North Carolina Reports

Defendants. No. COA06-242. North Carolina Court of
Appeals. Filed 2 January 2007.

Guilford County No. 04 CVS 12199

Appeal by defendant-appellant from judgment entered 26
September 2005 by Judge Lindsay R. Davis, Jr., in Guilford
County Superior Court. Heard in the Court of Appeals 24
August 2006.

Clark Bloss & Wall, PLLC, by John F. Bloss, for

Brinkley Walser, PLLC, by G. Thompson Miller, for

Carruthers & Roth, by Kenneth R. Keller.


Defendant-appellant, CM Partnership (“CM”), appeals from
summary judgment entered in favor of defendant-appellee
Lexington State Bank (“LSB”). We affirm.

Forsyth Drywall and Fireproofing, L.L.C. (“Forsyth
Drywall”) is a North Carolina corporation; defendants are
secured creditors of Forsyth Drywall. The relevant facts
are summarized as follows: In 1999 LSB loaned money to
Forsyth Drywall, secured by Forsyth Drywall’s inventory,
accounts, equipment, and other collateral. LSB filed a UCC
financing statement on 12 February 1999. In 2001 United
Capital Funding Corp. (“UC”) was interested in factoring
some of Forsyth Drywall’s accounts receivable. When UC’s
investigation revealed that Forsyth Drywall’s accounts
receivable were part of the collateral for LSB’s loan to
Forsyth Drywall and thus were subject to a prior lien, UC
requested a “first lien position” before it would factor
Forsyth Drywall’s accounts. On 24 September 2001 LSB filed
an amendment to its financing statement, purporting to make
a partial assignment to UC of its “security interest” in
certain of Forsyth Drywall’s accounts receivable.
Thereafter, UC advanced Forsyth Drywall money in exchange
for certain of Forsyth Drywall’s accounts receivable.

On 20 June 2002 Forsyth Drywall entered into a separate
factoring agreement with CM, in which CM agreed to buy
Forsyth Drywall’s accounts receivable, including the
account at issue herein. CM advanced money to Forsyth
Drywall, which then repaid the money it had borrowed from
UC. Forsyth Drywall and CM executed a security agreement
setting out the terms of their factoring agreement.
However, CM did not file a UCC financing statement until
January 2003.

On 26 June 2002 LSB executed a second loan to Forsyth
Drywall, consolidating its debt to LSB. This loan was also
secured by Forsyth Drywall’s assets, inventory, accounts
receivable, and other collateral, including the account at
issue in the present case. LSB perfected its security
interest in this collateral by reliance on its 1999
financing statement. In February 2003 UC executed a
“reassignment” of the first lien position to LSB.

Forsyth Drywall later defaulted on its obligations to both
LSB and CM, and filed a Chapter 7 bankruptcy petition in
March 2003. Thereafter, defendants each claimed a first
priority, perfected security interest in approximately
$72,500 that plaintiff Rentenbach Constructors, Inc., owes
to Forsyth Drywall. Plaintiff, which is not a party to this
appeal, filed an interpleader action in November 2004.
Defendants interpled their respective claims, and each
filed a summary judgment motion. On 26 September 2005 the
trial court granted LSB’s motion for summary judgment, from
which order CM appeals.[fn1]

Standard of Review

CM appeals the entry of summary judgment in favor of LSB.
Summary judgment is proper “if the pleadings, depositions,
answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that any party is
entitled to a judgment as a matter of law.” N.C. Gen. Stat.
§ 1A-1, Rule 56(c) (2005). In the instant case:

Each party based its claim upon the same sequence of
events. . . . Neither party has challenged the accuracy or
authenticity of the documents establishing the occurrence
of these events. Although the parties disagree on the
legal significance of the established facts, the facts
themselves are not in dispute. Consequently, we conclude
that `there is no genuine issue as to any material fact’
surrounding the trial court’s summary judgment order. We
next consider whether the trial court correctly determined
that [LSB] `is entitled to a judgment as a matter of law.’

Adams v. Jefferson-Pilot Life Ins. Co., 148 N.C. App. 356,
359, 558 S.E.2d 504, 507 (2002) (quoting N.C. Gen. Stat.
§ 1A-1, Rule 56 (2005)).

