In re Vigil Bros. Construction, Inc.

Joe E. Woods, Inc. (Woods) entered into a construction contract with Arizona State University and subcontracted with Vigil Bros. Construction, Inc. (Vigil) (debtor) for a portion of the work. Vigil subsequently subcontracted with Concrete Equipment Co., Inc. (CECO). CECO completed the required work under the subcontract and sought payment from Vigil. Vigil executed a $49,385.56 promissory note to CECO. Vigil also assigned to CECO Vigil’s accounts receivable from Woods up to $49,385.56. CECO did not file a financing statement covering the assignment. Subsequently, an involuntary Chapter 7 bankruptcy action was commenced against Vigil. CECO filed a proof of claim in the action for $49,385.56. The bankruptcy trustee objected to CECO’s claim, asserting that CECO had failed to produce evidence of a security agreement and had not perfected a security interest in the accounts receivable. CECO contended that Vigil’s assignment of the accounts receivable was an outright assignment of the Woods account (i.e., not a security interest). The bankruptcy court found that the assignment of the accounts receivable was not an outright assignment but a security interest governed by Article 9 of Arizona’s statutory Uniform Commercial Code (UCC). The bankruptcy court explained that under Article 9, perfection of a security interest required the filing of a financing statement unless the assignment covered only an insignificant portion of the assignor’s accounts. The bankruptcy court found that Vigil had roughly $125,000 in accounts receivable at the time of the assignment and that the $49,385.56—roughly 40 percent of the total amount—assigned to CECO was significant. The bankruptcy court thus concluded that CECO was required to have filed a financing statement to perfect its security interest. CECO appealed.