Wheeling & Lake Erie Railway Co. v. Keach

United States Court of Appeals
For the First Circuit
No. 15-9003
IN RE MONTREAL, MAINE & ATLANTIC RAILWAY, LTD.,
Debtor.
_____________________
WHEELING & LAKE ERIE RAILWAY CO.,
Appellant,
v.
ROBERT J. KEACH, Chapter 11 Trustee, ET AL.,
Appellees.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Torruella, Selya and Dyk,*
Circuit Judges.
George J. Marcus, with whom David C. Johnson, Andrew C.
Helman, and Marcus, Clegg & Mistretta, P.A. were on brief, for the
appellant.
Robert J. Keach, with whom Bernstein Shur Sawyer & Nelson was
on brief, for appellee.
* Of the Federal Circuit, sitting by designation.
August 19, 2015
SELYA, Circuit Judge. This bankruptcy appeal presents
an issue of first impression at the federal appellate level: does
Article 9 of the Uniform Commercial Code (UCC), as enacted in
Maine, govern the taking and perfection of a security interest in
a right to payment arising under an insurance policy? The
bankruptcy court answered this question in the negative;
determined that Maine common law controlled; and held that the
affected creditor, appellant Wheeling & Lake Erie Railway Company
(Wheeling), had failed properly to perfect its security interest
in payments due to the debtor under an insurance policy. See In
re Montreal Me. & Atl. Ry. Ltd. (MMA I), No. 13-10670, 2014 WL
1491301, at *2 (Bankr. D. Me. Apr. 15, 2014). Based on this
determination, the court awarded the proceeds from a settlement
arising out of a disputed claim under the policy to the debtor,
free and clear of Wheeling's asserted interest. See id. The
bankruptcy appellate panel (BAP) affirmed, see Wheeling & Lake
Erie Ry. Co. v. Keach (In re Montreal, Me. & Atl. Ry., Ltd.) (MMA
II), 521 B.R. 703, 715 (B.A.P. 1st Cir. 2014), and so do we.
I. BACKGROUND
We briefly rehearse the facts and travel of the case.
In June of 2009, Wheeling extended to the debtor, Montreal, Maine
and Atlantic Railway, Ltd. (MMA), a $6,000,000 line of credit. To
secure its obligations under the line of credit, MMA executed and
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delivered to Wheeling a security agreement (the Agreement).1 The
Agreement purposed to grant Wheeling a security interest in:
A. All Accounts and other rights to payment
(including Payment Intangibles), whether or
not earned by performance, including but not
limited to, payment for property or services
sold, leased, rented, licensed, or assigned.
This includes any rights and interests
(including all liens) that [MMA] may have by
law or agreement against any account debtor or
obligor of [MMA].
B. All Inventory[.]
C. All additions, accessions, substitutions,
replacements, products to or for, and all cash
or non-cash proceeds of any of the foregoing,
including insurance proceeds.
It further provided that all rights thereunder were to be governed
by Maine law, except where Maine's iteration of the UCC directed
application of the law of the state in which MMA was located
(Delaware).
Wheeling sought to perfect its security interest by
filing a UCC-1 financing statement with the Delaware Department of
State. It took no other action to perfect an interest in any
insurance policies that MMA might hold or come to hold.
1 Several of MMA's affiliates were parties to the line of
credit, the Agreement, and a series of related transactions. For
ease in exposition, we refer to MMA and its affiliates,
collectively, as MMA. We similarly omit any discussion of parallel
Canadian insolvency proceedings involving MMA's Canadian
subsidiary.
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In April of 2013, Travelers Property Casualty Company of
America (Travelers) issued a commercial property insurance policy
(the Policy) to MMA. The Policy granted MMA $7,500,000 of total
coverage and contained a section purporting to cover business
interruption. Within a matter of months, a calamitous incident of
historic proportions brought the Policy into play.
