## Facts

- CFB-5, Inc. filed an involuntary bankruptcy petition against Vernon Hulme, an artist; the case was later converted to Chapter 7, and James Cunningham was appointed Chapter 7 trustee (unrelated to Greg Cunningham, CFB-5’s president).
- The trustee determined that the bankruptcy estate’s only significant assets were Hulme’s paintings, which Hulme listed on his bankruptcy schedules.
- Several paintings were in the possession of Greg Cunningham when the bankruptcy case began.
- The bankruptcy court ordered Greg Cunningham and entities under his control, including CFB-5, to turn over paintings listed in the schedules; the trustee ultimately recovered nineteen paintings and placed them in storage with Surf City–USA, Dallas, Ltd. pending disposition.
- CFB-5 disputed Hulme’s ownership of three of the recovered paintings (the “Holland paintings”) and asserted that CFB-5 held rights in the paintings, including a purchase-money security interest and a possessory lien.
- At the hearing on the trustee’s objection to CFB-5’s claimed interest, Hulme testified that Greg Cunningham loaned him money to purchase the three paintings but that Hulme never executed a security agreement granting CFB-5 (or Greg Cunningham) a security interest in the paintings as collateral for repayment.
- Crediting Hulme’s testimony, the bankruptcy court sustained the trustee’s objection and held that CFB-5 did not have an enforceable security interest in, or possessory lien on, the three paintings.
- The bankruptcy court also approved the trustee’s settlement with Surf City concerning storage-related issues and the handling of the recovered artwork.
- CFB-5 appealed the bankruptcy court’s final orders to the United States District Court for the Northern District of Texas.

## Issues

1. Whether CFB-5 proved an enforceable non-estate interest in the three disputed paintings (including a purchase-money security interest or possessory lien) sufficient to defeat the trustee’s administration of the paintings as estate property.
2. Whether the bankruptcy court erred in sustaining the trustee’s objection to CFB-5’s asserted interests in the three paintings.
3. Whether the bankruptcy court abused its discretion in approving the trustee’s settlement with Surf City regarding storage and disposition of the recovered paintings.

## Decision

- The district court affirmed the bankruptcy court’s orders.
- The court upheld the determination that CFB-5 failed to establish an enforceable security interest in the paintings, including any purchase-money security interest, where the debtor did not execute a security agreement granting a security interest in the paintings.
- The court upheld the rejection of CFB-5’s asserted possessory lien on the paintings.
- The court upheld approval of the trustee’s settlement with Surf City, concluding the bankruptcy court acted within its discretion.

## Legal Principles

- In an appeal from bankruptcy court orders, factual findings are reviewed for clear error and legal conclusions are reviewed de novo; approval of a trustee’s compromise is reviewed for abuse of discretion.
- Under Article 9 principles, a security interest generally is not enforceable against the debtor or third parties unless it has attached, which ordinarily requires (among other things) an authenticated security agreement describing the collateral (or an alternative method of attachment recognized by law, such as qualifying possession pursuant to an agreement).
- A purchase-money security interest requires that the secured party provide value that enables the debtor to acquire rights in the collateral and that the creditor hold an enforceable security interest in that collateral.
- A claimed possessory lien requires satisfaction of the applicable statutory or common-law requirements; possession alone is not enough to create a lien that binds the estate.
- A bankruptcy court may approve a trustee’s settlement when it is fair and equitable and serves the estate’s interests by reducing expense, delay, and litigation risk.

## Conclusion

The district court affirmed the bankruptcy court’s rulings that CFB-5 did not carry its burden to show an enforceable security interest (including a purchase-money security interest) or a possessory lien in the three disputed paintings, and it also affirmed the order approving the trustee’s settlement with the storage company concerning the recovered artwork.


CFB-5, Inc. v. Cunningham, 371 B.R. 175 (2007)