## Facts

- Victoria Guthrie owned a condominium unit in a Manhattan building located at 11 East 36th Street.
- The remaining units in the building were owned by two affiliated limited-liability companies: 11 East 36th, LLC and Morgan Lofts, LLC.
- 11 East 36th was the sole member of Morgan Lofts, and together the two entities owned the condominium units in the building.
- Guthrie loaned money to Morgan Investment Fund, LLC (Morgan Fund), an affiliate of the Debtors and the borrower on the loan.
- To secure Guthrie’s loan to Morgan Fund, 11 East 36th executed a pledge agreement granting Guthrie a security interest in 11 East 36th’s membership interest in Morgan Lofts.
- Guthrie filed a UCC-1 financing statement to perfect her security interest, but the UCC-1 described the collateral as Morgan Lofts’ condominium units rather than 11 East 36th’s membership interest in Morgan Lofts.
- Morgan Lofts and 11 East 36th later filed Chapter 11 bankruptcy cases that were jointly administered.
- Guthrie filed proofs of claim in the bankruptcy cases asserting secured claims based on (i) 11 East 36th’s membership interest in Morgan Lofts and (ii) Morgan Lofts’ condominium units.
- The Debtors objected to Guthrie’s claims and sought to have them expunged, arguing that Guthrie lacked a perfected lien and that the UCC-1 did not describe the pledged collateral.

## Issues

1. Whether a financing statement that describes condominium units owned by Morgan Lofts “reasonably identifies” the collateral actually pledged—11 East 36th’s membership interest in Morgan Lofts—so as to perfect a security interest under UCC Article 9.
2. Whether Guthrie could claim a secured interest directly in Morgan Lofts’ condominium units when the pledge agreement granted a security interest only in 11 East 36th’s membership interest.
3. Whether the Debtors, as debtors-in-possession, could defeat Guthrie’s asserted secured status because any security interest was unperfected as of the petition date (including by using § 544(a) rights).
4. Whether Guthrie’s proofs of claim should be disallowed and expunged in the claims-allowance process.

## Decision

- The bankruptcy court sustained the Debtors’ objection to Guthrie’s proofs of claim.
- The court held that the UCC-1’s collateral description did not reasonably identify the pledged collateral (11 East 36th’s membership interest in Morgan Lofts) because it instead described different property (Morgan Lofts’ condominium units).
- Because the financing statement did not indicate the membership interest that was actually pledged, Guthrie did not perfect a security interest in that membership interest.
- The court rejected Guthrie’s attempt to treat the UCC-1 as creating or perfecting a lien on the condominium units, because the underlying pledge agreement did not grant a security interest in those units.
- With no valid perfected lien supporting Guthrie’s asserted secured status, the court expunged Guthrie’s claims.

## Legal Principles

- Under UCC Article 9, a financing statement must indicate the collateral; a description that points to different property than what the debtor granted as collateral does not provide the notice function required for perfection.
- A pledge of an LLC membership interest is a grant of a security interest in equity rights, not in the LLC’s underlying assets; treating the LLC’s assets as the collateral is not the same as describing the membership interest.
- A financing statement cannot expand the collateral beyond what the debtor granted in the security agreement; filing language cannot create a lien in property that was never pledged.
- In bankruptcy, a debtor-in-possession may rely on the rights of a hypothetical lien creditor as of the petition date to defeat an unperfected security interest, and a creditor lacking a perfected lien is not entitled to secured-claim treatment.
- Bankruptcy courts may disallow and expunge proofs of claim when the documentation and applicable nonbankruptcy law do not support the asserted secured status or basis for recovery against the estate.

## Conclusion

In re 11 East 36th, LLC held that Guthrie’s financing statement, which described Morgan Lofts’ condominium units, failed to indicate the collateral actually pledged—11 East 36th’s membership interest in Morgan Lofts—so her security interest was unperfected and could not support secured claims in the Chapter 11 cases; the court sustained the Debtors’ objection and expunged her proofs of claim.


In re 11 East 36th, LLC, 85 UCC Rep. Serv. 2d 668 (2015)