On July 6, an MMA freight train that included 72 tanker
cars filled with oil derailed in Lac-Mégantic, Québec. The
derailment sparked massive explosions, which destroyed part of
Lac-Mégantic and killed 47 people. In the wake of this disaster,
MMA filed a claim under the Policy for, inter alia, lost business
income. Travelers denied the claim, asserting that it had not
insured against business interruption.
In early August, MMA filed a voluntary petition for
protection under Chapter 11 of the Bankruptcy Code. See 11 U.S.C.
§ 301. Shortly thereafter, Robert J. Keach (the trustee) was
appointed to serve as Chapter 11 trustee for MMA's railroad
reorganization proceeding. See id. § 1163. Travelers moved for
relief from the automatic stay, see id. § 362, so that it could
seek a declaration that the Policy did not afford business
interruption coverage. The bankruptcy court denied this motion.
Wheeling — which by then was owed the entire $6,000,000
under the line of credit — soon instituted an adversary proceeding
against MMA, Travelers, and the trustee in which it sought a
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declaration regarding the nature, extent, validity, and priority
of its asserted security interest in any payments due under the
Policy. Without objection, the bankruptcy court stayed the
adversary proceeding. Meanwhile, MMA and the trustee began
negotiations with Travelers. Those negotiations culminated in a
settlement that, in relevant part, required Travelers to pay
$3,800,000 to MMA in satisfaction of all claims under the Policy.
When the trustee moved for bankruptcy court approval of
the settlement, Wheeling objected. Wheeling argued that the
Agreement granted it a first-priority security interest in the
proposed settlement. The gist of Wheeling's position was that it
held a perfected security interest in all payment rights belonging
to MMA and that the proposed settlement payment constituted
proceeds of MMA's right to payment under the Policy, which —
although contingent — arose at the time the Policy was issued.
Initially, the bankruptcy court temporized: it granted
the approval motion but ordered the funds held in escrow pending
a determination of the rights of the parties and the priorities of
their competing claims. The bankruptcy court later ruled that
Wheeling's asserted security interest was unenforceable because
Article 9 of the UCC does not apply to an interest in a claim under
a policy of insurance and Wheeling had failed to perfect its
interest under Maine common law. See MMA I, 2014 WL 1491301, at
*2. Building on this foundation, the court concluded that MMA was
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entitled to the settlement proceeds free and clear of Wheeling's
asserted interest. See id. Wheeling appealed to the BAP, which
affirmed. See MMA II, 521 B.R. at 715. This timely second-tier
appeal ensued.
II. ANALYSIS
Appeals in bankruptcy cases are filtered through a two-
tiered system of intermediate appellate review. A disappointed
litigant normally must take a first-tier appeal to either the
district court or the BAP. See 28 U.S.C. § 158(a)-(b); Brandt v.
Repco Printers & Lithographics, Inc. (In re Healthco Int'l, Inc.),
132 F.3d 104, 107 (1st Cir. 1997). Whichever route the litigant
chooses, further recourse is to the courts of appeals. See 28
U.S.C. § 158(d)(1); City Sanit., LLC v. Allied Waste Servs. of
Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 87 (1st Cir.
2011). We accord no special deference to determinations made by
the first-tier appellate tribunal but, rather, train the lens of
our inquiry directly on the bankruptcy court's decision. See
Gannett v. Carp (In re Carp), 340 F.3d 15, 21 (1st Cir. 2003).
Within this framework, we assay the bankruptcy court's findings of
fact for clear error and its conclusions of law de novo. See Am.
Cartage, 656 F.3d at 87.
A. Applicability of Article 9.
In bankruptcy proceedings, state law generally supplies
the rules governing the validity and perfection of security
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interests. See Indian Motocycle Assocs. III Ltd. P'ship v. Mass.
Hous. Fin. Agency, 66 F.3d 1246, 1252 (1st Cir. 1995). Here, the
Agreement directs us to Maine as the source of the relevant state
law. In Maine, secured transactions are largely governed by a
state-specific adaptation of Article 9 of the UCC. See Me. Rev.
