“All Commercial Tort Claims” is Insufficient Description to Perfect a Security Interest

By: Megan O’Connor

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

In Polk 33 Lending LLC v. Schwartz, a district court in Delaware held that a credit agreement did not identify the tort claims with the “requisite specificity” to convey a security interest in those claims to the lender.[1] Thus, the lender, Polk 33 Lending, LLC (“Polk”), did not have standing to assert commercial tort claims, breach of fiduciary duty and corporate waste, against the CEO of Aerogroup International Inc. (“Aerogroup”). [2] On September 15, 2017, Aerogroup filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) with the Delaware Bankruptcy Court.[3] During the bankruptcy case, Aerogroup filed a motion for an order authorizing it to obtain postpetition financing (“DIP Financing”) from Polk.[4] The purpose of the DIP Financing was to allow Aerospace to continue its operations while it pursued a sale of its assets in an attempt to “increase likelihood” that the business be preserved, and the value of assets maximized.[5] The DIP Financing credit agreement provided that the loan was secured by only collateral subject to Polk’s security interest for the DIP Facility which included “all commercial tort claims (including D&O claims)”.[6] Following the sale of Aerogroup’s assets, the bankruptcy court dismissed Aerogroup’s chapter 11 case. Thereafter, Polk filed a complaint against Aerogroup’s CEO (“Schwartz”) in the Delaware District Court asserting claims of breach of fiduciary duty and corporate waste.[7] Schwartz moved to dismiss the complaint arguing that because Polk asserted commercial tort claims for injuries to Aerogroup, Polk did not have standing to assert its claims.  

Delaware’s version of the Uniform Commercial Code (“DCC”) states that a security interest in a commercial tort claim must be specifically identified and such an interest is “insufficiently described when described only by a type of collateral.”[8] Here, the DIP Credit Agreement provided only that the collateral subject to Polk’s security interest for the DIP Facility included “all commercial tort claims (including D&O Claims).”[9] The court found the DIP Credit Agreement to be overgeneralized and insufficient according to DCC Section 9-108(e)(1) and thus did not convey to Polk a security interest in the D&O claims.[10] Because Polk did not have a perfected security interest in the D&O claims, it therefore has no standing to assert them.[11]

According to the Delaware District Court, a DIP credit agreement including as collateral “all commercial tort (including D&O Claims)” is an overgeneralized “type of collateral” identification that is insufficient according to DCC Section 9-108(e)(1) to perfect a security interest.[12] Therefore, to create a security interest, security agreement or controlling documents must expressly reference the D&O claims within the agreement.[13]




[1]Polk 33 Lending LLC v. Schwartz, No. CV 20-1647, 2021 WL 3662868, at *3 (D. Del. Aug. 18, 2021).

[2] Id. at *1.

[3] Id.

[4] Id.

[5] See id.

[6] Id. at *3. D&O insurance claims are paid to directors and officers of a company or organization for losses or reimbursement of defense costs if legal action is brought against them. See Julia Kagan, Directors and Officers (D&O) Liability Insurance, Investopedia, Aug. 29, 2021, https://www.investopedia.com/terms/d/directors-and-officers-liability-in...

[7] Id. at *1, *2.

[8]Schwartz, No. CV 20-1647, 2021 WL 3662868, at *3; see e.g., In re JMF CAB, Inc., 614 B.R. 648, 650-52 (Bankr. D. Mas. 2020); see also 6 Del. C. § 9-108(e)(1) (stating that a security interest in a commercial tort claim is insufficiently described when described only by a type of collateral).

[9] Schwartz, No. CV 20-1647, 2021 WL 3662868, at *3.  

[10] Id.

[11] Id.

[12] Id.

[13] Schwartz, No. CV 20-1647, 2021 WL 3662868, at *3.