FOR THE NORTHERN DISTRICT OF CALIFORNIA
MOANA LEASING COMPANY, INC., No. 1-85-01477
CHARLES DUCK, Trustee,
v. A.P. No. 1-88-0042
ROBERT J. MILLER, et al.,
Memorandum of Decision
The facts in this matter are not subject to significant dispute. The task of the Court is to resolve an
issue of commercial law regarding the rights of an assignee of an equipment lease.
Debtor Moana Leasing Company ("Moana") was in the business of leasing personal property.
Individuals who needed personal property would identify the property to Moana, and Moana would buy
the desired property and lease it to them.
Defendant Miller Family Trust ("MFT") loaned Moana the funds it needed to purchase many of the
items to be leased. Between November 26, 1983, and the date the involuntary bankruptcy petition was
filed against Moana on December 16, 1985, MFT loaned $74,306.00 to Moana.
The first loan, for $15,900.00 made on November 26, 1983, was evidenced by a note; the other loans
were not evidenced until December 1, 1985 (15 days before the petition was filed), when Moana gave
MFT a consolidated note reflecting the entire $74,306.00 it had borrowed over the previous two years.
This note also recited that payments on it were to be made from residual payments owed to the debtor on
an attached list of leases.
When the original loan was made on November 26, 1983, Moana executed a document entitled
"Conditional Assignment of Lease Rentals." This document provided that if Moana defaulted on its note
to MFT, then all of Moana's right to rent payments on a lease of equipment to Quail Ridge Winery were
assigned to MFT and Quail Ridge, upon notice from MFT, was to make its lease payments to MFT and
not Moana. MFT was not given possession of the lease, nor did it file a UCC-1 financing statement.
Moana made its monthly payments to MFT for January, February, and March, 1986, totalling
$2,872.59, and stopped when an order for relief was entered on March 13, 1986. Thereafter, MFT made
demand on Quail Ridge pursuant to the conditional assignment and on various other lessees pursuant to
the December 1 note. MFT has collected $11,340.00 from Quail Ridge pursuant to the conditional
assignment and $12,500.50 from other lessees. The case having been converted from Chapter 11 to
Chapter 7 without confirmation of a plan of reorganization, the Trustee now seeks avoidance of MFT's
interests in the leases and recovery of all postpetition funds MFT received from Moana, Quail Ridge, and
the lessees named in the list attached to the December 1 note.
As to the Quail Ridge payments, MFT argues that its rights stem from the 1983 document and
therefore cannot be attacked as preferential. It argues that its rights in the Quail Ridge lease were
absolute upon the happening of a condition, Moana's default, and were not limited to the amount then
owed by Moana. Therefore, its interest in the Quail Ridge lease was not a security interest subject to
perfection. The Court finds these arguments unconvincing.
Section 9102 of the California Commercial Code makes any transaction regardless of form
Article 9 perfection requirements if the transaction was intended to create a security interest. Section
1201(37) of the Commercial Code defines "security interest" as an interest in property which secures
payment of an obligation. It is clear that MFT was given the assignment of Moana's rights under the Quail
Ridge lease in order to assure that if Moana defaulted MFT could proceed against an asset of Moana. As
such, it was clearly a security interest. In In re Woodson Company
(9th Cir.1987) 813 F.2d 266, the court
found that an interest in a deed of trust created by an assignment which was on its face absolute and
unconditional was nonetheless a security interest. Here, the fact that the assignment was conditioned upon
Moana's default makes it beyond question a security transaction notwithstanding MFT's protests.
The proper method of perfecting the security interest in the Quail Ridge lease was either by taking
possession of it or filing a UCC-1 financing statement naming Moana as the debtor. Since nothing at all
was done by MFT to perfect its security interest (MFT obtained the original lease in March of 1986, three
the petition date), MFT's interest in the Quail Ridge lease is avoidable as a preference
pursuant to section 547(e)(2)(C) of the Bankruptcy Code, and the Trustee's rights in the lease are superior
to those of MFT pursuant to Section 544(a)(1) of the Code. Payments made after the petition date on
account of an unperfected security interest are avoidable pursuant to section 549(a) of the Code. In re
(Bkrtcy.W.D.N.Y.1983) 27 B.R. 106, 108; In re Florida Consumers Furniture Warehouse
(Bkrtcy.S.D.Fla.1981) 9 B.R. 7. Section 549(a) by its terms covers transfers of property of the estate,
and is not limited to transfers made by the debtor; it is therefore no defense the payments came from Quail
Ridge, as those payments belonged to the bankruptcy estate.
MFT has given no reason, nor can the Court think of one, as to why the Quail Ridge acknowledgment
of the assignment to MFT should be a defense. Section 544(a)(1) of the Code gives the trustee the rights
of a lien creditor. California Commercial Code section 9301(1)(b) gives a lien creditor priority over an
unperfected security interest. Obtaining the signature of the lessee is not a method of perfecting a security
interest in a lease. See White & Summers, Uniform Commercial Code
(2nd Ed.), section 23-5.
Accordingly, the Court finds that Quail Ridge's acknowledgement of the assignment is not a defense.
MFT raises no defense to the $12,500.00 received from various lessors as a result of the December 1 note
and its attachment. Any rights created by the note were clearly preferential, and in any event were not
perfected in any manner. Likewise, there is no defense to the claim for return of the $2,872.59 in
postpetition payments made directly to MFT by Moana; section 549(b) does not apply because all of the
consideration was prepetition.
For the foregoing reasons, the Trustee is entitled to a judgment declaring that the interest of MFT in
all leases except 1the "ETS" lease is avoided, and that he shall recover the sum of
$26,713.09, plus interest at the legal rate from and after March 31, 1988, from defendants on account of
postpetition transfers. Counsel for the Trustee shall submit an appropriate form of judgment.2
This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule
Dated: August 11, 1988 _____________________
U.S. Bankruptcy Judge
1. MFT was named as assignee of the debtor on the UCC-1 filed by Moana to protect its interest in
the leased items. The Trustee is incorrect in his belief that this perfects MFT's interest as to Moana's
creditors (see section 9302(2) of the Commercial Code and Uniform Commercial Code Comment 7
thereto). However, since the Trustee did not seek relief as to the "ETS" lease, none will be given. 2.
The Court further finds that all of the elements required for avoidance pursuant to section 547(b) are