- Category: Judge Nugent
- Published: 16 June 2010
- Written by Judge Nugent
In Re QuVIS, Inc., 09-10706 (Bankr. D. Kan. Jun. 2, 2010) Doc. # 333
SIGNED this 01 day of June, 2010.
ROBERT E. NUGENT
UNITED STATES CHIEF BANKRUPTCY JUDGE
OPINION DESIGNATED FOR ON - LINE PUBLICATION
BUT NOT PRINT PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
QuVIS, INC. ) Case No. 09-10706
) Chapter 11
ORDER ON DEBTOR’S MOTION TO DETERMINE
SECURED STATUS OF NOTEHOLDERS
Debtor’s motion to determine the secured status of various Noteholders1 came on for
evidentiary hearing on March 17, 2010.2 The Court received documentary evidence regarding that
1 Dkt. 212.
2 Debtor appeared by counsel Nicholas R. Grillot. J. Michael Morris appeared for the
Unsecured Creditors’ Committee (“Committee”). J. Maxwell Tucker and Thomas J. Lasater
appeared for Seacoast Capital Partners (“Seacoast”). F. Patrick Riordan and Michael R. Munson
appeared for JFM Limited Partnership I (“JFM”). William B. Sorensen appeared for the
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certain First Amended and Restated Convertible Loan and Security Agreement (“Loan Agreement”
or “Security Agreement”) and UCC filings under which various individuals and entities
(“Noteholders”) loaned money to debtor and took a security interest in most of debtor’s assets.3 At
the conclusion of the hearing, the Court permitted additional time for the parties to file legal
memoranda regarding the issues presented. The Court has now received the post-trial legal
memoranda and having reviewed the same, together with the evidentiary record, is prepared to rule.4
This is a contested matter that is core and over which this Court has subject matter
This chapter 11 case was commenced as an involuntary bankruptcy by petitioning creditors,
Douglas A. Friesen, Marilyn R. Friesen Greenbush, and Douglas A. Cusick, on March 20, 2009.6
The debtor consented to an order for relief being entered on May 18, 2009. Debtor filed its
Disclosure Statement and Plan on November 6, 2009.7 In its plan, debtor proposed that all
Noteholders under the Loan Agreement be placed in the same class and treated identically. Several
Petitioning Creditors and Wichita Investment Group, LLC (“WIG”).
3 The Court received into evidence Exhibits 1-5 by stipulation of the parties, Exhibit 6
and 8, and a limited portion of Exhibit 7.
4 See Dkt. 287 (Creditor Seacoast Capital Partners); Dkt. 295 (Debtor); Dkt. 296
(Creditor JFM Limited Partnership I); Dkt. 297 (Petitioning Creditors and Wichita Investment
Group, LLC); Dkt. 299 (Unsecured Creditors’ Committee).
5 28 U.S.C. § 1334(b) and § 157(b)(1) and (b)(2)(B), (K) and (O).
6 Each of the petitioning creditors are Noteholders under the Loan Agreement.
7 Dkt. 157 and 158.
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responses or objections were filed to debtor’s disclosure statement, including debtor’s proposed
classification of the Noteholders.8 On January 14, 2010 the Court held a hearing on the adequacy
of debtor’s disclosure statement and determined that it was inadequate.9 The Court concluded that
a determination of the secured status of Noteholders under the Loan Agreement would affect the
classification of these creditors under debtor’s plan and was necessary prior to approving any
amended disclosure statement or plan filed by debtor or other parties. The Court therefore directed
that a motion to determine the Noteholders’ secured status under 11 U.S.C. § 506 be filed to bring
the issue before the Court and allowed a brief period of discovery on the same. On January 28,
2010, debtor filed the motion to determine secured status of noteholders for the purpose of plan
classification and otherwise (“Motion”).10 Numerous responses to the Motion were filed and it was
set for evidentiary hearing on March 17, 2010.11
The Court convened a status conference on the Motion on March 9, 2010 and directed
counsel to prepare and submit a pretrial order. The agreed pretrial order was entered by the Court
on March 15, 2010.12 It contained the following stipulations of fact:13
3. . . . the Debtor issued secured promissory notes to several creditors (each a
8 Dkt. 195 (Petitioning Creditors, J. Greg Kite and Wichita Investment Group, LLC),
Dkt. 196 (Unsecured Creditors’ Committee), and Dkt. 200 (Seacoast Capital Partners).
9 Dkt. 203 and 210.
10 Dkt. 212.
11 See Dkt. 236 (Petitioning Creditors and Wichita Investment Group, LLC), Dkt. 235
(Creditor Seacoast Capital Partners), Dkt. 234 (Creditor JFM Limited Partnership I), Dkt 224
(Unsecured Creditors’ Committee), and Dkt. 223 (Creditor George O. Haggard Jr.).
12 Dkt. 266.
13 Dkt. 266 at 3-4.
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“Noteholder”) pursuant to a First Amended and Restated Convertible Loan and
Security Agreement, dated June 30, 2003 (the “Security Agreement”).
