CLC Equipment Co. v. Brewer (In re Value-Added Communications, Inc.)

Value-Added Communications, Inc. (VAC) (debtor) had government contracts (the site leases) to operate telephone systems for Minnesota state prison inmates. VAC entered into a lease agreement (the equipment lease) with CLC Equipment Company (CLC) (creditor) to lease the equipment VAC needed to perform the site leases, which included coin-operated payphones. VAC and CLC also entered into a security agreement in which VAC granted CLC a security interest in the equipment and certain personal property, as well as VAC’s profits under the site leases. CLC filed financing statements describing the collateral to include the property covered by the equipment lease and the proceeds of that property. However, CLC’s financing statements did not reference the site leases. VAC subsequently filed for bankruptcy. CLC claimed a security interest in approximately $181,000 collected from inmates who used the telephone system that VAC leased from CLC. The bankruptcy trustee objected and argued that CLC’s financing statements did not cover the $181,000 collected under the site leases. The bankruptcy court found that the $181,000 represented revenue and proceeds of the site leases, not proceeds of the equipment. Accordingly, the bankruptcy court agreed with the bankruptcy trustee because CLC’s financing statements failed to mention the site leases. The district court affirmed.