The issue before the trial court was determination of which
defendant had a priority lien position with respect to
monies owed by plaintiff to Forsyth Drywall. We agree with
the parties that the relevant transactions are governed by
the Uniform Commercial Code, N.C. Gen. Stat. §
25-1-101 et. seq (2005) (hereinafter the UCC). See N.C.
Gen. Stat. § 25-9-109(a)(1) and (3) (2005). In our
analysis, we have also made use of the Official Comment to
various sections of the UCC:

This Court has noted that the commentary to a statutory
provision can be helpful in some cases in discerning
legislative intent. In Bogle this Court noted that since
the commentary printed with the [statute at issue] was
not enacted into law, it was not binding but, where
proper, could be given substantial weight in our efforts
to discern legislative intent.

Parsons v. Jefferson-Pilot Corp., 333 N.C. 420, 425, 426
S.E.2d 685, 689 (1993) (citing State v. Bogle, 324 N.C.
190, 376 S.E.2d 745 (1989)) (other citation omitted).

Priority among competing security interests is governed
generally by N.C. Gen. Stat. § 25-9-322 (2005),
which states in relevant part that:

(a) . . . Except as otherwise provided in this section,
priority among conflicting security interests . . . in the
same collateral is determined according to the following

(1) Conflicting perfected security interests . . . rank
according to priority in time of filing or perfection.
Priority dates from the earlier of the time a filing
covering the collateral is first made or the security
interest . . . is first perfected, if there is no period
thereafter when there is neither filing nor perfection.

N.C. Gen. Stat. § 25-9-322(a)(1) (2005) (emphasis
added). The “filing covering the collateral” is a UCC-1
financing statement:

Pursuant to §§ 25-9-302(1) and 25-9-303,
therefore, a financing statement that identifies the
debtor, covers the collateral at issue, and contains the
debtor’s signature must be filed in order to perfect a
security interest of the kind at issue in this case.
Because filing is a necessary element of perfection,
§ 25-9-303, the priority provision discussed above,
§ [25-9-322(a)(1)], essentially creates a rule in
which the first creditor to file a sufficient financing
statement has priority.

In Re Environmental Aspecs, Inc., 235 B.R. 378, 385
(E.D.N.C. 1999) (emphasis added) (citing Finance Co. v.
Finance Co., 36 N.C. App. 401, 245 S.E.2d 510 (1978)); see
also N.C. Gen. Stat. § 25-9-310(a) (2005) (“Except
as otherwise provided . . . a financing statement must be
filed to perfect all security interests and agricultural
liens.”). Thus, the first party to perfect its security
interest in collateral by filing a UCC financing statement
generally will have priority over subsequent lenders who
rely on the same collateral to secure a loan.

The financing statement may be filed before the security
agreement is drafted. See N.C. Gen. Stat. §
25-9-308(a) (2005) (A security interest is perfected if “it
has attached and all of the applicable requirements for
perfection in G.S. 25-9-310 through G.S. 25-9-316 have been
satisfied. A security interest is perfected when it attaches
if the applicable requirements are satisfied before the
security interest attaches.”).

“North Carolina’s is essentially a system of notice filing
pursuant to which the notice provided by a financing
statement `indicates merely that the secured party who has
filed may have a security interest in the collateral
described. Further inquiry from the parties concerned will
be necessary to disclose the complete state of affairs.’
`The purpose of a notice-filing statute is to . . .
furnish[] to others intending to enter a transaction with
the debtor a starting point for investigation which will
result in fair warning concerning the transaction
contemplated.”‘ In Re Environmental Aspecs, Inc., 235 B.R.
at 385-86 (quoting Evans v. Everett, 279 N.C. 352, 356, 183
S.E.2d 109, 112 (1971), and TMMB Funding v. Associated Food
Stores, 136 A.D.2d 540, 542, 523 N.Y.S.2d 161, 163
(N.Y.A.D. 2d Dep’t 1988)).