4. Under the Security Agreement, individuals or entities were allowed to loan
the Debtor money in exchange for a security interest in the following of the Debtor’s
‘ . . . the Borrower (“Debtor”) hereby pledges, and grants to the
Lenders a security interest in all of the right, title and interest of the
Borrower in and to all of the property, assets, interests and
undertakings of the Borrower, whether now owned or hereafter
acquired, existing or arising, real, person [sic] or mixed, tangible or
intangible, of every kind and description, wherever located, together
with all renewals thereof, substitutions therefor and proceeds thereof
and all interest, dividends, income and revenue therefrom, excluding
all factored accounts receivable whether now existing or in the
future, but otherwise including all accounts, chattel paper, all
contracts, all deposit accounts, all equipment, all fixtures, all goods,
all instruments, all inventory, all cash of the Borrower, all patents,
trademarks, trade names, copyrights and other intellectual property
or intellectual property rights of a secured party under the Uniform
Commercial Code of the State of Kansas as it may be amended from
time to time.’
5. In paragraph Article VI, Section 6.01(b) of the Security Agreement, the
Debtor was required to take the steps necessary to perfect the Noteholder’s security
interest. Pursuant to this obligation, on March 14, 2002, the Debtor filed a financing
statement with the Kansas Secretary of State Office for all Noteholders who had
taken a security interest at that time. As additional loans were made by different
individuals or entities, new Noteholders were added to the original financing
statement by the filing of a UCC-2.
6. By operation of K.S.A. § 84-9-515, the March 14, 2002 financing statement
lapsed on March 14, 2007. No continuation statement was filed by the Debtor.
At trial, the parties introduced into evidence the Loan Agreement,14 a record of the various lapsed
UCC financing statements filed in connection with the Loan Agreement,15 the current filed UCC
14 Ex. 1.
15 Ex. 5.
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financing statements,16 and other documents. Kenbe Goertzen, chief executive officer of debtor,
testified to the circumstances surrounding the loans to QuVis under the Loan Agreement.17 He is
a computer engineer and founded QuVis in 1994 and funded it during the development stages
through late 1995. At that time, QuVis hired a chief operating officer to raise capital and had a stock
offering sale in late 1996 or early 1997.18 During the period 1998-2001, additional sales of stock
were made to some of the previous equity holders. It is not readily apparent how much money was
raised through investor equity sales. By 2001, a small group of the investors wanted more security
for their equity investment. This led to the first secured note which Goertzen said was
approximately $2.9 million. A second secured note followed in 2002 in the amount of $1.5 million.
QuVis granted a security interest in its intellectual property and all of its assets, except receivables.
Goertzen testified that in June 2003, the current Loan Agreement was entered into. He believes that
the 2001 and 2002 notes were rolled into the 2003 Loan Agreement. For each of the parties who
loaned money to QuVis under the 2003 Loan Agreement, QuVis executed a note.19 The Loan
Agreement is open-ended in the sense that not all of the parties loaned funds to QuVis at the same
16 Ex. 4.
17 QuVis develops and sells software and hardware that compresses and processes video
data for various digital video applications in the medical, film, and military industries. The
readers of this Order are directed to this Court’s previous Order entered November 23, 2009
allowing a post-petition salary to Mr. Goertzen, for a description of QuVis and the background
of its debt structure. See Dkt. 177.
18 Goertzen testified that Becky Lester was the individual hired and was the person
primarily responsible for raising capital. By the 2001-2002 time frame, Goertzen was not
directly involved in raising money but was primarily involved in the technology development
aspects of QuVis. Lester remained at QuVis until 2007 or 2008.
19 The form of the secured note executed by QuVis is attached as an exhibit to the Loan
Agreement. See Ex. 1.
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time. Goertzen testified that when a new loan was made, the lender was added as a secured party
with the filing of a UCC-2.20 The parties offered no other extrinsic evidence to aid in the
interpretation or construction of the Loan Agreement. The Loan Agreement specifies that Kansas
law shall govern interpretation of the Loan Agreement.21
This Motion requires the Court to interpret the First Amended and Restated Convertible Loan
and Security Agreement (“Loan Agreement”) dated June 30, 2003 and entered into by the Debtor
and approximately 70 parties (“Noteholders”) who loaned money to QuVis in exchange for a
security interest in QuVis’s assets. The obligations matured on June 30, 2006.22 According to
Exhibit 2, Debtor owed 73 Noteholders total principal and accrued interest as of June 30, 2008 in
the approximate amount of $38.7 million dollars. The UCC-1 financing statement filed by debtor
for all Noteholders on March 14, 2002, as it was authorized and obligated to do under the Loan
Agreement, lapsed on March 14, 2007 by operation of Kansas law.23 Thereafter, at various times
between June 7, 2007 and February 5, 2009, some, but not all, of the Noteholders proceeded
individually to file new financing statements.24 The primary issue is whether the new UCC-1 filing
by the individual Noteholders perfected not only their individual security interests but also the
20 See Ex. 5. The UCC suggests that an amendment that adds a secured party is
effective from the date of filing the financing statement. See KAN. STAT. ANN. § 84-9-512(c) and
21 Ex. 1, Section 12.09.
22 Ex. 1, p. 3.
23 See KAN. STAT. ANN. § 84-9-515(a) (2009 Supp.). When the financing statement
lapsed, the Noteholders became unperfected. See § 84-9-515(c).
24 Ex. 3.
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security interests of those Noteholders who failed to file a new financing statement and who were
not named as secured parties on the new financing statements. If each separate filing operated to
perfect all the Noteholders’ security interests, all of the Noteholders have allowed secured claims
that may be placed in a single plan class for voting purposes. If the separate filings only operated
for the separate filers’ benefit, some of the Noteholders are secured, while others are unsecured.