Stat. tit. 11, §§ 9-1101 to 9-1709.
Wheeling posits that Article 9, as enacted in Maine,
applies to the creation of security interests in rights to payment
arising under insurance policies. It further posits that because
Article 9 governs the taking and perfection of security interests
in such payment rights, the bankruptcy court erred by looking to
the common law to evaluate the enforceability of Wheeling's
asserted interest.
As relevant here, Article 9 applies to transactions
"regardless of [] form, that create[] a security interest in
personal property or fixtures by contract." Id. § 9-1109(1)(a).
But Article 9 expressly excludes certain transactions from its
scope. The validity of security interests created through such
transactions is determined by reference either to other statutes
or to the common law. See Am. Bank & Trust Co. v. Jardine Ins.
Servs. Tex., Inc. (In re Barton Indus., Inc.), 104 F.3d 1241, 1246-
47 (10th Cir. 1997).
One subset of transactions that Article 9 excludes
encompasses the "transfer of an interest in or an assignment of a
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claim under a policy of insurance." Me. Rev. Stat. tit. 11, § 9-
1109(4)(h). Thus, the question becomes whether Article 9's
insurance exclusion covers payment rights under insurance
policies. We turn to that question.
The insurance exclusion is broadly worded. It was
inserted in Article 9 to ensure that financing arrangements
involving the use of insurance policies as collateral would remain
matters of state insurance law. See 7 Thomas M. Quinn, Quinn's
Uniform Commercial Code Commentary & Law Digest § 9-104[A][9] (rev.
2d ed. 2011); see also Thico Plan, Inc. v. Maplewood Poultry Co.
(In re Maplewood Poultry Co.), 2 B.R. 550, 554 (Bankr. D. Me. 1980)
(Cyr, J.) (noting that insurance transactions were excluded at
insurance industry's request). This is borne out by the official
commentary to Article 9, which originally explained that all
transactions involving the use of "[r]ights under" insurance
policies as collateral were excluded because such transactions
"are often quite special, do not fit easily under a general
commercial statute and are adequately covered by existing law."
Me. Rev. Stat. tit. 11, § 9-104 cmt. 7 (repealed 2001).2
2 We say "originally" because the Maine legislature enacted
an overhauled version of Article 9 (known as Revised Article 9)
some 15 years ago. Those revisions, widely enacted by other states
as well, were accompanied by their own commentary. But the
revisions leave the insurance exclusion intact, and the newer
commentary does not contradict the language alluded to above.
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By its terms, the exclusion applies to the use of an
insurance policy as original collateral or to any assignment of a
claim under an insurance policy. See Am. Bank, FSB v. Cornerstone
Cmty. Bank, 733 F.3d 609, 614 (6th Cir. 2013); PPG Indus., Inc. v.
Hartford Fire Ins. Co., 531 F.2d 58, 60 (2d Cir. 1976). And the
exclusion is generally understood to sweep more expansively in
line with the official commentary's reference to the use of
"rights" under an insurance policy as collateral. Consistent with
this broader articulation of applicability, courts regularly have
read the exclusion to remove from the reach of Article 9 any
transaction involving the transfer of rights under an insurance
policy.
One example will suffice. Many cases construing the
exclusion have done so in the context of determining whether the
exclusion applies to the creation of security interests in refunded
insurance premiums under premium financing agreements. Courts
typically have concluded that the right to reimbursement of
unearned premiums is an interest arising under a policy of
insurance and, thus, lies within the exclusion and outside the
scope of Article 9. See, e.g., In re JII Liquidating, Inc., 344
B.R. 875, 882-84 (Bankr. N.D. Ill. 2006) (citing cases). Their
reasoning emphasizes that the Article 9 insurance exclusion
applies to the transfer of "interests inseparable from insurance
policies." Maplewood Poultry, 2 B.R. at 555; see Drabkin v. A.I.