Accordingly, “the financing statement’s purpose is to
merely alert the third party as to the need for further
investigation, never to provide a comprehensive data bank
as to the details of prior security arrangements. The
notice system of the Code places the burden of further
inquiry upon anyone seeking additional information.”
Thompson v. Danner, 507 N.W.2d 550, 561 (N.D. 1993)
(citation omitted). In this regard, the Commentary to N.C.
Gen. Stat. § 25-9-502 states in pertinent part that:

. . . This section adopts the system of `notice filing.’
What is required to be filed is . . . only a simple record
providing a limited amount of information (financing
statement). The financing statement may be filed before
the security interest attaches or thereafter. . . . The
notice itself indicates merely that a person may have a
security interest in the collateral indicated. Further
inquiry from the parties concerned will be necessary to
disclose the complete state of affairs. . . .

Subject to certain exceptions not at issue in the instant
case, a financing statement is effective for five years,
N.C. Gen. Stat. § 25-9-515(a) (2005), during which
time it may be relied on to perfect multiple security
interests, including those that attach after the filing of
the financing statement. Commentary to N.C. Gen. Stat.
§ 25-9-502 states in pertinent part that:

Notice filing . . . obviates the necessity of refiling on
each of a series of transactions in a continuing
arrangement[.] . . . [A] financing statement is effective
to encompass transactions under a security agreement not
in existence and not contemplated at the time the notice
was filed, if the indication of collateral in the
financing statement is sufficient to cover the collateral

In the above described situation, the date of perfection
relates back to the date the financing statement was filed,
provided there has been no gap during which the financing
statement had expired. See, e.g., Finance Co. v. Finance
Co., 36 N.C. App. 401, 245 S.E.2d 510 (1978) (upholding
reliance on financing statement to perfect a second loan
after the first loan was paid in full and terminated, as
financing statement was not terminated and had not
expired);[fn2] In re K & P Logging, Inc., 272 B.R. 867, 876
(2001) (“financing statement which adequately describes
collateral can serve to perfect a security interest not
contemplated by the parties at the time of the filing of
the financing statement”).

In the instant case, LSB perfected its security interest in
the accounts receivable prior to CM, and thus has a
superior security interest. The record on appeal includes
the financing statement filed by LSB in 1999 listing
accounts receivable as part of the collateral covered by
the financing statement, as well as the security agreement
executed by LSB and Forsyth Drywall on 26 June 2002, both of
which identify accounts receivable as collateral for LSB’s
loan to Forsyth Drywall.[fn3] LSB relied on the financing
statement it filed in 1999 to perfect its security interest
in collateral for its 2002 loan to Forsyth Drywall.
Accordingly, its security interest was perfected upon
execution of the security agreement on 26 June 2002. The
record also includes the factoring agreement executed by CM
and Forsyth Drywall on 20 June 2002, and the financing
statement filed by CM in January 2003. These documents
establish that LSB perfected its security interest on 26
June 2002, while CM did not perfect its security interest
until six months later. Consequently, LSB’s security
interest in the accounts receivable has priority over that
of CM.

We have considered and rejected CM’s arguments to the
contrary. Preliminarily, we note that the Official Comment
to N.C. Gen. Stat. § 25-9-513 (2005) explains the
implications of CM’s failure to immediately perfect its
security interest:

4. Buyers of Receivables. . . . While the security
interest of a buyer of accounts . . . (B-1) is perfected,
the debtor is not deemed to retain an interest in the sold
receivables and thus could transfer no interest in them
to another buyer (B-2)[.] . . . However, for purposes of
determining the rights of the debtor’s creditors and
certain purchasers of accounts or chattel paper from the
debtor, while B-1’s security interest is unperfected, the
debtor-seller is deemed to have rights in the sold
receivables, and a competing security interest or judicial
lien may attach to those rights. See sections 9-109 and
9-318 and [C]omment 5.