Their claims should be treated in at least two separate classes. Once this question is resolved, the
Court must also determine whether the perfected Noteholders should be paid pro-rata or whether the
Noteholders should be paid in order of their UCC filing (i.e. first to file having priority).
The debtor’s plan places all the Noteholders in a single class and treats them as pro-rata
secured creditors. The evidence demonstrates that the Noteholders were, in reality, investors who
sought a more-secure position in the company than that which usually attends an equity interest.
The Loan Agreement represents an effort to accommodate that desire by allowing individual
Noteholders to have a security interest in the assets of he company (except its receivables), but
providing that the notes could be converted to equity on the Noteholders’ request. So long as the
notes were not converted, the Noteholders remained secured creditors. The Loan Agreement
provides for the debtor to file financing statements to perfect each Noteholders’ interest and, in turn,
authorizes the Noteholders to file such statements if the debtor does not. Debtor filed statements
on behalf of all the secured Noteholders, but allowed them to lapse. Certain Noteholders have now
filed their own financing statements. Some of the Noteholders claim they filed them on behalf of
all the Noteholders; others assert they have a priority in the secured assets based on the time of their
Case 09-10706 Doc# 333 Filed 06/01/10 Page 7 of 24
Does the Loan Agreement Unambiguously Authorize a Single
Noteholder to Perfect for All Noteholders?
The Court begins its analysis by reviewing and applying principles of contract law for
interpreting the Loan Agreement. Several of those legal principles are summarized in Heyen v.
Hartnett, with the overriding rule expressed as follows:
The fundamental rule in construing the effect of a written instruments is that the
intent and purpose of the parties be determined from an examination of the entire
instrument or from its four-corners. The language used anywhere in the instrument
should be taken into consideration and construed in harmony with other provisions.26
The Court first considers whether the Loan Agreement is ambiguous. Ambiguity is present when
the language in the document is susceptible to two or more meanings or is of doubtful or conflicting
meaning.27 If the Loan Agreement is ambiguous, the Court may apply rules of construction and
consider extrinsic evidence to ascertain the parties’ intent.28 The law favors reasonable
25 Debtor and Seacoast are in the camp that all Noteholders were perfected by one
Noteholder filing. The Committee, WIG and JFM are in the camp that only the creditor
Noteholder listed on the filed UCC-1 is perfected.
26 235 Kan. 117, 122, 679 P.2d 1152 (1984).
27 Waste Connections of Kansas, Inc. v. Ritchie Corp., __ Kan. App. 2d __, 228 P.3d
429, 438 (2010); Simon v. National Farmers Organization, Inc., 250 Kan. 676, 680 (829 P.2d
28 See Anderson v. Dillard’s Inc., 283 Kan. 432, 436, 153 P.3d 550 (2007) (If there is no
ambiguity, there is no need to resort to the rules of construction since the court can determine the
intent of the parties from the plain language of the contract); Pioneer Ridge Nursing Facility
Operations, L.L.C. v. Ermey, 41 Kan. App. 2d 414, 203 P.3d 4 (2009) (When a written
agreement is ambiguous, facts and circumstances existing before and connected with the signing
of such contract are competent to clarify the intent and purpose of the agreement.); Central
Natural Resources, Inc. v. Davis Operating Co., 288 Kan. 234, 201 P.3d 680 (2009) (If
ambiguous, circumstances existing prior to and contemporaneously with instrument’s execution
may clarify the intent and purpose of the contract, but may not be used to vary and nullify its
clear and positive provisions.).
Case 09-10706 Doc# 333 Filed 06/01/10 Page 8 of 24
interpretations of contracts, and results which vitiate the purpose of the terms of the agreement to
an absurdity should be avoided.29
The starting point for the Court is that part of the Loan Agreement that speaks to the security
interest granted to the lenders, Article VI.30 It is this part of the Loan Agreement that the Debtor
contends empowers any single Noteholder to perfect the security interest in the Debtor’s assets on
behalf of all Noteholders, without identifying any of the other Noteholders as a secured party.
Section 6.05 with the heading “Appointment of Lenders as Attorney-in-Fact” states:
Borrower [Debtor] appoints Lenders [Noteholders], and each of them individually,
as Borrower’s attorney-in-fact to do any act which Borrower is obligated by this
Agreement to do, and to exercise the rights that Borrower may exercise under this
Agreement, to use the Collateral as Borrower might use it and to protect and preserve
Lenders’ rights under this Agreement and in the Collateral. . . . No Lender shall have
any liability whatsoever to the Borrower, any other Lender or any third party for any
action taken or rights exercised pursuant to this section.31
Section 6.01(b) provides:
In order to perfect such security interest, Borrower [Debtor] shall: make such filings
and take such other actions as may be required under the Uniform Commercial Code
of the State of Kansas or other jurisdiction. Borrower authorizes each Lender
[Noteholder] to perform every act which such Lender considers necessary to protect
and preserve the Collateral and Lenders’ interest therein and, in that regard,
Borrower agrees to execute such documents and to take whatever other action is
reasonably requested by Lenders to perfect and continue the security interest granted
Overlaying these specific provisions is the definition of “Lenders” in Article I and an interpretative