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Credit Corp. (In re Auto-Train Corp.), 9 B.R. 159, 164-65 (Bankr.
D.D.C. 1981).
Viewed against this backdrop, the assignment of a right
to payment under an insurance policy, which is inseparable from
the policy itself, falls squarely within the heartland of the
exclusion. One can scarcely imagine a right more central to an
insurance contract than the policyholder's right to be paid.
Indeed, the very purpose of the exclusion was to place this type
of financing transaction beyond the reach of Article 9. See 9A
William D. Hawkland & Frederick H. Miller, Uniform Commercial Code
Series § 9-109:12 [Rev] (2001) (explaining that Article 9 purposely
excludes transactions in which debtor uses right to be paid under
insurance policy as collateral).
Wheeling balks at this seemingly straightforward
application of the insurance exclusion. It submits that there is
a difference between a "claim" under an insurance policy and a
"right to payment" under an insurance policy, and that the
exclusion applies only to the former. In its view, the former is
the process by which a policyholder demands payment whereas the
latter is either an "account" or a "payment intangible" (both of
which are forms of collateral falling within the scope of Article
9).
This acrobatic exercise in semantics does not get
Wheeling very far. Although there may be a difference between a
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claim and a right to payment, Wheeling's argument hinges on a
tortured reading of the insurance exclusion. Its argument assumes
that the insurance exclusion applies only to claims under insurance
policies, but that assumption has quite properly been rejected by
a number of courts as contrary to the plain language of the
exclusion. See Am. Bank, 733 F.3d at 614 (collecting cases). The
impetus for this chorus of rejection is both compelling and
obvious: by its terms, the insurance exclusion applies broadly to
interests in as well as to claims under an insurance policy. See
Me. Rev. Stat. tit. 11, § 9-1109(4)(h). To cinch the matter, the
original commentary makes it transparently clear that the
insurance exclusion was meant to cover the use of rights under
insurance policies as collateral. Thus, even if we grant
Wheeling's premise that a contingent right to payment (divisible
from any associated claims) came into being when the Policy was
issued, that right to payment is inextricably intertwined with the
Policy itself and plainly beyond the reach of Article 9.3
3 Article 9 does contain an exception for insurance payments
that constitute proceeds of other collateral. See Me. Rev. Stat.
tit. 11, § 9-1109(4)(h). But that exception requires that a
creditor have a valid security interest in some other collateral
as to which an insurance payment is "proceeds." See Miller v.
Norwest Bank Minn., N.A. (In re Inv. & Tax Servs., Inc.), 148 B.R.
571, 574 (Bankr. D. Minn. 1992). Because Wheeling's asserted
interest in MMA's contingent right to payment under the Policy is
invalid, it does not have a security interest in any collateral as
to which the settlement payment can be considered proceeds. See
id.
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In an apparent effort to create some space between MMA's
right to payment of the settlement funds and the Policy itself
(and thereby escape the grasp of Article 9's insurance exclusion),
Wheeling alternatively suggests that the payment right did not
come into existence until Travelers agreed to pay the settlement
amount to MMA. But this alternative theory does not sufficiently
disentangle the right to receive payment under the Policy from an
interest in the Policy itself. Even if it did, the theory would
fail as a matter of bankruptcy law.
Under the Bankruptcy Code, a security interest that is
properly perfected before the initiation of bankruptcy proceedings
does not extend to property rights acquired by either the debtor
or the bankruptcy estate after the filing of the bankruptcy
petition. See 11 U.S.C. § 552(a). Here, Travelers did not agree
to pay MMA in satisfaction of its claims under the Policy until
after MMA instituted bankruptcy proceedings. Under Wheeling's
alternative theory, therefore, MMA's right to payment would
constitute post-petition property to which Wheeling's asserted
security interest cannot attach.4
4 For the sake of completeness, we note that since Wheeling
asserts (for purposes of this argument) that it has an interest in
MMA's right to payment as original collateral, the Bankruptcy
Code's exception for post-petition proceeds would be inapplicable.
