## Facts

- Vigil Bros. Construction, Inc. (Vigil), a subcontractor, hired Concrete Equipment Co., Inc. (CECO) as a sub-subcontractor on an Arizona State University project.
- Vigil failed to pay CECO for completed concrete work and executed a promissory note for $49,385.56.
- To secure the debt, Vigil assigned to CECO sums due (or to become due) from the general contractor, Joe E. Woods, Inc., up to $49,385.56.
- CECO did not file a UCC financing statement covering the assigned receivable.
- An involuntary Chapter 7 case was commenced against Vigil; CECO filed a proof of claim asserting a secured claim based on the assignment.
- The Chapter 7 trustee objected, asserting the transaction was an Article 9 security interest in accounts requiring perfection by filing.
- The bankruptcy court found Vigil had about $125,000 in total accounts receivable when the assignment occurred; the assigned portion was about 40% of Vigil’s outstanding accounts.

## Issues

1. Whether the assignment of Vigil’s receivable to CECO was an outright assignment outside Article 9, or a security interest in accounts governed by Article 9 of the Arizona UCC.
2. If Article 9 applied, whether the assignment qualified for the “insignificant part” exception such that no filing was required to perfect.
3. If unperfected, whether the trustee could avoid CECO’s interest and treat CECO as unsecured in bankruptcy.

## Decision

- The Bankruptcy Appellate Panel affirmed the bankruptcy court.
- The assignment functioned as collateral for an existing obligation and was therefore a security interest in accounts subject to Article 9.
- The “insignificant part” exception did not apply because the assignment transferred about 40% of Vigil’s outstanding accounts.
- Because CECO did not file to perfect, the trustee could avoid the unperfected interest, leaving CECO with an unsecured claim.

## Legal Principles

- Transactions labeled as “assignments” are characterized by their economic substance; if the transfer secures payment of a debt and the debtor remains obligated, it is treated as an Article 9 security interest.
- A security interest in accounts generally must be perfected by filing a financing statement unless a statutory exception applies.
- The “insignificant part” exception for assignments of accounts is limited to casual or isolated transfers and does not cover a transfer of a substantial share of the debtor’s accounts (such as roughly 40%).
- In bankruptcy, an unperfected security interest is subordinate to the trustee’s rights as a hypothetical lien creditor and may be avoided, resulting in unsecured status for the creditor.

## Conclusion

The panel held that CECO’s receivable assignment was a security interest governed by Article 9, required filing to perfect because it transferred a significant portion of Vigil’s accounts, and was avoidable by the Chapter 7 trustee due to nonperfection.


In re Vigil Bros. Constr., Inc., 193 B.R. 513 (B.A.P. 9th Cir. 1996)