Security Is More Than A Feeling

Section 101(37) of the Bankruptcy Code defines “lien” as a “charge against or interest in property to secure payment of a debt . . . .” and section 101(51) defines “security interest” as a “lien created by an agreement.” Most of us who get hired to enforce homemade loan documents have encountered a promissory note or other contract that clearly contemplates the application of specific property to pay the debt in the event of a default, but which doesn’t exactly say “Joe grants a security interest to Bob.”

A source of confusion for the non-lawyer is that “security” also has a common meaning – according to Merriam Webster: “Freedom from fear or anxiety” Real commercial lawyers hate it when someone says that a loan is “secured by a personal guaranty.” The guaranty may make the lender feel more “secure” but it doesn’t give the lender a security interest as either the UCC or the Bankruptcy Code defines it. It is sometimes hard to make an unsophisticated client understand that having lots of promises from a borrower doesn’t help much once the major promise – the promise to repay the debt – has been broken.

In re Ryalls, 2007 WL 1228789 (Bankr. N.D. Cal. April 23, 2007) interpreted the following language in a homemade loan agreement:

Borrowers agree to repay Lender the entire principal of $18,000 on or before April 1st, 2005. If Borrower cannot refinance their current mortgage to cover this amount, or, if another source of funds is unavailable, Borrowers agree to sell their mobile home in order to repay Lender. After the debtor received a chapter 7 discharge the secured creditor sent a “Notice of Default” and then filed a lawsuit in the Superior Court to foreclose on the mobile home. Bankruptcy Judge Jaroslovsky, without wasting time citing a lot of readily available authority, held that “the Loan Agreement does not objectively indicate the intent to create a security interest. Specifying when a loan is to be repaid and promising to sell an asset if necessary is not the same thing as granting a security interest in the asset.”

On behalf of all lawyers everywhere: God bless all do it yourselfers. What makes them secure may help to make us secure.

Copyright Dean T. Kirby 2007. All rights reserved.