Lender Lien Priority Disputes

With the downturn in the economy beginning in 2008 and corresponding uptick in lender foreclosures and collection actions, Colorado courts have been revisiting the arena of secured transactions. In certain cases, competing lenders have skirmished over the assets of a common borrower. These skirmishes can be expensive and inefficient for lenders to resolve through litigation. Fortunately, a recent Colorado Court of Appeals decision has clarified the process of determining the category of asset under the Uniform Commercial Code (UCC). This decision may help competing lenders avoid costly litigation and resolve lien priority disputes without resorting to protracted formal legal proceedings.

Specifically, the Colorado Court of Appeals recently addressed a lender lien priority dispute in Millennium Bank v. UPS Capital Business Credit, 327 P.3d 335 (Colo. App. 2014). This dispute involved two lenders both of which asserted a secured, first position interest in the proceeds of a substantial arbitration award granted to a common borrower. One lender claimed that the arbitration proceeds were proceeds of an account receivable under the UCC in which it had a secured priority interest, while the other lender argued that the arbitration proceeds where general intangibles under the UCC in which it had a secured priority interest.

One of the key questions for the Colorado Court of Appeals was the analytical process of determining precisely how to characterize collateral under the UCC in a lender lien priority dispute. No prior court rulings on the UCC provided specific guidance on this question.

Ultimately, the Court of Appeals held that it is the nature of claim for which damages are awarded that determines the type of collateral under the UCC. In this particular case, the Appeals Court held that the arbitration award constituted a claim for breach of warranty for bad paint and, as such, the underlying debtor’s claim for breach of warranty was properly classified as a general intangible rather than an account receivable. The Colorado Court of Appeals clarified that rights to recover debts, money and damages for breach of contact (such as a lawsuit to recover damages for defective paint) are generally considered general intangibles under Colorado’s UCC.

Interestingly, the Court of Appeals concluded that courts should look to the underlying claim when characterizing collateral under the UCC even though the amount awarded to the borrower in this particular case reflected an amount for services rendered by the borrower. A payment for services rendered is traditionally thought of as an “account” under the UCC. However, the Colorado Appeals Court held: “it is not the measure of damages, but the nature of the claim for which the damages are awarded” that courts should look to in characterizing collateral in lender lien priority disputes. Accordingly, it was the fact that the underlying arbitration claim was for breach of warranty on paint quality that determines the type of collateral under the UCC and not the fact that the damages awarded to the borrower was for the services it rendered.

Hopefully, this recent ruling will serve to help resolve lender lien priority disputes by clarifying the process of properly characterizing borrower’s collateral under the UCC. Now that the analytical process is clearer, it will likely be more efficient and less costly for competing lenders to determine the type of collateral under the UCC.

Note: The successful appeal case referenced in this article, Millennium Bank v. UPS Capital Business Credit, 327 P.3d 335 (Colo. App. 2014), was won by Frascona, Joiner, Goodman and Greenstein, P.C. attorneys Jordan C. May and Corey T. Zurbuch.