## Facts

- The debtor won a Massachusetts lottery prize payable as twenty annual installments of $50,000.
- A funding company advanced money to the debtor over several years; the debtor later executed a restated promissory note for $136,504 and a security agreement purporting to assign and grant a security interest in the remaining sixteen annual lottery payments.
- The security agreement included a Florida law reference tied to post-default rights rather than an explicit governing-law clause for validity and perfection.
- After the debtor’s default and the commencement of a Chapter 7 case, the Chapter 7 trustee sold the debtor’s remaining lottery payment rights, generating $401,500 in sale proceeds.
- The funding company filed a proof of claim asserting it was secured by the lottery rights (and/or the sale proceeds); the trustee objected.
- The parties filed cross-motions for partial summary judgment; the material facts were undisputed and the dispute turned on questions of law.

## Issues

1. Whether Massachusetts or Florida law governed the creation and perfection of the asserted security interest in the lottery payments.
2. Whether the claimant held a valid, perfected security interest in the debtor’s lottery payment rights or in the trustee’s sale proceeds under the applicable UCC and related law.
3. Whether prepetition state-court orders concerning transfer/sale of the lottery payment stream created an equitable lien in favor of the claimant enforceable in bankruptcy.

## Decision

- The court applied Massachusetts law to questions of validity and perfection because the agreement’s Florida reference was limited and Massachusetts had the closest relationship to the debtor, the lottery payments, and the paying authority.
- The court held the claimant did not have a valid, perfected security interest in the lottery payment stream or the proceeds realized from the trustee’s sale.
- The court rejected the equitable-lien theory, finding the cited prepetition orders did not create or perfect a lien that would bind the bankruptcy estate.
- Summary judgment was granted in favor of the trustee on the secured-status dispute, and the claimant’s debt was treated as unsecured.

## Legal Principles

- A choice-of-law clause limited to post-default remedies does not displace UCC choice-of-law rules governing the validity and perfection of a security interest.
- Security interests in rights to future lottery payments are constrained by applicable lottery statutes and regulations; an attempted private assignment inconsistent with that statutory scheme may be ineffective against the estate.
- Even where a debtor signs a security agreement, secured status in bankruptcy requires perfection under the governing jurisdiction’s Article 9 rules (by the appropriate method for the collateral type).
- Prepetition court orders authorizing or addressing a transfer of payment rights do not, without clear statutory and equitable predicates, create an equitable lien enforceable against the bankruptcy estate.

## Conclusion

The court held that Massachusetts law governed and that the claimant failed to establish either a perfected Article 9 security interest or an equitable lien in the debtor’s lottery payment rights or the trustee’s sale proceeds, so the claim was unsecured in the Chapter 7 case.


In re Fraden, 317 B.R. 24 (Bankr. D. Mass. 2004)