Vienna Park Properties v. United Postal Savings Association (In re Vienna Park Properties)

Vienna Park Properties (Vienna Park) (debtor) purchased condominium units (the units) in Virginia. Congressional Mortgage Corporation (Congressional) loaned Vienna Park most of the money for the purchase. Congressional secured repayment of the loan by obtaining a Deed of Trust to each of the units. Vienna Park financed some of the remaining purchase price through the seller, Vienna Park Associates (VPA). As security, Vienna Park granted VPA subordinate second Deeds of Trust to each of the units. Vienna Park and VPA established an escrow fund that initially contained $2,500,000, $500,000 of which Vienna Park contributed. The remainder of the funds was drawn from the Congressional loan money. A bank held the escrow account during the period of the VPA/Vienna Park loan, and a management agent designated by VPA was to use the account to manage the units. Once Vienna Park satisfied its obligations to VPA, the escrow agreement was to terminate, and Vienna Park had the right to receive any remaining funds in the escrow account. Vienna Park assigned to Congressional this right to the escrow account residual as further collateral. Congressional assigned its Deeds of Trust to United Postal Savings Association and Trustbank Federal Savings Bank (the Banks) (creditors), as well as its security interest in Vienna Park’s right to the escrow account residual. Vienna Park made no payments to the Banks. The Banks eventually commenced foreclosure proceedings on the units. Before the Banks successfully foreclosed, Vienna Park filed for Chapter 11 Bankruptcy. The bankruptcy court found that the right to receive the escrow account residual was a “general intangible” under Virginia law and held that the Banks’ security interests were unperfected because the Banks failed to file the requisite financing statement. The district court agreed. Accordingly, the trustee could void the Banks’ interests pursuant to the Bankruptcy Code, which granted bankruptcy trustees the power of hypothetical lien creditors under non-bankruptcy law. The Banks appealed, arguing that the collateral was money and the Banks’ security interests were perfectible by possession.