IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
ARNOWITZ STUDIOS, INC., No. 95-11492
ARNOWITZ STUDIOS, INC.,
v. A.P. No. 95-1189
SILICON VALLEY BANK,
Memorandum of Decision
Plaintiff and debtor in possession Arnowitz Studios, Inc., filed its Chapter 11 petition on
June 16, 1995. At the time it filed its petition, its principal asset was license fee income from
computer software it had created. The issue in this adversary proceeding is whether the security
interest of defendant Silicon Valley Bank in those license fees is avoidable as a preference.
On September 15, 1994, Arnowitz agreed in writing to give the Bank a security interest in
the license fees to secure a $175,000.00 line of credit. At the same time, Arnowitz executed
a Negative Pledge Agreement whereby it promised not to sell or encumber its intellectual
On November 4, 1994, the Bank filed a UCC-1 financing statement. However, the
financing statement did not describe the Bank's security interest, but only the Negative Pledge
Agreement. It read as follows:
Debtor has agreed with Secured Party that Debtor
will not pledge any of its intellectual property to a third party.
The purpose of this UCC Financing Statement is to notify all searching parties
of Debtor's Negative Pledge Agreement with Secured
On March 20, 1995, the Bank filed a new UCC-1 correctly identifying its security interest.
However, Arnowitz filed its Chapter 11 petition within 90 days thereafter. Assuming Arnowitz
was insolvent on March 20, 1995, avoidance of the Bank's lien as a preference depends on when
its security interested was perfected on that date or by the November 4 filing.
Section 547(e)(2)(B) of the Bankruptcy Code provides that a transfer of an interest in
personal property is made when the transfer is perfected. Section 547(e)(1)(B) provides that
a transfer of personal property is perfected when a creditor cannot obtain a judicial lien superior
to the transferee. If the November 4 UCC-1 perfected the Bank's security interest, then there
was no preference. If the security interest was not perfected until March 20, then there was a
A purely negative covenant against encumbrances does not create a legal or equitable lien.
Kuppenheimer & Co. v. Morin
, 78 F.2d 261, 263 (8th Cir.1935) cert. den. 296 U.S. 615 (1936).
Section 9311 of the California Commercial Code provides that a judicial lien is valid
notwithstanding a prior covenant not to encumber. Furthermore, "it seems clear that buyers,
transferees and creditors will take free of the prohibitory covenant even if they have knowledge
of it." Gilmore, Security Interests in Personal Property
, p. 1018 (1965). Moreover,
Commercial Code section 9402 provides that a financing statement must contain a statement
describing the collateral. The November 4 statement does not describe any collateral. It only
describes what is not
Since knowledge of a negative pledge agreement does not defeat the rights of a subsequent
creditor, such a creditor would have no obligation to make further inquiry after seeing the
Bank's November 4 financing statement. The November 4 filing did not in itself describe any
collateral. It therefore did not serve to perfect the Bank's security interest. That interest was
not perfected until March 20, well within the preference period.
For the foregoing reasons, judgment will be entered avoiding the Bank's security interest and
preserving it for the benefit of the estate. However, enforcement of the judgment will be stayed
as ordered at trial in order to give the Bank further opportunity to investigate the debtor's
solvency and seek a new trial as to that issue if post-trial discovery establishes that Arnowitz
This memorandum constitutes the court's findings and conclusions pursuant to FRCP
52(a) and FRBP 7052. Counsel for Arnowitz shall submit an appropriate form of judgment
forthwith which counsel for the Bank has approved as conforming to this decision.
U.S. Bankruptcy Judge
1. While the evidence at trial established that Arnowitz was not as insolvent as it claimed,
it appeared nonetheless that it was insolvent on March 20. However, the court leaves the door
open for the Bank to seek a new trial as to this issue, since trial was expedited to accommodate
the debtor's pending plan and the Bank had limited opportunity to conduct disc