## Facts

- JoJo’s 10 Restaurant, LLC (JoJo) operated a restaurant in Massachusetts.
- On May 15, 2009, JoJo and Devin Properties, LLC (Devin) entered a group of related transactions, including a commercial lease for space in Devin’s building and an asset purchase to equip the restaurant.
- The asset purchase agreement provided that Devin would sell JoJo restaurant equipment, inventory, furniture, and fixtures for $285,000, and also transfer Devin’s liquor license to JoJo.
- As part of the financing, JoJo executed a $225,000 promissory note to Devin. The note referenced collateral but did not identify the collateral and did not itself grant Devin a security interest.
- The asset purchase agreement stated that the promissory note would be secured by a Uniform Commercial Code (UCC) security agreement and perfected by a UCC financing statement.
- Separately, JoJo and Devin executed a pledge agreement stating that the liquor license was collateral for the promissory note.
- Devin filed a UCC-1 financing statement describing the tangible restaurant assets and the liquor license as collateral. The financing statement did not include JoJo’s signature.
- JoJo filed a Chapter 11 petition in 2010, then brought an adversary proceeding seeking declaratory relief and lien-avoidance relief concerning Devin’s claimed security interests.
- The bankruptcy case later converted to Chapter 7, and the Chapter 7 trustee succeeded to JoJo’s position in pursuing the dispute.
- In the adversary proceeding, the parties filed cross-motions for summary judgment and stipulated that neither side obtained required Massachusetts governmental approval to pledge the liquor license.

## Issues

1. Whether Devin had an enforceable and perfected security interest in JoJo’s tangible restaurant assets (equipment, inventory, furniture, and fixtures) even though the promissory note did not itself grant a security interest and the UCC-1 financing statement lacked the debtor’s signature.
2. Whether Devin had any valid, enforceable security interest in the restaurant liquor license when the parties did not obtain the governmental approvals required under Massachusetts law for a liquor-license pledge.
3. Whether, to the extent Devin’s asserted interests were invalid or avoidable, the Chapter 7 trustee could avoid them under 11 U.S.C. § 544 and preserve the resulting benefit for the estate under 11 U.S.C. § 551.

## Decision

- The court granted summary judgment for Devin as to the tangible restaurant assets, ruling Devin held an enforceable and perfected security interest in those assets.
- The court granted summary judgment for the trustee as to the liquor license, ruling Devin’s purported security interest in the liquor license was invalid under Massachusetts law because the required governmental approval for the pledge was not obtained.
- The cross-motions were therefore granted in part and denied in part, with each side prevailing on a different category of collateral.

## Legal Principles

- Under UCC Article 9, a security interest is enforceable against the debtor and third parties only if value is given, the debtor has rights in the collateral, and the secured party can point to an authenticated record (a “security agreement”) that reasonably describes the collateral (or an alternative Article 9 method such as possession/control when applicable).
- A promissory note that references “collateral,” without granting a security interest or describing collateral, may be insufficient by itself to create an enforceable security interest; the court may consider related authenticated transaction documents to determine whether the parties created a security interest covering identified collateral.
- A UCC financing statement is a perfection device; it does not, standing alone, create a security interest. Perfection depends on a valid underlying security interest plus the steps required for perfection.
- Under revised Article 9 as adopted in Massachusetts, a debtor signature is not required on a financing statement if the debtor authorized the filing. Authorization can be shown through the parties’ authenticated agreements that contemplate UCC filing to perfect a security interest.
- State law determines whether certain rights can be pledged as collateral at all. Massachusetts liquor licenses are regulated privileges subject to statutory and administrative controls; creating an enforceable lien in a liquor license requires governmental approval through the applicable licensing authorities.
- When a purported lien is invalid under applicable nonbankruptcy law, the bankruptcy trustee, exercising the “strong-arm” powers under 11 U.S.C. § 544(a), may defeat the creditor’s claimed interest as against the estate, and any avoided interest is preserved for the estate under 11 U.S.C. § 551.

## Conclusion

In *In re Jojo’s 10 Restaurant, LLC*, the bankruptcy court split the result on cross-motions for summary judgment: Devin’s security interest in the restaurant’s tangible assets was enforceable and perfected despite the unsigned UCC-1 because the debtor authorized the filing through the transaction documents, but Devin’s claimed lien in the liquor license was unenforceable because the parties failed to obtain the governmental approvals Massachusetts requires for a liquor-license pledge, allowing the Chapter 7 trustee to prevail as to that asset under § 544 and § 551.


In re Jojo's 10 Restaurant, LLC, 455 B.R. 321 (2011)