This is underscored by the Official Commentary to N.C. Gen.
Stat. § 25-9-109:

5. . . . Following a debtor’s outright sale and transfer
of ownership of a receivable, the debtor-seller retains no
legal or equitable rights in the receivable that has been
sold. See section 9-318(a). This is so whether or not the
buyer’s security interest is perfected. . . . However, if
the buyer’s interest in accounts . . . is unperfected, a .
. . perfected secured party, or qualified buyer can reach
the sold receivable and achieve priority over (or take
free of) the buyer’s unperfected security interest under
section 9-317. This is so . . . for the simple reason that
sections 9-317, 9-318(b), and 9-322 make it so, as did
former sections 9-301 and 9-312. Because the buyer’s
security interest is unperfected, for purposes of
determining the rights of creditors of and purchasers for
value from the debtor-seller, under section 9-318(b) the
debtor-seller is deemed to have the rights and title it
sold. Section 9-317 subjects the buyer’s unperfected
interest in accounts and chattel paper to that of the
debtor-seller’s lien creditor and other persons who
qualify under that section.

CM concedes that it did not perfect its security interest
until January 2003, well after LSB filed its financing
statement. Although CM executed a security agreement with
Forsyth Drywall prior to the date of LSB’s 26 June 2002
loan to Forsyth Drywall, LSB nonetheless has priority
because it was the first to file a financing statement.

CM bases its claim to a superior security interest on the
existence of an amendment to the 1999 financing statement
filed by LSB. Therefore, we next consider the legal
significance of this amendment. As discussed above, the
amendment states that it is a partial assignment of LSB’s
“security interest” in certain accounts receivable. CM
argues that, with the mere filing of this amendment, LSB
thereby “assigned away its security interest” and “assigned
its rights under its financing statement.”[fn4] CM further
asserts that after LSB filed the amendment to its original
financing statement, “LSB’s security interest was
undisputedly unperfected.”

LSB’s amendment to the February 1999 financing statement
does not purport either to (1) assign a “bare” financing
statement not associated with any perfected security
interest; or (2) to assign its priority position, freed
from any security interest. Accordingly, we do not address
the parties’ arguments as to whether such assignments are
possible under North Carolina statute and common law.

In the instant case, the financing statement amendment
states that it is a partial assignment of “any security
interest” that LSB had in certain accounts receivable that
were collateral for LSB’s loan to Forsyth Drywall. Under
N.C. Gen. Stat. § 25-1-201(37) (2005), a security
interest is “an interest in personal property or fixtures
which secures payment or performance of an obligation.”
(emphasis added). Thus, a security interest in collateral
cannot be transferred unless the underlying debt is also

A security interest cannot exist, much less be
transferred, independent from the obligation which it
secures. The security interest follows the debt. If the
debt is not transferred, neither is the security interest.

In re Leisure Time Sports, 194 B.R. 859, 861 (9th Cir.
B.A.P. 1996) (citing Matter of DiSanto & Moore Associates,
Inc., 41 Bankr. 935, 938 (N.D. Cal. 1984)) (other citations
omitted). “This is not a mere technical legal requirement:
To allow the assignee of a security interest to enforce the
security agreement [absent transfer of the underlying debt]
would expose the obligor to a double liability, since a
holder in due course of the promissory note clearly is
entitled to recover from the obligor.” In re Belize
Airways, Ltd., 7 B.R. 604, 607 (Bankr. S.D. Fla. 1980).

CM’s argument rests on assumptions drawn from the bare
amendment to the financing statement. “Obviously, absent an
existing security agreement in some form or fashion, a
financing statement, without more, has no legal import or
effect.” U. S. v. Greenstreet, 912 F. Supp. 224, 228 (N.D.
Tex. 1999). “Furthermore, other jurisdictions which have
considered the question involved in this action have held
that it is the language in the security agreement, not the
financing statement, that determines what collateral is
subject to a security interest. . . . Accordingly, we hold
that the security agreement, not the financing statement,
establishes the scope or the limits of the security
interest.” Dowell v. D.R. Kincaid Chair Co., 125 N.C. App.
557, 561-62, 481 S.E.2d 670, 673 (1997) (citation omitted).

