## Facts

- Lewis Irving Cohen and Peggy Lynn Chesnut-Cohen pursued a California personal-injury claim arising from an auto accident.
- To fund litigation expenses, they obtained a loan from a neighbor’s business, granting rights in anticipated lawsuit proceeds as protection for repayment.
- The loan-related interest in the future recovery was later transferred to Christine Houston and Helen Getsey.
- No UCC-1 financing statement was filed to perfect any claimed interest in the settlement proceeds.
- After moving to Oregon, the debtors filed bankruptcy; during the case, the personal-injury claim settled for $195,000.
- The Chapter 7 trustee sought to avoid Houston and Getsey’s interest under 11 U.S.C. § 544(a) as an unperfected security interest.
- Houston and Getsey argued their rights constituted (a) an equitable assignment conferring ownership of settlement funds, or (b) an automatically perfected security interest in a “payment intangible” under Revised UCC Article 9.

## Issues

1. Whether the transaction created an equitable assignment (ownership) of settlement proceeds or merely a security interest securing repayment.
2. Whether Revised UCC Article 9 governed the creditors’ right to receive a portion of the tort settlement.
3. Whether the creditors’ interest was a “payment intangible” (automatically perfected upon attachment) or a “general intangible” (requiring filing to perfect).
4. Whether the trustee could avoid the creditors’ interest under 11 U.S.C. § 544(a) due to lack of perfection.

## Decision

- The Bankruptcy Appellate Panel affirmed judgment for the trustee.
- The creditors’ right to receive settlement funds was a security interest, not an equitable assignment transferring ownership.
- Revised UCC Article 9 applied, and the collateral was properly treated as a general intangible rather than an automatically perfected payment intangible.
- Because no financing statement was filed, the security interest was unperfected and avoidable by the trustee under § 544(a).

## Legal Principles

- A transaction structured as a loan secured by a right to future litigation recovery is generally treated as a security interest, not an equitable assignment, absent a clear transfer of ownership.
- A contractual right to receive proceeds from a tort settlement can fall within Revised UCC Article 9 when analyzed as a payment right, even if the underlying source is a tort claim.
- Classification matters: an interest characterized as a general intangible requires perfection by filing; automatic perfection is limited and does not apply merely because the right involves payment.
- Under 11 U.S.C. § 544(a), a bankruptcy trustee may avoid an unperfected security interest as a hypothetical lien creditor as of the petition date.

## Conclusion

The panel held that creditors claiming a right to a debtor’s tort-settlement proceeds based on a litigation-expense loan held an Article 9 security interest in a general intangible that required perfection by filing; because no financing statement was filed, the trustee could avoid the interest under § 544(a).


In re Cohen, 305 B.R. 886 (B.A.P. 9th Cir. 2004)