Court noted that since the
commentary printed with the [statute at issue]
was not enacted into law, it was not binding
but, where proper, could be given substantial
weight in our efforts to discern legislative
Parsons v. Jefferson-Pilot Corp
., 333 N.C. 420, 425, 426 S.E.2d
685, 689 (1993) (citing State v. Bogle
, 324 N.C. 190, 376 S.E.2d
745 (1989))(other citation omitted). Priority among competing security interests is governed
generally by N.C. Gen. Stat. § 25-9-322 (2005), which states in
relevant part that:
(a) . . . Except as otherwise provided in this
section, priority among conflicting security
interests . . . in the same collateral is
determined according to the following rules:
(1) Conflicting perfected security interests .
. . rank according to priority in time of
filing or perfection. Priority dates from the
earlier of the time a filing covering the
collateral is first made
or the security
interest . . . is first perfected, if there is
no period thereafter when there is neither
filing nor perfection
N.C. Gen. Stat. § 25-9-322(a)(1) (2005) (emphasis added). The
filing covering the collateral is a UCC-1 financing statement:
Pursuant to §§ 25-9-302(1) and 25-9-303,
therefore, a financing statement that
identifies the debtor, covers the collateral
at issue, and contains the debtor's signature
must be filed in order to perfect a security
interest of the kind at issue in this case.
Because filing is a necessary element of
perfection, § 25-9-303, the priority provision
discussed above, § [25-9-322(a)(1)],
essentially creates a rule in which the first
creditor to file a sufficient financing
statement has priority
In Re Environmental Aspecs, Inc
., 235 B.R. 378, 385 (E.D.N.C. 1999)
(emphasis added) (citing Finance Co. v. Finance Co
., 36 N.C. App.
S.E.2d 510 (1978)); see also
N.C. Gen. Stat. § 25-9-310(a)
(2005) (Except as otherwise provided . . . a financing statement
must be filed to perfect all security interests and agricultural
liens.). Thus, the first party to perfect its security interest
in collateral by filing a UCC financing statement generally willhave priority over subsequent lenders who rely on the same
collateral to secure a loan.
The financing statement may be filed before the security
agreement is drafted. See
N.C. Gen. Stat. § 25-9-308(a) (2005) (A
security interest is perfected if it has attached and all of the
applicable requirements for perfection in G.S. 25-9-310 through
G.S. 25-9-316 have been satisfied. A security interest is
perfected when it attaches if the applicable requirements are
satisfied before the security interest attaches.).
North Carolina's is essentially a system of notice filing
pursuant to which the notice provided by a financing statement
'indicates merely that the secured party who has filed may have a
security interest in the collateral described. Further inquiry
from the parties concerned will be necessary to disclose the
complete state of affairs.' 'The purpose of a notice-filing
statute is to . . . furnish to others intending to enter a
transaction with the debtor a starting point for investigation
which will result in fair warning concerning the transaction
contemplated.' In Re Environmental Aspecs, Inc.,
235 B.R. at
385-86 (quoting Evans v. Everett
, 279 N.C. 352, 356, 183 S.E.2d
109, 112 (1971), and TMMB Funding v. Associated Food Stores,
A.D.2d 540, 542, 523 N.Y.S.2d 161, 163 (N.Y.A.D. 2d Dep't 1988)).
Accordingly, the financing statement's purpose is to merely
alert the third party as to the need for further investigation,
never to provide a comprehensive data bank as to the details of
prior security arrangements. The notice system of the Code placesthe burden of further inquiry upon anyone seeking additional
information. Thompson v. Danner
, 507 N.W.2d 550, 561 (N.D. 1993)
In this regard, the Commentary to N.C. Gen.
Stat. § 25-9-502 states in pertinent part that:
. . . This section adopts the system of
'notice filing.' What is required to be filed
is . . . only a simple record providing a
limited amount of information (financing
statement). The financing statement may be
filed before the security interest attaches or
thereafter. . . . The notice itself indicates
merely that a person may have a security
interest in the collateral indicated. Further
inquiry from the parties concerned will be
necessary to disclose the complete state of
affairs. . . .
Subject to certain exceptions not at issue in the instant
case, a financing statement is effective for five years, N.C. Gen.
Stat. § 25-9-515(a) (2005), during which time it may be relied on
to perfect multiple security interests, including those that attach
after the filing of the financing statement.
Commentary to N.C.
Gen. Stat. § 25-9-502 states in pertinent part that:
Notice filing . . . obviates the necessity of
refiling on each of a series of transactions
in a continuing arrangement[.] . . . [A]
financing statement is effective to encompass
transactions under a security agreement not in
existence and not contemplated at the time the
notice was filed, if the indication of
collateral in the financing statement is
sufficient to cover the collateral concerned.
In the above described situation, the date of perfection
relates back to the date the financing statement was filed,
provided there has been no gap during which the financing statement
had expired. See, e.g., Finance Co. v. Finance Co
., 36 N.C. App.
