## Facts

- Tri-County Materials, Inc. (Tri-County) operated a sand and gravel pit and agreed to sell sand and gravel to Ladd Construction Company (Ladd), the general contractor on a State of Illinois highway project.
- To perform, Tri-County leased equipment from KMB, Inc. (KMB) that was used at the gravel pit to process material supplied for the project.
- The parties’ lease arrangement began as an oral agreement and was reduced to a written agreement in June 1988.
- The written agreement provided that, to secure Tri-County’s obligation to pay equipment rent, Tri-County assigned KMB a portion of Tri-County’s account receivable from Ladd.
- Ladd was notified of the assignment and received periodic (bi-weekly) statements showing amounts Tri-County claimed were due to KMB.
- KMB did not file a UCC financing statement covering the assigned receivable.
- Neither Tri-County nor KMB had previously used this type of security arrangement with each other.
- Tri-County filed a voluntary Chapter 11 petition in October 1988. At filing, Ladd owed Tri-County $43,413.71, and Tri-County owed KMB $30,484 in unpaid rent under the lease.
- In the bankruptcy proceedings, KMB asserted (i) priority based on the assignment/security interest in the Ladd account and (ii) a lien claim under the Illinois Mechanics Liens Act’s public-improvement provision.
- The bankruptcy court ruled KMB’s security interest in the Ladd account was unperfected, but held KMB had a valid public-improvement mechanics lien for $30,484 against funds owed by Ladd.
- KMB appealed the security-interest ruling, and other parties cross-appealed the mechanics-lien ruling to the U.S. District Court for the Central District of Illinois.

## Issues

1. Whether KMB had a perfected security interest in Tri-County’s assigned account receivable from Ladd, despite not filing a financing statement, because the assignment fell within Article 9’s limited exceptions for certain transfers of accounts (including transfers that do not assign a significant part of the assignor’s accounts or that are casual and isolated).
2. Whether KMB, as an equipment lessor, had a valid lien under the Illinois Mechanics Liens Act public-improvement provision for unpaid equipment rent, enforceable against funds owed by Ladd to Tri-County for the highway project.

## Decision

- The district court affirmed the bankruptcy court.
- KMB did not have a perfected Article 9 security interest in the Ladd account because KMB failed to file a financing statement and the assignment did not qualify for an exception to the filing requirement.
- KMB had a valid Illinois public-improvement mechanics lien for $30,484 for the rental value of equipment used in performing work that contributed to the public project, giving KMB lien rights in the funds owed by Ladd to Tri-County.

## Legal Principles

- An assignment of an account receivable intended to secure payment of an obligation is treated as a security interest governed by UCC Article 9.
- Perfection of a security interest in an account generally requires filing a financing statement; exceptions for certain assignments of accounts are construed narrowly.
- The Article 9 filing exception for assignments that do not transfer a “significant part” of the assignor’s outstanding accounts (often described in case law as the “casual and isolated” type of transfer) does not apply where the assignment functions as part of an ongoing commercial arrangement or covers a meaningful portion of the receivable at stake in the bankruptcy dispute.
- Under the Illinois Mechanics Liens Act provision for public improvements (Ill. Rev. Stat. ch. 82, ¶ 23(b)), a lien may secure amounts due for the reasonable rental value of equipment used in connection with performance of a public contract, and the lien attaches to funds due the party that benefited from that equipment in supplying labor or materials for the improvement.

## Conclusion

In re Tri-County Materials, Inc. holds that an equipment lessor that takes an assignment of a debtor’s receivable as collateral must perfect under Article 9—typically by filing a financing statement—unless a narrow statutory exception clearly applies; at the same time, the lessor may still obtain protection through an Illinois public-improvement mechanics lien for unpaid equipment rent when the equipment was used to perform work contributing to the public project.


In re Tri-County Materials, Inc., 114 B.R. 160 (1990)