In the instant case, CM failed to include in the record
either (1) any security agreement between LSB and Forsyth
Drywall other than the one executed 26 June 2002; or (2)
any security agreement between LSB and UC. Consequently,
the record does not establish the extent of LSB’s security
interest in the accounts receivable under the first loan to
Forsyth Drywall. Nor does it include any showing that a
portion of that first debt was assigned to UC. In the
absence of a security agreement showing an assignment of
LSB’s “security interest” in the accounts receivable, there
is no evidence that such an assignment took place. Indeed,
the record strongly suggests that the parties intended only
to exchange their respective priority positions with
respect to the accounts receivable. For example, the
financing statement filed by LSB and the one terminated by
UC bear different file numbers, indicating that UC’s loan
to Forsyth Drywall was separate from LSB’s. The affidavit
executed by UC executive Ivan Baker states that the
amendment was filed because UC “required that LSB assign
its first lien position in accounts receivable.” However,
regardless of whether the record proves that LSB and UC
exchanged priority positions, it clearly fails to include a
security agreement showing an assignment of Forsyth
Drywall’s original loan to UC, along with the corresponding
security interest in certain accounts receivable.

“In reviewing the propriety of summary judgment, the
appellate court is restricted to assessing the record
before it. Only those pleadings and other materials that
have been considered by the trial court for purposes of
summary judgment and that appear in the record on appeal
are subject to appellate review. If on the basis of that
record it is clear that no genuine issue of material fact
existed and that the movant was entitled to judgment as a
matter of law, summary judgment was appropriately granted.”
Waste Management of Carolinas, Inc. v. Peerless Ins. Co.,
315 N.C. 688, 690, 340 S.E.2d 374, 377 (1986) (citing
Vassey v. Burch, 301 N.C. 68, 74, 269 S.E.2d 137, 141
(1980), and Kessing v. Mortgage Corp., 278 N.C. 523, 180
S.E.2d 823 (1971)).

As discussed above, CM has appealed a summary judgment

The moving party bears the burden of showing that no
triable issue of fact exists. This burden can be met by
proving: (1) that an essential element of the non-moving
party’s claim is nonexistent; (2) that discovery indicates
the non-moving party cannot produce evidence to support an
essential element of his claim; or (3) that the
non-moving party cannot surmount an affirmative defense
which would bar the claim.

Union v. Branch Banking & Trust Co., ___ N.C. App. ___, ___
n. 2, 627 S.E.2d 276, 277-78 n. 2 (2006) (citation
omitted). “‘Once the party seeking summary judgment makes
the required showing, the burden shifts to the nonmoving
party to produce a forecast of evidence demonstrating
specific facts, as opposed to allegations, showing that he
can at least establish a prima facie case at trial.”‘
Draughon v. Harnett Cty. Bd. of Educ., 158 N.C. App. 705,
708, 582 S.E.2d 343, 345 (2003) (quoting Gaunt v. Pittaway,
139 N.C. App. 778, 784-85, 534 S.E.2d 660, 664 (2000)),
aff’d, 358 N.C. 137, 591 S.E.2d 520 (2004).

In the instant case, LSB introduced evidence that it
perfected its security interest in Forsyth Drywall’s
accounts receivable several years before CM, and thus had a
priority lien on the proceeds at issue. CM has not produced
any evidence to refute this showing. Accordingly, we
conclude that the trial court did not err by entering
summary judgment in favor of LSB and that the trial court’s
order must be


Judge STEELMAN concurs.

Judge STEPHENS concurred prior to 31 December 2006.

[fn1] The subject action was brought in the Superior Court
after Forsyth Drywall filed Chapter 7 bankruptcy, and only
after defendants CM and LSB were granted relief from the
automatic bankruptcy stay, 11 U.S.C. § 362.

[fn2] CM asserts, based on dicta in this case, that the
result should be different under N.C. Gen. Stat. §
25-9-322 as it exists today. However, the statute has been
amended several times since the 1977 Finance Co. opinion,
and our reading of the present version does not indicate
that a different result is required.

[fn3] No party has suggested or argued that the financing
statement concerning LSB’s secured interest was not
properly continued or renewed.

[fn4] CM does not argue, and we therefore do not address,
whether the assignment by LSB of its security interest
could constitute a contractual agreement by LSB to
subordinate its security interest, N.C.G.S. §
25-9-339 (2005).