## Facts

- Norman C. Turley, a professional auto racer, was a “franchise member” of Championship Auto Racing Teams (CART), which organized Indy-car racing events open only to members.
- CART required each member to purchase one share of CART stock, evidenced by a stock certificate, as part of the membership arrangement.
- CART imposed strict conditions on membership, including commitments to participate in races and detailed disclosures about the racing team and its finances and operations; CART’s board reviewed applicants for suitability.
- CART restricted transfer of the membership/share arrangement: members could not sell, transfer, or encumber their share without CART’s permission, and the membership was not freely transferable.
- If a member left CART or the relationship ended, the member had to return the stock certificate to CART, and CART would redeem it for a value set through CART’s internal process.
- Turley granted Thomas C. Thompson Sports, Inc. (Thompson Sports) a security interest in all of Turley’s general intangibles; Thompson Sports perfected its security interest by filing a UCC financing statement.
- Turley also pledged the CART stock certificate to Farmers & Merchants Bank of Long Beach (the Bank), and the Bank took and kept possession of the certificate.
- Shortly after these transactions, Turley filed for bankruptcy. CART later redeemed Turley’s certificate for $220,000, and the redemption funds were interpleaded.
- Both Thompson Sports and the Bank claimed the interpleaded redemption funds. The bankruptcy court and district court ruled for the Bank based on its possession of the certificate, and Thompson Sports appealed.

## Issues

1. Whether Turley’s CART interest, evidenced by a stock certificate, qualified as a “certificated security” under UCC Article 8 so that the Bank perfected by possession and had priority in the redemption proceeds.
2. If the CART interest was not an Article 8 security, whether it was a UCC Article 9 “general intangible,” making Thompson Sports’ filed security interest superior to the Bank’s claim.

## Decision

- The Ninth Circuit reversed the district court’s order affirming summary judgment for the Bank.
- The court held Turley’s CART interest was not a UCC Article 8 “certificated security,” despite being evidenced by a stock certificate.
- The court characterized Turley’s CART interest as a UCC Article 9 general intangible (a restricted membership/franchise-type right rather than a market-traded security).
- The $220,000 redemption payment was treated as proceeds of that general intangible.
- Because Thompson Sports had perfected by filing against general intangibles and the Bank did not perfect an Article 9 interest by filing, Thompson Sports had priority to the interpleaded funds.
- The case was remanded to the bankruptcy court with instructions to enter judgment in favor of Thompson Sports.

## Legal Principles

- Priority between secured creditors depends on correct UCC collateral classification and compliance with the matching perfection method.
- An instrument labeled “stock” and represented by a certificate is not necessarily an Article 8 certificated security; Article 8 status turns on whether the interest is the kind of property dealt in or traded on securities markets (or otherwise fits Article 8’s definition of a security).
- Where an interest is tightly restricted, not freely transferable, and tied to a personal-performance membership arrangement, it is typically treated as an Article 9 general intangible rather than an Article 8 security.
- Possession of a certificate does not perfect a security interest in a general intangible; perfection for general intangibles is ordinarily accomplished by filing a financing statement.
- A perfected Article 9 security interest in general intangibles continues in identifiable proceeds, and a perfected secured party has priority over an unperfected claimant to the same proceeds.

## Conclusion

In re Turley held that the value generated when CART redeemed Turley’s “share” belonged to the creditor with a perfected Article 9 filing because Turley’s CART interest functioned as a restricted membership/franchise right, not a market-traded Article 8 certificated security, so the Bank’s possession of the certificate did not give it priority in the redemption proceeds.


In re Turley, 172 F.3d 671 (1999)