See 11 U.S.C. § 552(b).
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Caught between the Scylla of the insurance exclusion and
the Charybdis of section 552(a), Wheeling makes two further
attempts to convince us that we have overlooked subtle nuances
lurking in the penumbras of Article 9. Neither attempt is
persuasive.
First, Wheeling labors to construct a parallel between
Article 9's insurance exclusion and Article 9's treatment of tort
claims. But that parallel is more imagined than real. Article 9
expressly excludes security interests in "claim[s] arising in
tort," Me. Rev. Stat. tit. 11, § 9-1109(4)(l), but "once a claim
arising in tort has been settled and reduced to a contractual
obligation to pay, the right to payment becomes a payment
intangible and ceases to be a claim arising in tort," id. § 9-1109
cmt. 15. Unlike a tort claim, however, the right to payment under
an insurance policy is always in the nature of "a contractual
obligation to pay." And at any rate, the insurance exclusion
applies broadly to interests in and claims under an insurance
policy, whereas the tort exclusion applies solely to claims. The
two exclusions are simply not fair congeners.
Wheeling's second effort is no more rewarding. It
insists that interpreting the insurance exclusion to exclude
payment rights under insurance policies contravenes the intent of
both the drafters of the UCC and the Maine legislature. But the
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opposite is true: it is Wheeling's position that is at odds with
legislative intent. We explain briefly.
Although Revised Article 9 expanded the number and type
of transactions subject to the statute in an endeavor to bring
greater certainty to the law of securitization — the drafters
widened the definition of "account" and added a new category of
collateral called "payment intangibles" — these changes by no means
evinced an intent to bring all payment streams within the scope of
Article 9. Pertinently for present purposes, the drafters chose
to retain the broadly worded insurance exclusion with minimal
modifications (none of which is helpful to Wheeling).
Wheeling's suggestion that the revised definition of
"account" includes the right to payment under an insurance policy
is wishful thinking. Even though an "account" is now defined to
include "a right to payment of a monetary obligation . . . [f]or
a policy of insurance issued or to be issued," id. § 9-1102(2)(c),
that language has nothing to do with the policyholder's right to
payment under an insurance contract. Rather, the quoted language
refers to an insurer's right to be paid in connection with the
sale of an insurance policy. Had the drafters intended the term
"account" to include insurance payouts, the definition would have
referred to payment under an insurance policy instead of payment
for the issuance of a policy. After all, it would be curious for
a policyholder to be paid for the issuance of its policy.
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Our construction of this language is buttressed by the
fact that most of the other items included within the meaning of
"account" correspond to receivables that a commercial debtor is
likely to generate in the course of its business. See United
States v. Williams, 553 U.S. 285, 294 (2008) (explaining that under
canon of noscitur a sociis words and phrases are "given more
precise content by the neighboring words with which [they are]
associated"). For example, the term "account" includes
receivables related to the sale or lease of property, see Me. Rev.
Stat. tit. 11, § 9-1102(2)(a), the provision of services, see id.
§ 9-1102(2)(b), the sale of energy, see id. § 9-1102(2)(e), and
the use of charge cards, see id. § 9-1102(2)(g).
Any lingering doubt as to whether the definition of
"account" includes a policyholder's right to payment under an
insurance policy is dispelled by Article 9's treatment of "health-
care-insurance receivables." Article 9 expressly carves such
receivables out of the insurance exclusion, see id. § 9-1109(4)(h),
and explicitly identifies them as a species of "account," see id.
