## Facts

- Norwest Bank St. Paul, N.A. made a $163,000 loan evidenced by a promissory note executed by United Wisconsin Properties; United Corporations of Minnesota (UCM) partially guaranteed the debt.
- UCM’s guarantee was secured by a negotiable instrument payable to UCM (the “Owen note”) pledged to Norwest as collateral.
- Because the Owen note was subject to a confidentiality agreement, the parties arranged for the note to be held by the debtor’s attorney, Mannikko, rather than by Norwest directly.
- Mannikko held the Owen note under a written agency agreement stating he would hold the note for Norwest; the agreement was later amended when the loan’s due date was extended and UCM increased its guarantee.
- Paul V. Rolain filed Chapter 7 bankruptcy; his case was consolidated with related corporate debtors, including UCM and United Wisconsin.
- The trustee, Edward W. Bergquist, disputed whether Norwest had perfected its security interest in the Owen note.
- The bankruptcy court granted Norwest partial summary judgment that it held a perfected security interest; the district court affirmed.

## Issues

1. Whether, under Minnesota law, a secured party may perfect a security interest in a negotiable instrument by possession through a third-party agent/bailee.
2. Whether a debtor’s attorney holding the instrument under a written agreement can constitute the secured party’s possession, given the trustee’s claim that the attorney remained under the debtor’s control.
3. Whether the trustee, using 11 U.S.C. § 544(a), could avoid the bank’s interest if the interest was not perfected against a hypothetical lien creditor under state law.

## Decision

- The Eighth Circuit affirmed the district court’s judgment affirming the bankruptcy court.
- The court held that Norwest had a perfected security interest in the Owen note.
- The court concluded that Minnesota law permits perfection of a security interest in a negotiable instrument by possession through an agent or bailee acting for the secured party.
- The court rejected a categorical rule that a debtor’s attorney can never serve as such a bailee; it focused on the actual control and obligations created by the written agreement.
- Because Norwest’s interest was perfected, the trustee could not avoid it under § 544(a).

## Legal Principles

- A bankruptcy trustee’s avoidance powers under 11 U.S.C. § 544(a) are derivative of the rights of a hypothetical lien creditor under applicable state law; if a security interest is perfected under state law, it is not avoidable under § 544(a).
- Under Minnesota UCC principles, a security interest in a negotiable instrument may be perfected by possession, including possession maintained through a third-party agent/bailee holding the instrument for the secured party.
- Possession-based perfection serves a notice function by placing the collateral beyond the debtor’s unfettered control; effective third-party holding can satisfy this function when the debtor cannot unilaterally reclaim or deploy the instrument.
- An attorney’s status as the debtor’s counsel does not automatically defeat third-party possession; the controlling question is whether the attorney, with respect to the collateral, is obligated to the secured party and not subject to the debtor’s unilateral direction.

## Conclusion

The court held that Norwest perfected its security interest in a negotiable note when the note was delivered to and held by the debtor’s attorney under a written agreement making the attorney the bank’s bailee/agent, defeating the trustee’s § 544(a) avoidance claim.


In re Rolain, 823 F.2d 198 (8th Cir. 1987)