29 Waste Connections of Kansas, Inc., supra at 436.
30 In Section 6.01(a), Debtor clearly and unequivocally granted a security interest in its
assets to the Noteholders. Subsequent provisions in Article VI speak to the perfecting of that
31 Ex. 1, p. 9 [Emphasis added].
32 Ex. 1, p. 8 [Emphasis added].
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provision in section 12.10. “Lenders” is defined as “each person who has executed this [Loan]
Agreement on the signature pages hereto, collectively, or any successor or substitute Lender . . .”33
Section 12.10 provides, in pertinent part: “Unless the context clearly indicates, words used in the
singular include the plural, words in the plural include the singular . . .”34 The Court finds that this
interpretative term affects the reading of the definition of “lenders.” It provides that singular
references can be read as plural and vice versa. While the definitional clause states that “lenders”
means “each [lender] . . . , collectively,” this does not, absent context, render the word “lenders” a
collective, or plural, reference wherever it is used in the Loan Agreement. Indeed, as defined,
“lenders” alternatively includes “or any successor or substitute [singular] Lender.”35
Section 6.01(a) grants “Lenders” a security interest in the company’s assets. In the context
of the Loan Agreement and section 6.01(a), it is a collective or plural use of the word “lenders.” In
contrast, section 6.01(b) authorizes “each Lender” to do what is necessary for “such Lender” to
preserve the collateral “and Lenders’ interest therein.” This language authorizes direct action by a
single lender to perfect, as does the UCC itself.36 Notably, section 6.05 appoints each lender as an
attorney in fact to do what the borrower is supposed to do to protect the collateral or perfect the
security interest.37 Seacoast and Debtor argue that, taken together, these clauses mean that the
debtor was to file and maintain current financing statements that perfected all of the lenders’ security
33 Ex. 1, p. 3.
34 Ex. 1, p. 21.
35 Ex. 1, p. 3.
36 See KAN. STAT. ANN. § 84-9-509 (2009 Supp.) and Official UCC Comments thereto.
37 Section 6.05 states, “Borrower appoints Lenders, and each of them individually, as
Borrower’s attorney-in-fact . . .”
Case 09-10706 Doc# 333 Filed 06/01/10 Page 10 of 24
interests and that it appointed the lenders individually as its attorneys in fact to maintain the
collective financing statement current. Even though they were individually appointed, the actions
they took were done on behalf of the lender body.
The Court disagrees and finds that there is no express authority in the Loan Agreement for
the lenders to file for one another. Nothing in section 6.05 appoints lenders individually as attorneys
in fact for other lenders. The individual lenders are appointed attorneys in fact for the Debtor.
Under Kansas law, a power of attorney is a written instrument by which one person, as principal,
appoints another as agent and confers upon such agent the authority to act in the place of the
principal for the purposes set forth in the instrument.38 Like other written instruments, there is no
room for construction if the power of attorney is not ambiguous or uncertain and whose meaning
is perfectly plain.39 Here, section 6.05 enables each Noteholder (as agent of the Borrower) to perfect
its security interest vis-a-vis the Debtor, should the Debtor fail to perform its obligation to make the
requisite filings to perfect the security interest. Section 6.05 is the authorization from the Debtor
for a Noteholder to file a financing statement as contemplated by KAN. STAT. ANN. § 84-9-509(a)
and (b). There is no mention of acting on behalf of or exercising rights as an agent for or
representative of all lenders or Noteholders as it pertains to filing a financing statement. Moreover,
§ 6.01(c)(iii) does not contemplate a single financing statement on behalf of all Noteholders. QuVis
warrants to the Lenders that the Loan Agreement is effective to create a valid lien and “upon the
38 Geren v. Geren, 29 Kan. App. 2d 565, 569, 29 P.3d 448 (2001), quoting Muller v.
Bank of America, 28 Kan. App. 2d 136, 139, 12 P.3d 899 (2000) (A power of attorney is to be
39 See Bank IV, Olathe v. Capital Federal Saving & Loan Ass’n, 250 Kan. 541, 549, 828
P.2d 355 (1992).
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filing of the appropriate financing statements [plural], a perfected Lien in favor of the Lenders on
the Collateral . . .” This language suggests that multiple financing statements would be filed to
perfect the Noteholders’ security interest rather than a single filing to perfect for all.
In only a few instances, does the Loan Agreement delineate the Noteholders’ duties and
obligations to one another or authorizes fewer than all Noteholders to exercise rights for all
Noteholders. There are Noteholder actions that can be taken by all of them unanimously, by a
majority of them, or by any one of them separately. For instance, section 10.01(a) gives Noteholders
with a majority of the principal balance of the notes the right to waive debtor’s default.40 The
Noteholder majority may also waive the debtor’s covenants under section 9.01. But in section
12.02, modification of the Loan Agreement can only be effected by consent of “each Lender or an
authorized representative of each Lender.” Section 10.2 provides that the Noteholders (as a group)
share in recoveries pro rata. Section 10.3 recognizes that the Noteholders can exercise remedies and
enforce the Loan Agreement “collectively or individually.” And as it relates to the financing
statement specifically, section 5.04 authorizes “each Lender” to file a UCC-3 termination statement
upon payment of the notes “held by the Lender.”41 These provisions suggest that the parties to the
Loan Agreement understood the difference between authorizing collective as opposed to individual
actions and that the parties knew how to plainly authorize action by fewer than all of the
Noteholders. Section 6.05 speaks to separate action by a Noteholder and does not authorize a single
Noteholder to act as an agent or representative of all Noteholders. Its last sentence provides “ no
40 Any such waiver under this section must be in writing. Under section 10.01(a)(v) and
(viii), the debtor’s bankruptcy and debtor’s permitting the financing statement to lapse constitute
events of default.
