626 B.R. 406
Bankr. E.D. Pa.2021Background
- Debtors Daniel and Georgina Ricca borrowed from D&P Private Lending, LLC and, after defaults, executed two Modified Loan Agreements on August 21, 2018 that included a pledge: "Security Interest in inheritance in the estate of Michael L. Ricca."
- D&P did not file a UCC financing statement or otherwise record the purported security interest after the Modified Agreements.
- Michael Ricca had died testate on April 15, 2017; probate completed and the Debtor Husband’s net inheritance ($149,046.41 less a $2,774 exemption) was paid to the chapter 7 Trustee on October 8, 2019.
- D&P filed two proofs of claim totaling $111,998.16 and moved under 11 U.S.C. §725 to require the Trustee to dispose of the funds in its favor; the Trustee objected, asserting the claims were unsecured because no separate assignment or additional document perfected the claimed interest.
- The Bankruptcy Court applied New Jersey law (UCC Article 9), found the Modified Agreements created a valid security interest in the inheritance that attached and was automatically perfected under the assignment-of-beneficial-interest rule, overruled the Trustee’s objections, and ordered immediate payment to D&P (with remaining funds after payment and the exemption to be administered for unsecured creditors).
Issues
| Issue | Trustee's Argument | D&P's Argument | Held |
|---|---|---|---|
| Whether D&P holds a valid security interest in the Debtor’s expected/pending inheritance | The Modified Agreements are insufficient; there was no separate assignment or other writing that properly described or transferred a beneficial interest, so D&P is unsecured | The Modified Agreements (signed by Debtors) plainly grant a security interest in the inheritance; under NJ UCC a security interest by assignment of a decedent’s beneficial interest is perfected when it attaches — no further document required | Court: Agreement language sufficiently described the collateral; attachment occurred; under N.J. UCC §9-309 the assignment-of-beneficial-interest is perfected upon attachment — D&P is a secured creditor |
| Whether D&P is entitled to immediate payment of the secured portion of the inheritance under 11 U.S.C. §725 | Funds in Trustee’s hands are estate property to be administered for creditors; no basis to pay secured creditor now | Secured creditor’s interest is not property of the estate; §725 permits disposition to return property/proceeds to the secured creditor before general administration | Court: §725 permits and directs disposition to secured creditor here; immediate payment to D&P ordered (estate retains only balance after secured claims and debtor exemption) |
Key Cases Cited
- In re Allegheny Int'l, Inc., 954 F.2d 167 (3d Cir. 1992) (shifting burden analysis for objections to proofs of claim)
- Matter of Bollinger Corp., 614 F.2d 924 (3d Cir. 1980) (writing signed by debtor describing collateral demonstrates intent to create a security interest)
- In re Giaimo, 440 B.R. 761 (B.A.P. 6th Cir. 2010) (no magic words required; intent and a signed writing suffice to create Article 9 security interest)
- In re WL Homes, [citation="534 F. App'x 165"] (3d Cir. 2013) (debtor may pledge limited or contingent rights; security interest attaches to debtor’s existing rights)
- In re Schwalb, 347 B.R. 726 (Bankr. D. Nev. 2006) (informal instruments like a pawn ticket can create a security interest; substance over form)
- In re Talbert, 268 B.R. 811 (Bankr. W.D. Mich. 2001) (discussion of 11 U.S.C. §725 and disposition of property subject to liens)