§ 9-1102(2). To accomplish this singular treatment, a health-
care-insurance receivable is defined as "an interest in or claim
under a policy of insurance that is a right to payment of a monetary
obligation for health-care goods or services provided or to be
provided." Id. § 9-1102(46). We think that it is no coincidence
that this definition refers particularly to interests in and claims
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under health-care-insurance policies. Solely as a result of this
added language, health-care-insurance receivables include a
"patient's right to payment under [his] health-care insurance
policy." Steven L. Harris & Charles W. Mooney, Jr., How Successful
Was the Revision of UCC Article 9?: Reflections of the Reporters,
74 Chi.-Kent L. Rev. 1357, 1376 (1999). That right is deemed to
be an "account" despite the fact that "the patient's right to
payment is not of a type that is included . . . in the broader
definition of [account] in Revised Article 9." Id. No comparable
language applies to claims for payment under other types of
insurance policies.
The UCC's singular treatment of health-care-insurance
claims is telling. If the term "account" already included a
policyholder's right to payment under an insurance policy, there
would have been no reason at all for the drafters of Article 9 to
excise health-care-insurance receivables from the insurance
exclusion and add specific language designed to bring those
receivables — and only those receivables — within the definition
of "account." There is a general canon of statutory construction
which teaches that courts should construe statutes to avoid
rendering superfluous any words or phrases therein. See, e.g.,
Astoria Fed. Sav. & Loan Ass'n v. Solimino, 501 U.S. 104, 112
(1991); Stromberg-Carlson Corp. v. State Tax Assessor, 765 A.2d
566, 569 (Me. 2001). That canon applies four-square here:
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accepting Wheeling's ambitious definition of "account" would make
totally redundant the language of Revised Article 9 dealing with
health-care-insurance receivables. There is no justification for
creating such a redundancy by judicial fiat.5
Wheeling's back-up position is that the right to payment
under an insurance policy constitutes a "payment intangible" and,
as such, eludes the insurance exclusion. Here, too, Wheeling's
reach exceeds its grasp.
A "payment intangible" is defined as "a general
intangible under which the account debtor's principal obligation
is a monetary obligation." Me. Rev. Stat. tit. 11, § 9-1102(61).
Though Wheeling's thesis might have a patina of plausibility if
one were to view the definition of "payment intangible" in a
vacuum, that patina dissolves under the glare of careful scrutiny.
It is common ground that when general and specific provisions of
a statute conflict, the specific provision controls. See, e.g.,
HCSC-Laundry v. United States, 450 U.S. 1, 6 (1981) (per curiam);
Ziegler v. Am. Maize-Prods. Co., 658 A.2d 219, 222 (Me. 1995).
5 We add, moreover, that Wheeling's arguments about
legislative intent are further contradicted by the history of the
Article 9 revision process. The drafters of Revised Article 9
originally voted to eliminate the insurance exclusion altogether
but, in the end, settled for bringing health-care-insurance
receivables within the ambit of the statute. See Harris & Mooney,
supra, at 1374-76. Adopting Wheeling's self-serving reading of
Revised Article 9 would gut the insurance exclusion,
notwithstanding the drafters' decision to leave it mostly intact.
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Accordingly, Article 9's general definitional language must bow to
its specific exclusion of rights under a policy of insurance.
Wheeling's exhortation that we should reach a contrary
result on policy grounds is empty rhetoric. Its warning that
leaving insurance financing transactions to the vagaries of the
common law will produce uncertainty and render insurance payments
an under-utilized form of collateral is old hat. See, e.g., Andrew
Verstein, Bad Policy for Good Policies: Article 9's Insurance
Exclusion, 17 Conn. Ins. L.J. 287 (2011) (advocating elimination
of insurance exclusion). The drafters of Revised Article 9 were
well aware of these purported dangers, yet chose to retain the
exclusion. See id. at 341-43; see also Harris & Mooney, supra, at
1374-75 & n.75. The appropriate forum in which to challenge that
policy judgment is the Maine legislature, not the federal courts.
The upshot is that the creation of a security interest
in a right to payment under an insurance policy falls, under
Maine's version of the UCC, squarely within Article 9's insurance
exclusion. We hold, therefore, that the courts below did not err
in rejecting Wheeling's strained effort to read the insurance
exclusion into oblivion.