41 See KAN. STAT. ANN. § 84-9-513(c).
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Lender shall have any liability whatsoever to . . . any other Lender . . . for any action taken or rights
exercised pursuant to this section.” This exculpatory language is entirely consistent with
Noteholders acting alone and cuts against concluding that one Noteholder is authorized to act as an
attorney in fact for another Noteholder.
Several relevant provisions of the Kansas UCC support the Court’s interpretation of Article
VI of the Loan Agreement. First and foremost, KAN. STAT. ANN. § 84-9-502(a) specifies the
information required on a financing statement for it to be sufficient: the name of the debtor, the name
of the secured party or a representative of the secured party, and the collateral. More than one
secured party may be shown on the financing statement.42 A “representative of the secured party”
need not indicate its representative capacity on the financing statement.43 None of the Noteholders
who filed new UCC-1s identified multiple secured parties on the financing statement. Each of them
named only themselves as the secured party. Thus, the question becomes whether any provision in
Article Nine operated to make the named Noteholder a “representative” of all Noteholders.
Although Article Nine does not require a secured party’s representative to disclose its
representative capacity on the financing statement, the alleged representative must be able to
demonstrate some source of its authority to be deemed the “representative of the secured party.”
The Debtor and Seacoast argue that the § 6.05 of the Loan Agreement is the source of that authority.
As previously noted, however, neither the debtor’s appointment of the Noteholders as attorneys-infact
in § 6.05 nor any other language in the Loan Agreement unequivocally makes any single
Noteholder the representative, agent, or attorney-in-fact for all of the Noteholders. The parties point
42 KAN. STAT. ANN. § 84-9-503(e).
43 KAN. STAT. ANN. § 84-9-503(d).
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to no separate agreement such as an intercreditor agreement or loan participation agreement that
would authorize one creditor to act as an agent or representative of all of the Noteholders.44 The
Court concludes that each filing Noteholder had only the power to act separately as a secured party,
and not as a representative of all Noteholders. In the absence of multiple secured parties being
named on the new financing statements, the Court concludes per § 84-9-502(a) that the filed
financing statements perfect only the security interests of those Noteholders named a secured party
thereon.45 Those Noteholders who did not file financing statements and who were not named as
secured parties on any of the new UCC-1s filed after the lapse, are not perfected.
KAN. STAT. ANN. § 84-9-509 was added to Article Nine in 2000 and amended in 2002 and
2004. It addresses who may file a “record” in a secured transaction. The financing statement itself
need not explain the party’s authority to file the financing statement. As the comments to § 84-9509
This section collects in one place most of the rules determining whether a record may
be filed. . . . Under these sections, the identity of the person who effects a filing is
immaterial. The filing scheme contemplated by this Part does not contemplate that
the identity of a “filer” will be part of the searchable records. This is consistent with,
and a necessary aspect of, eliminating signatures or other evidence of authorization
44 See In re Amron Technologies, Inc., 2007 WL 917236 at *3 (Bankr. M.D. Ga. Mar. 22,
45 The failure to name the other Noteholders as secured parties presents a similar type of
“floating secured parties” problem identified in In re EA Fretz Co., 565 F.2d 366 (5th Cir. 1978).
In that case, the financing statement identified corporation X as the secured party. But the
security agreement also secured loans made in the future to debtor by corporation X or any of its
future divisions and affiliates. Later loans made by wholly owned subsidiaries of corporation X
were unperfected because the subsidiaries were not listed as secured parties. While this case
might be decided differently today with the addition of a “representative of the secured party” in
§ 84-9-502, the relationship among the corporate lenders was insufficient for the parent to
perfect for the subsidiaries. The current case is even farther removed than EA Fretz where there
was no relationship between or among the Noteholders.
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from the system. . . .As long as the appropriate person authorizes the filing, or, in the
case of a termination statement, the debtor is entitled to the termination, it is
insignificant whether the secured party or another person files any given record. The
question of authorization is one for the court, not the filing office.46
Records filed in the filing office do not require signatures for their effectiveness.
Subsection (a)(1) substitutes for the debtor’s signature on a financing statement the
requirement that the debtor authorize in an authenticated record the filing . . . Of
course, a filed financing statement is ineffective to perfect a security interest if the
filing is not authorized. See Section 9-510(a). Law other than this Article, including
the law with respect to ratification of past acts, generally determines whether a
person has the requisite authority to file a record under this section. . . .47
The Official UCC Comments further explain that a debtor gives ipso facto authorization for a
secured party to file a financing statement by executing a security agreement.48 But subsections (a),
(b), and (c) of § 84-9-509 address a debtor’s authorization of a person (including a secured party)
to file an initial financing statement and certain amendments. Section 84-9-509(d) empowers a
secured party to authorize “a person” [i.e. another secured party] to file certain financing statement
amendments.49 But as the Official Comments make clear, there must still be some express grant of
that authority. Apart from the Loan Agreement, which the Court previously concluded does not
provide this authority, the parties have identified no other source giving authorization for a
46 KAN. STAT. ANN. § 84-9-509 (2009 Supp.), OFFICIAL UCC COMMENT 2 (Emphasis
47 KAN. STAT. ANN. § 84-9-509, OFFICIAL UCC COMMENT 3 (Emphasis added).
48 See KAN. STAT. ANN. § 84-9-509(b), OFFICIAL UCC COMMENT 4. As stated by
treatise author Barkley Clark, “[a]s a practical matter, the secured party will get the debtor’s
express authorization for filing in the security agreement.” Barkley Clark and Barbara Clark, 1
The Law of Secured Transactions under the Uniform Commercial Code ¶ 2.09[a] (Rev. ed.