401, 245 S.E.2d 510 (1978) (upholding reliance on financingstatement to perfect a second loan after the first loan was paid in
full and terminated, as financing statement was not terminated and
had not expired);
(See footnote 2)
In re K & P Logging, Inc
., 272 B.R. 867, 876
(2001) (financing statement which adequately describes collateral
can serve to perfect a security interest not contemplated by the
parties at the time of the filing of the financing statement).
In the instant case, LSB perfected its security interest in
the accounts receivable prior to CM, and thus has a superior
security interest. The record on appeal includes the financing
statement filed by LSB in 1999 listing accounts receivable as part
of the collateral covered by the financing statement, as well as
the security agreement executed by LSB and Forsyth Drywall on 26
June 2002, both of which identify accounts receivable as collateral
for LSB's loan to Forsyth Drywall.
(See footnote 3)
LSB relied on the financing
statement it filed in 1999 to perfect its security interest in
collateral for its 2002 loan to Forsyth Drywall. Accordingly, its
security interest was perfected upon execution of the security
agreement on 26 June 2002. The record also includes the factoring
agreement executed by CM and Forsyth Drywall on 20 June 2002, andthe financing statement filed by CM in January 2003. These
documents establish that LSB perfected its security interest on 26
June 2002, while CM did not perfect its security interest until six
months later. Consequently, LSB's security interest in the
accounts receivable has priority over that of CM.
We have considered and rejected CM's arguments to the
contrary. Preliminarily, we note that the Official Comment to N.C.
Gen. Stat. § 25-9-513 (2005) explains the implications of CM's
failure to immediately perfect its security interest:
4. Buyers of Receivables. . . . While the
security interest of a buyer of accounts . . .
(B-1) is perfected, the debtor is not deemed
to retain an interest in the sold receivables
and thus could transfer no interest in them to
another buyer (B-2)[.] . . . However, for
purposes of determining the rights of the
debtor's creditors and certain purchasers of
accounts or chattel paper from the debtor,
while B-1's security interest is unperfected,
the debtor-seller is deemed to have rights in
the sold receivables, and a competing security
interest or judicial lien may attach to those
rights. See sections 9-109 and 9-318 and
This is underscored by the Official Commentary to N.C. Gen. Stat.
5. . . . Following a debtor's outright sale
and transfer of ownership of a receivable, the
debtor-seller retains no legal or equitable
rights in the receivable that has been sold.
See section 9-318(a). This is so whether or
not the buyer's security interest is
perfected. . . . However, if the buyer's
interest in accounts . . . is unperfected, a .
. . perfected secured party, or qualified
buyer can reach the sold receivable and
achieve priority over (or take free of) the
buyer's unperfected security interest under
section 9-317. This is so . . . for the
simple reason that sections 9-317, 9-318(b),and 9-322 make it so, as did former sections
9-301 and 9-312. Because the buyer's security
interest is unperfected, for purposes of
determining the rights of creditors of and
purchasers for value from the debtor-seller,
under section 9-318(b) the debtor-seller is
deemed to have the rights and title it sold.
Section 9-317 subjects the buyer's unperfected
interest in accounts and chattel paper to that
of the debtor-seller's lien creditor and other
persons who qualify under that section.
CM concedes that it did not perfect its security interest
until January 2003, well after LSB filed its financing statement.
Although CM executed a security agreement with Forsyth Drywall
prior to the date of LSB's 26 June 2002 loan to Forsyth Drywall,
LSB nonetheless has priority because it was the first to file a
CM bases its claim to a superior security interest on the
existence of an amendment to the 1999 financing statement filed by
LSB. Therefore, we next consider the legal significance of this
amendment. As discussed above, the amendment states that it is a
partial assignment of LSB's security interest in certain accounts
receivable. CM argues that, with the mere filing of this
amendment, LSB thereby assigned away its security interest and
assigned its rights under its financing statement.
(See footnote 4)
asserts that after LSB filed the amendment to its original
financing statement, LSB's security interest was undisputedly
unperfected. LSB's amendment to the February 1999 financing statement does
not purport either to (1) assign a bare financing statement not
associated with any perfected security interest; or (2) to assign
its priority position, freed from any security interest.
Accordingly, we do not address the parties' arguments as to whether
such assignments are possible under North Carolina statute and
In the instant case, the financing statement amendment states
that it is a partial assignment of any security interest that LSB
had in certain accounts receivable that were collateral for LSB's
loan to Forsyth Drywall. Under N.C. Gen. Stat. § 25-1-201(37)
(2005), a security interest is an interest in personal property or
fixtures which secures payment or performance of an obligation
(emphasis added). Thus, a security interest in collateral cannot
be transferred unless the underlying debt is also assigned:
A security interest cannot exist, much less be
transferred, independent from the obligation
which it secures. The security interest
follows the debt. If the debt is not
transferred, neither is the security interest.
In re Leisure Time Sports
, 194 B.R. 859, 861 (9th Cir. B.A.P. 1996)
(citing Matter of DiSanto & Moore Associates, Inc.
, 41 Bankr. 935,
938 (N.D. Cal. 1984)) (other citations omitted). This is not a
mere technical legal requirement: To allow the assignee of a
security interest to enforce the security agreement [absent
transfer of the underlying debt] would expose the obligor to a
double liability, since a holder in due course of the promissorynote clearly is entitled to recover from the obligor. In re
Belize Airways, Ltd
., 7 B.R. 604, 607 (Bankr. S.D. Fla. 1980).
