In re Fraden

Enrique Fraden (debtor) purchased a $1 million winning ticket in the Massachusetts lottery in 1995. By the terms of the lottery, he was to receive $50,000 before taxes per year for twenty years. Windsor Thomas Group (Windsor Thomas) (creditor) made advances to Fraden from 1996 to 1998. On the occasion of the last advance, Fraden signed a promissory note and a security agreement, with the security agreement giving Windsor Thomas a security interest in Fraden’s remaining sixteen payments from the state lottery. The security agreement referenced applying Florida law, but only in the event of the debtor’s default and determination of subsequent rights of the debtor and creditor. Fraden defaulted, and Windsor Thomas sued and later filed an involuntary Chapter 7 bankruptcy petition against Fraden. Fraden did not answer. Windsor Thomas filed a motion for authority to sell Fraden’s right to his remaining payments, and after Fraden did not answer and the court granted its motion, Windsor Thomas sold the rights for $401,500. The matter came before the bankruptcy court on the bankruptcy trustee’s argument that the security agreement was not effective to create a security interest. The issue before the court was which state’s law should apply to this matter. Absent any more explicit choice of law provision governing the entire agreement, Massachusetts’s UCC controlled the choice of law selection. The debtor, the collateral, and state lottery board responsible for paying over the collateral were all located within Massachusetts. However, Florida was referenced in the security agreement regarding issues involving Fraden’s default and subsequent determination of rights between Fraden and Windsor Thomas.