Nov. 2009). This is precisely what §§ 6.01 and 6.05 of the Loan Agreement effected.
49 Amendments excluded from the reach of subsection (d) are amendments that add
collateral or amendments that add a debtor. For these amendments, the debtor must give the
authorization. See § 84-9-509(a)(1) and (b). Amendments which add a secured party to the
financing statement must be authorized by the secured party of record under subsection (d).
Case 09-10706 Doc# 333 Filed 06/01/10 Page 15 of 24
Noteholder to file on behalf of all Noteholders.
In addition, the new filing made by the Noteholders here was not an amendment of an
existing UCC-1. The Noteholders filed “new” UCC-1s.50 A secured party (Noteholder) under an
existing UCC-1 could have authorized an amendment to add a secured party under § 84-9-509(d),
but could not have authorized an initial financing statement.51 An initial financing statement must
be authorized by the debtor. The Court observes that none of the new financing statements filed by
the Noteholders after the lapse of the March 14, 2002 financing statement, identify any secured party
other than the filing Noteholder. Nor is there any indication on the financing statement that the
named secured party represents other unnamed and unidentified secured parties. And there is no
reference in the new financing statements to identify the “secured party” by linkage to the Loan
Agreement. No one reviewing these new financing statements in the Secretary of State’s records
would have an inkling that the secured parties identified therein are all related Noteholders under
the Loan Agreement. If the parties truly intended that a single Noteholder was authorized to file for
all Noteholders, any one of them could have filed amendments to the first UCC-1 filed on June 7,
2007 by secured party, J. Greg Kite (# 95498557) to name the other Noteholders.52 They did not.
The Court also considers whether a Noteholder had ostensible or apparent authority to act
as the agent of all Noteholders. An apparent agent is one who, with or without authority, reasonably
appears to third persons to be authorized to act as the agent of another.53 To determine whether an
50 See Ex. 4 and § 84-9-515(c) for effect of a lapse of a filed financing statement.
51 See § 84-9-509(e), Official UCC Comment 7 and § 84-9-510(b).
52 See Ex. 4.
53 National Bank of Andover v. Kansas Bankers Sur. Co., ___ Kan. ___, 225 P. 3d 707,
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apparent agency exists, the courts look to intentional acts or words of the principal to a third party
and if those acts or words reasonably induced the third party to believe that an agency relationship
existed.54 A principal’s words or conduct may be overt and explicit to confer authority or the mere
relationship between the agent and principal or the title conferred upon the agent by the principal
may be sufficient to confer authority.55 The evidentiary record here is devoid of any conduct or
words by any of the Noteholders that one of them could perfect the security interest in debtor’s
assets for all of the Noteholders. None of the Noteholders announced to or informed debtor (or any
other third party) that one of the Noteholders was authorized to perfect the security interest on behalf
of all and who that agent Noteholder was. There was no relationship or affiliation among the
Noteholders that would lead debtor or any other third party to believe that the Noteholders delegated
to one Noteholder the authority to act for all with respect to perfecting the Noteholders’ security
interest.56 Nor did the Noteholders engage in any conduct that would lead third parties to believe
that a single Noteholder’s action in filing a UCC-1 was effective for all.57 To the contrary, here the
Noteholders by their action in filing additional UCC-1s, after the first Noteholder Kite filed a UCC
54 Town Center Shopping Center, LLC v. Premier Mortgage Funding, Inc., 37 Kan. App.
2d 1, 6, 148 P.3d 565 (2006)
55 Bucher & Willis Consulting Engineers v. Smith, 7 Kan. App. 2d 467, 470, 643 P.2d
56 Cf. Town Center Shopping Center, LLC, supra where a branch manager signed lease
and lease was returned to landlord with a cover letter identifying the signer as a branch manager
for the tenant. See also, Bucher & Willis Consulting Engineers, supra where an attorney, by
virtue of attorney-client relationship alone, is clothed with apparent authority to bind the client
for services connected with the representation.
57 See National Bank of Andover, supra where bank employee was allowed to honor
several overdrafts over a three year period thus giving customers the appearance that the
employee possessed overdraft honoring authority.
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1, suggest that no one Noteholder had apparent authority to perfect or file a financing statement for
all Noteholders. Moreover, the Noteholders each received separate notes from the debtor. In sum,
the Court finds no circumstances exist that would lead a third party to reasonably believe that any
one Noteholder had apparent authority to act for all.58
The Court therefore concludes that the Loan Agreement and Article VI is unambiguous in
that it can be reasonably and naturally read in a way that does little violence to any of its terms and
gives effect to all of them. It is not capable of multiple meanings, although it is less than precise in
its treatment of the secured creditors and their rights vis-a-vis one another. In the absence of an
expression provision in the Agreement that authorizes individual Noteholders to act for the
collective in filing financing statements, the individual filings perfect only the liens of the particular
filing Noteholders, subject to any meritorious Chapter 5 avoidance actions.
