Knostman v. West Loop Savings Association (In re Newman)

West Loop Savings Association (West Loop) (defendant) loaned money to Bobby Lynn Newman. As security, Newman assigned to West Loop his right to receive payments under an annuity contract issued by Manufacturers Life Insurance Company (MLIC). West Loop never filed a financing statement. Newman filed for bankruptcy, and West Loop asserted its security interest. Knostman (plaintiff), the bankruptcy trustee, filed an adversary proceeding pursuant to Section 544 of the United States Bankruptcy Code. Knostman argued that West Loop failed to perfect its security interest, which subordinated West Loop’s unperfected interest to Knostman’s interest as a hypothetical lien creditor. West Loop argued that its possession of an annuity certificate related to the contract constituted an instrument, which automatically perfected its interest upon delivery. The bankruptcy court held that the certificate constituted a general intangible and West Loop failed to perfect its interest by filing a financing statement. The bankruptcy court reasoned that the annuity contract is not a type that is typically transferred by delivery in the ordinary course of business. Moreover, the bankruptcy court pointed to language in the annuity contract indicating that an assignment is not binding on MLIC until MLIC received a copy. On appeal, the district court affirmed and agreed that the certificate constituted a general intangible. The district court noted that to be an instrument, the writing must evidence a right to receive payment and be of the type which in the ordinary course of business is transferred by delivery with an endorsement or assignment. The district court reasoned that the annuity contract did not evidence a right to receive payment to the person in possession of the certificate based on language in the contract specifying how Newman could change the beneficiary. The district court further reasoned that MLIC had not received notice of the assignment and the writing is not of the type that is customarily transferred by delivery with an endorsement or assignment. West Loop appealed.