CM's argument rests on assumptions drawn from the bare
amendment to the financing statement. Obviously, absent an
existing security agreement in some form or fashion, a financing
statement, without more, has no legal import or effect. U. S. v.
, 912 F. Supp. 224, 228 (N.D. Tex. 1999). Furthermore,
other jurisdictions which have considered the question involved in
this action have held that it is the language in the security
agreement, not the financing statement, that determines what
collateral is subject to a security interest. . . . Accordingly,
we hold that the security agreement, not the financing statement,
establishes the scope or the limits of the security interest.
Dowell v. D.R. Kincaid Chair Co.
, 125 N.C. App. 557, 561-62, 481
S.E.2d 670, 673 (1997) (citation omitted).
In the instant case, CM failed to include in the record either
(1) any security agreement between LSB and Forsyth Drywall other
than the one executed 26 June 2002; or (2) any security agreement
between LSB and UC. Consequently, the record does not establish
the extent of LSB's security interest in the accounts receivable
under the first loan to Forsyth Drywall. Nor does it include any
showing that a portion of that first debt was assigned to UC. In
the absence of a security agreement showing an assignment of LSB's
security interest in the accounts receivable, there is no
evidence that such an assignment took place. Indeed, the record
strongly suggests that the parties intended only to exchange theirrespective priority positions with respect to the accounts
receivable. For example, the financing statement filed by LSB and
the one terminated by UC bear different file numbers, indicating
that UC's loan to Forsyth Drywall was separate from LSB's. The
affidavit executed by UC executive Ivan Baker states that the
amendment was filed because UC required that LSB assign its first
lien position in accounts receivable. However, regardless of
whether the record proves that LSB and UC exchanged priority
positions, it clearly fails
to include a security agreement showing
an assignment of Forsyth Drywall's original loan to UC, along with
the corresponding security interest in certain accounts receivable.
In reviewing the propriety of summary judgment, the appellate
court is restricted to assessing the record before it. Only those
pleadings and other materials that have been considered by the
trial court for purposes of summary judgment and that appear in the
record on appeal are subject to appellate review. If on the basis
of that record it is clear that no genuine issue of material fact
existed and that the movant was entitled to judgment as a matter of
law, summary judgment was appropriately granted. Waste Management
of Carolinas, Inc. v. Peerless Ins. Co
., 315 N.C. 688, 690, 340
S.E.2d 374, 377 (1986) (citing Vassey v. Burch
, 301 N.C. 68, 74,
269 S.E.2d 137, 141 (1980), and Kessing v. Mortgage Corp
., 278 N.C.
523, 180 S.E.2d 823 (1971)).
As discussed above, CM has appealed a summary judgment order:
The moving party bears the burden of showing
that no triable issue of fact exists. This
burden can be met by proving: (1) that an
essential element of the non-moving party'sclaim is nonexistent; (2) that discovery
indicates the non-moving party cannot produce
evidence to support an essential element of
his claim; or (3) that the non-moving party
cannot surmount an affirmative defense which
would bar the claim.
Union v. Branch Banking & Trust Co
., 176 N.C. App. 711, 714 n.2,
627 S.E.2d 276, 277-78 n.2 (2006). 'Once the party seeking
summary judgment makes the required showing, the burden shifts to
the nonmoving party to produce a forecast of evidence demonstrating
specific facts, as opposed to allegations, showing that he can at
least establish a prima facie case at trial.' Draughon v. Harnett
Cty. Bd. of Educ
., 158 N.C. App. 705, 708, 582 S.E.2d 343, 345
(2003) (quoting Gaunt v. Pittaway
, 139 N.C. App. 778, 784-85, 534
S.E.2d 660, 664 (2000)), aff'd
, 358 N.C. 137, 591 S.E.2d 520
In the instant case, LSB introduced evidence that it perfected
its security interest in Forsyth Drywall's accounts receivable
several years before CM, and thus had a priority lien on the
proceeds at issue. CM has not produced any evidence to refute this
showing. Accordingly, we conclude that the trial court did not err
by entering summary judgment in favor of LSB and that the trial
court's order must be
Judge STEELMAN concurs.
Judge STEPHENS concurred prior to 31 December 2006.
The subject action was brought in the Superior Court after
Forsyth Drywall filed Chapter 7 bankruptcy, and only after
defendants CM and LSB were granted relief from the automatic
bankruptcy stay, 11 U.S.C. § 362.
CM asserts, based on dicta
in this case, that the result
should be different under N.C. Gen. Stat. § 25-9-322 as it exists
today. However, the statute has been amended several times since
the 1977 Finance Co.
opinion, and our reading of the present
version does not indicate that a different result is required.
No party has suggested or argued that the financing
statement concerning LSB's secured interest was not properly
continued or renewed
CM does not argue, and we therefore do not address,
whether the assignment by LSB of its security interest could
constitute a contractual agreement by LSB to subordinate its
security interest, N.C.G.S. § 25-9-339 (2005).
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