Even if the Loan Agreement is Ambiguous, Extrinsic Evidence
Supports the Court’s Interpretation
Even if the Court were to conclude that this Loan Agreement is ambiguous and to apply rules
of construction, the Court notes that the later-filed UCC-1s were, on their face, each filed
individually and not on behalf of the Noteholder group. The 2002 UCC-1 filed by the debtor named
every Noteholder as a “secured party” and whenever a new investor loaned money to QuVis, the
debtor amended it to name the new secured party. The new UCC-1s represent opportunistic efforts
on the part of the various filing Noteholders to establish a rank of priority among themselves.
58 The party relying on an alleged agency relationship has the burden of establishing its
existence by clear and satisfactory evidence. Town Center Shopping Center, 37 Kan. App. 2d at
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Nothing in the Loan Agreement nor the Kansas Uniform Commercial Code precludes that.59
Nevertheless, it remains clear to the Court that the Noteholders themselves believed that they were
not all perfected by the filing of a new UCC-1 by one Noteholder. Otherwise, there would have
been no reason for individual Noteholders to subsequently file their own UCC-1 financing statement
after the first Noteholder (Kite) filed a new UCC-1.60
While it might be easier to propose and confirm a plan that deems all of the lenders
perfected as of the date of the first separate filing, the Court cannot allow the parties’ post facto
desired interpretation of the Loan Agreement to trump its unambiguous meaning. The Loan
Agreement expresses the parties’ intention that lenders be individually permitted to file UCC-1s.
Nowhere does it state that such filings are on behalf of all the lenders.
III. Payment of Noteholders – Pro Rata vs. First-to-File
Having determined that only those Noteholders who filed UCC-1s after the lapse of the
2002 financing statement are perfected, the Court next considers whether such Noteholders are
entitled to payment pro-rata or in the order in which they filed their financing statement. KAN.
STAT. ANN. § 84-9-322(a)(1) states the general priority rule between two competing perfected
security interests in the same collateral and is governed by the first to file or perfect. The UCC also
recognizes that a party with priority may subordinate its claim or interest to a party that would
59 Under KAN. STAT. ANN. § 84-9-509(a) and (b), a debtor may authorize a secured party
(Noteholder) to file a UCC-1.
60 See Cline v. Angle, 216 Kan. 328, 333-34, 532 P.2d 1093 (1975) (Where parties to a
contract, subsequent to its execution, have shown by their conduct that they have placed a
common interpretation on the contract, this interpretation will be given great weight in
determining the meaning to be attributed to the provisions in question.)
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otherwise have a junior priority.61 The issue here is whether the Loan Agreement alters the first to
file priority scheme.
Article X of the Loan Agreement addresses default and the rights and remedies upon a
default. The Debtor’s allowing the March 2002 financing statement to lapse and not file a
continuation statement is in itself an event of default under § 10.01(a)(viii). So, too, is the filing
of bankruptcy.62 The Debtor, Seacoast and the Committee rely upon § 10.02(a)(iv) of the Loan
Agreement to advocate that amounts received by the Noteholders under a chapter 11 plan are shared
pro rata. WIG and JFM argue that the first-to-file rule applies.
Section 10.02(a)(iv) provides:
All amounts received by the Lenders upon the exercise of its [sic] remedies
hereunder shall be applied by Lenders, pro rata based on the outstanding principal
amount of Notes issued under this Agreement.
The Court cannot reconcile the use of “its” in § 10.02(a)(iv) with the rest of the provision which
appears to signify the Noteholders acting collectively to exercise “their” remedies upon an event of
default. The Loan Agreement undoubtedly contemplated that the Debtor would file a financing
statement to perfect the Noteholders’ security interests collectively as QuVis in fact did on March
14, 2002.63 When that financing statement lapsed, the Noteholders were left to fend for themselves
to preserve and perfect their security interest in the assets of QuVis. The Loan Agreement and the
61 See KAN. STAT. ANN. § 84-9-339. The statute makes clear, however, that the party
with priority must agree to the subordination and be a party to any such subordination
62 § 10.01(a)(v).
63 Exhibit 1, § 6.01(b).
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UCC both permitted the Noteholders to take those steps.64 Nothing in the Loan Agreement,
however, purports to alter the first-to-file priority scheme of KAN. STAT. ANN. § 84-9-322(a)(1). If
the 2002 financing statement had not lapsed, all of the Noteholders (perfected under the same
financing statement) would have enjoyed the same priority. It makes sense, in that instance, that the
Noteholders collective enforcement of their security interest would result in a pro-rata recovery.
But when the Noteholders as a group became unperfected and only some of them exercised
their right to perfect, they are no longer similarly situated nor are they acting collectively to enforce
their rights or remedies under the Loan Agreement. Indeed, the Court is not convinced that
Noteholders have “exercise[d] . . . remedies [under the Loan Agreement]” to trigger § 10.02(a)(iv).
Those remedies under the Loan Agreement include acceleration of the notes65 and the exercise of
rights as “secured parties.”66 In short, the Court believes that the pro-rata sharing provision of §
10.02(a)(iv) can only be applied when the Noteholders are similarly situated and acting collectively.