B. Treatment Under Common Law.
Having correctly found not only that Article 9 was
inapposite but also that no other Maine statute governs the taking
of security interests in insurance rights, the bankruptcy court
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proceeded to conclude that Wheeling had failed to perfect a
security interest under Maine common law. See MMA I, 2014 WL
1491301, at *2. The BAP agreed. See MMA II, 521 B.R. at 714.
Battling on, Wheeling challenges this conclusion.
Because Maine's highest court has not addressed the
common-law requirements for perfecting a security interest in
insurance rights, our duty is to make an informed prophecy as to
how that court would rule if faced with the issue. See Bos. Reg'l
Med. Ctr., Inc. v. Reynolds (In re Bos. Reg'l Med. Ctr., Inc.),
410 F.3d 100, 108 (1st Cir. 2005). In vaticinating the course
that a state court likely would follow, we begin with settled
principles of state law and then consider persuasive authority
from other jurisdictions and the teachings of learned treatises.
See id.; Blinzler v. Marriott Int'l, Inc., 81 F.3d 1148, 1151 (1st
Cir. 1996). While conducting this inquiry, we pay particular heed
to prior public policy pronouncements emanating from the state's
highest court, see Andrew Robinson Int'l, Inc. v. Hartford Fire
Ins. Co., 547 F.3d 48, 52 (1st Cir. 2008), and assume that the
state tribunal would select a rule that best implements those
policies, see Bos. Reg'l Med. Ctr., 410 F.3d at 108.
At common law, a creditor claiming a security interest
through a chattel mortgage was required to perfect its interest by
taking possession of the collateral. See Prod. Credit Ass'n v.
Kent, 56 A.2d 631, 632 (Me. 1948); Peaks v. Smith, 71 A. 884, 886
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(Me. 1908). The Maine legislature later provided that perfection
could also be accomplished by recording the chattel mortgage with
the appropriate municipal official. See Prod. Credit Ass'n, 56
A.2d at 632; Peaks, 71 A. at 886. In instances in which one method
of perfection proved either impossible or impracticable, a
creditor had to comply with the other in order to achieve priority
status. See Prod. Credit Ass'n, 56 A.2d at 633.
The purpose of requiring possession or recordation was
to prevent the creation of secret liens and ensure that bona fide
purchasers as well as creditors were given fair notice of the
encumbrance. See id. at 632; Peaks, 71 A. at 886. This purpose
is shared by the Article 9 regime, see Maplewood Poultry, 2 B.R.
at 555, which now governs most secured transactions in Maine.
Where intangible collateral (such as a payment right
under an insurance policy) is involved, possession is not a
practical method of perfection. Nor does any party suggest that
Maine has a filing system that allows the recordation of interests
in insurance policies. Yet the bankruptcy court has concluded
that, in a situation similar to the situation here, a creditor
could still comply with Maine common law even without recording
its interest or taking possession of the insurance policy. See A-
1 Credit Corp. v. Big Squaw Mt. Corp. (In re Big Squaw Mt. Corp.),
122 B.R. 831, 838-39 (Bankr. D. Me. 1990). This is a sensible
view of the law — and we believe that Maine's highest court would
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not invariably require either possession or recordation as a sine
qua non to the perfection of a security interest in an insurance
policy. In all events, the trustee does not argue to the contrary.
But this conclusion gets us only part-way home: it leaves
open the question of what Maine law actually requires for the
perfection of such an interest. This case does not demand a
definitive answer to that question; principles of federalism and
comity argue convincingly for cabining a federal court's
predictions about how a state's highest court will answer novel
legal questions as narrowly as possible. See Nolan v. CN8, 656
F.3d 71, 76 (1st Cir. 2011) (citing Moores v. Greenberg, 834 F.2d
1105, 1112 (1st Cir. 1987)). Following that wise precept, it
suffices to say here that the Maine Supreme Judicial Court would,
in our view, adopt a perfection rule requiring something more than
what Wheeling did.
