## Facts

- Product Design and Fabrication, Inc. (PDF) manufactured agricultural equipment and sought operating funds in 1991–1992.
- PDF obtained a written appraisal (dated May 15, 1992) valuing PDF’s machinery and equipment at $314,434; the appraisal did not include inventory.
- On June 30, 1992, PDF and investor John Michelosen executed a short-term financing agreement for a $100,000 loan stating the loan would be secured by the machinery and equipment listed in the appraisal.
- PDF’s attorney prepared a bar-association form security agreement stating the debtor granted a security interest “in the property described in the paragraphs checked below,” but mistakenly checked the box for “inventory.”
- The attorney added typed language stating “an inventory of which is attached hereto as Exhibit ‘A’ and by this reference made a part hereof”; Exhibit A was the machinery-and-equipment appraisal.
- PDF and Michelosen later executed two additional short-term financing agreements (a second advance and then, on August 1, 1992, another $100,000 advance intended to consolidate and fund ongoing operations), each referencing the appraisal as the collateral source.
- On August 7, 1992, an agent for Michelosen filed a UCC financing statement describing PDF’s equipment.
- About a week after the UCC filing, PDF filed a Chapter 11 petition; the case later converted to Chapter 7, and Harry R. Terpstra was appointed trustee.
- The trustee sold PDF’s machinery, equipment, and inventory and held the proceeds pending resolution of lien claims.
- Michelosen asserted he had a secured claim in the machinery and equipment proceeds based on the security agreement and UCC filing.
- The trustee filed an adversary complaint arguing (1) no enforceable security interest existed in machinery/equipment because the security agreement described “inventory,” and (2) even if a security interest existed, perfection occurred too late and was avoidable (and the trustee also challenged perfection as to certain titled vehicles).

## Issues

1. Whether the security agreement, which checked “inventory” but incorporated an attached appraisal listing machinery and equipment, created an enforceable security interest in the machinery and equipment.
2. Whether Michelosen’s UCC filing on August 7, 1992 perfected the security interest, and how the timing of perfection affected avoidance under 11 U.S.C. § 547 for the June 30 and July 23 advances.
3. Whether the security interest securing the August 1, 1992 advance was protected from avoidance because perfection occurred within the statutory relation-back period.
4. Whether Michelosen held a perfected security interest in any titled vehicles included in the collateral claims.

## Decision

- The court held the security agreement created a security interest in the machinery and equipment listed in the appraisal, despite the form’s “inventory” checkbox, because the attachment and the surrounding documents made the collateral description uncertain on its face and the evidence showed the parties meant the appraised machinery and equipment.
- The court treated the August 7, 1992 UCC financing statement as the act of perfection for the non-titled machinery and equipment.
- As to the June 30 and July 23 advances, the court held perfection occurred more than 10 days after the security interest was granted; the transfer was therefore deemed to occur on the perfection date, within 90 days of bankruptcy, and the lien securing those antecedent debts was avoidable as a preference under § 547(b).
- As to the August 1, 1992 $100,000 advance, the court held the August 7 filing occurred within 10 days; the transfer was deemed to occur when the security interest was granted, so it was not an avoidable preference to the extent it secured that new value.
- The court held Michelosen did not have a perfected security interest in titled vehicles because perfection required compliance with certificate-of-title procedures rather than a UCC filing.

## Legal Principles

- A security agreement must evidence an intent to create a security interest and reasonably identify the collateral; when the document is unclear because it contains conflicting indications (e.g., a checked category label versus an incorporated exhibit listing different property), a court may consider incorporated documents and other evidence of the parties’ intent.
- Incorporation by reference can supply the specific collateral description needed for attachment when the exhibit is part of the agreement and identifies particular items.
- For preference analysis, perfection of a security interest is a “transfer,” and the timing of that transfer is determined by 11 U.S.C. § 547(e)(2): if perfection occurs within the statutory period (10 days in this case), the transfer is treated as occurring when the security interest was granted; if not, it is treated as occurring when perfection happened.
- A lien perfected outside the relation-back period may secure an antecedent debt and be avoidable under § 547(b) if it was made within 90 days before bankruptcy while the debtor was insolvent and it improves the creditor’s recovery compared to a liquidation without the transfer.
- For titled vehicles, Article 9 filing is not enough when state law requires notation on the certificate of title; failure to perfect by the title method leaves the creditor unperfected against the trustee.

## Conclusion

The bankruptcy court concluded that Michelosen and PDF formed an enforceable security agreement covering the appraised machinery and equipment even though the form mistakenly checked “inventory,” but it avoided Michelosen’s lien as a preference to the extent it secured the earlier June 30 and July 23 advances because perfection occurred too late; the lien securing the August 1 new-value advance survived because the UCC filing occurred within the statutory period, and any claimed lien on titled vehicles failed for lack of title-based perfection.


In re Product Design and Fabrication, Inc. (Terpstra v. Michelosen), 182 B.R. 803 (1994)