Refined to bare essence, Wheeling argues here for a rule
of perfection upon creation (that is, for a rule that the very
creation of a security interest perfects that interest). Although
automatic perfection paradigms are not unknown, such paradigms are
not the norm. See James J. White & Robert S. Summers, Uniform
Commercial Code § 23-5 (6th ed. 2010). Nor is there any sound
reason to think that Maine's highest court would embrace such a
paradigm. After all, a primary goal of both Article 9 and Maine's
pre-UCC perfection rules is to ensure that other creditors have
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notice of the security interest. An automatic perfection rule
would frustrate that goal by making irrelevant the existence vel
non of publicly available evidence of asserted security interests.
Cf. Big Squaw Mt., 122 B.R. at 837 (suggesting that mere retention
of security agreement was insufficient under Maine law to perfect
security interest in insurance policy). Given Maine's well-
established public policy disfavoring secret liens, see, e.g.,
Prod. Credit Ass'n, 56 A.2d at 632-33; Shaw v. Wilshire, 65 Me.
485, 490-92 (1876), we are confident that Maine's highest court
will require some additional step, designed to furnish fair notice
to other creditors, beyond the mere execution of a security
agreement creating an interest in the right to payment under an
insurance policy.
This gets the grease from the goose. In this instance,
Wheeling did nothing to perfect its claimed security interest other
than filing a UCC-1 financing statement in Delaware. That
financing statement described the collateral as "[a]ll of [MMA's]
inventory, accounts and payment intangibles (as those terms are
defined in the Uniform Commercial Code)." Those forms of
collateral, as defined in the UCC, do not include rights under an
insurance policy. See supra Part II.A. And though the financing
statement mentions insurance as a form of proceeds, it does not
identify insurance rights as a form of original collateral. It
follows, we think, that the financing statement was wholly
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inadequate to give fair notice (or, indeed, any notice at all) to
others of Wheeling's purported interest in the Policy.6 We
therefore conclude that Wheeling never perfected its security
interest under Maine common law.
III. CONCLUSION
This case involves collateral that is, by means of a
clearly articulated exclusion set forth in Maine's version of the
UCC, outside the scope of Article 9. That exclusion plainly
forecloses attempts to create a security interest in "a claim under
a policy of insurance." Wheeling does not assert a direct interest
in the insurance policy issued by Travelers to MMA but, rather,
asserts a right to receive the only useful value of the Policy: a
claim for payment under it. However, the insurance exclusion
encompasses all rights to payment under insurance policies. It
follows that a security interest in "accounts" and "payment
intangibles" (like that held by Wheeling) does not attach to such
rights.
6 Apart from filing the financing statement — a step that was
meaningless in terms of providing fair notice to others that
Wheeling was claiming a security interest in a right to payment
under an insurance policy issued to MMA — Wheeling took no other
steps to perfect its asserted security interest even though such
steps were feasible. For example, Wheeling could have informed
Travelers of its interest prior to the accrual of the claim and
taken a direct assignment, or required MMA to name it as a loss
payee under the Policy as a condition for establishing the line of
credit.
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In the last analysis, the letter of the insurance
exclusion does not permit the hairsplitting that Wheeling would
have us undertake. Instead, the exclusion, properly read, makes
it pellucid that the UCC does not furnish the rules for taking or
perfecting security interests in future insurance payouts. Here,
those rules must be distilled from Maine common law. And for the
reasons elucidated above, we find that Wheeling's meager efforts
at perfection, which in practical terms gave no notice at all to
other creditors of its purported security interest in the insurance
settlement proceeds at issue here, would be deemed impuissant by
Maine's highest court.
We need go no further. We hold that the courts below
did not err in concluding that MMA was entitled to the proposed
settlement payment free and clear of Wheeling's asserted security
interest.
Affirmed.
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