This is simply not the case under the existing circumstances.
Moreover, § 10.03 recognizes the ability of the Noteholders to exercise their remedies
collectively or individually. It provides:
Lenders, collectively or individually, shall be entitled to enforce payment and
performance of all obligations of the Borrower hereunder or under the Notes and to
exercise all rights and powers hereunder or under the Notes, or under any Law and
the pursuit of any remedy available to Lenders against the Borrower shall not
prejudice or in any manner affect a Lender’s rights to realize upon or enforce any
other remedy or security now or hereafter available to it in such order and in such
manner as such Lender may determine in its sole discretion. No such right or
64 See Exhibit 1, § 6.01(b) and § 6.05; KAN. STAT. ANN. § 84-9-509(a)(1) and (b).
65 Section 10.02(a)(I).
66 Section 10.02(a)(ii). The secured parties’ remedies include, possession or sale of the
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remedy shall be exclusive, but each shall be cumulative and shall be in addition to
every other remedy provided herein or in any other agreement or by Law and each
such remedy may be exercised concurrently or independently. Nothing in this
Agreement shall be construed as prohibiting the Lenders, collectively or individually,
from seeking a deficiency judgment against the Borrower.
Obviously, a Noteholder acting individually would not be entitled to recover an amount more than
the principal balance (and accrued interest) of its separate note. The Court therefore concludes that
§ 10.02(a)(iv) merely ensures that where Noteholders are similarly situated and acting collectively,
each individual Noteholder will receive amounts in proportion to their note, thereby precluding one
Noteholder from a greater or earlier recovery at the expense of a similarly situated Noteholder. A
pro rata sharing does this. But where some Noteholders are perfected secured creditors and some
are not, § 10.02(a)(iv) cannot be applied.
The Court therefore concludes that the Loan Agreement did not abrogate the first to file rule
under the circumstances existing here and that payments to the Noteholders who filed new UCC-1s
should be made in the order in which each Noteholder filed a financing statement.
IV. The June 1, 2005 Subordination Agreement
Creditor JFM suggests that the subordination agreement entered into between Seacoast and
two other Noteholders, Owen Leonard and Vernon Nelson, is parol evidence of Seacoast’s belief
that its security interest and note was separate and distinct from the other Noteholders and therefore,
one Noteholder’s filing did not perfect for all.67 Creditor WIG cites to the subordination agreement
67 See Dkt. 296, p. 4. The Court observes that in its examination of the Kansas Secretary
of State’s Uniform Commercial Code records showing the original financing statement filed
March 14, 2002, the last UCC-2 amendment to add secured parties occurred on May 27, 2005.
The Court can find no UCC-2 filing showing that Seacoast was ever added as a secured party to
this financing statement and it thus appears that Seacoast was never perfected in the 2002
financing statement. See Exhibit 5.
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as parol evidence of Seacoast’s intent to alter the first-to-file priority rule.68 Having concluded that
the Loan Agreement is unambiguous, the Court does not resort to parol evidence to interpret it.
Even if the Court considered parol evidence, it is not convinced that the subordination agreement
by itself sheds much light on the parties’ intent with respect to either issue.
The Court first observes that the subordination agreement was entered into by only three of
the Noteholders – Seacoast, Leonard and Nelson, and it is dated June 1, 2005 – prior to the lapse
of the March 14, 2002 financing statement.69 The Court questions the evidentiary value of a preexisting
subordination agreement when analyzing the effect of UCC-1s filed up to two years after
the 2002 financing statement lapsed and all of the Noteholders became unperfected, a situation not
contemplated when the subordination agreement was executed. Moreover, the subordination
agreement does not affect Seacoast’s priority vis-a-vis the other Noteholders who did not consent
to subordination of their interest to Seacoast. Finally, after the lapse of the 2002 financing statement
on March 14, 2007, Seacoast filed a new UCC-1 on June 14, 2007 while Vernon Nelson filed his
UCC-1 on January 13, 2009 and Owen Leonard filed his UCC-1 on January 16, 2009.70 It would
thus appear that Seacoast is ahead of Nelson and Leonard by virtue of its UCC-1 filing. The Court
considers the subordination agreement to be of little value in construing the Loan Agreement.
The Court concludes that each Noteholder who filed a UCC-1 after the lapse of the March
14, 2002 financing statement, holds a perfected secured interest as of the date of the UCC-1 filing,
68 See Dkt. 297, pp. 8-9.
69 Exhibit 6. On its face, the subordination agreement indicates that it was entered into
as an inducement for Seacoast to enter into the Loan Agreement and become a Noteholder.
70 Exhibit 3 and 4.
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with an interest in the collateral in an amount equal to its claim, up to the value of the collateral
remaining after application of the collateral to lenders of senior priority. Some Noteholders’
security interests may be subject to avoidance by the debtor-in-possession in the exercise of its
Chapter 5 avoiding powers. The potential consequences of this are several. The lien of any
Noteholder who filed a UCC-1 during the 90-day preference period, December 20, 2008 to March
20, 2009, may, in the absence of applicable defenses, be avoidable by Debtor as having been
preferentially perfected under 11 U.S.C. § 547. Noteholders who failed to file a UCC-1 after the
lapse of the 2002 financing statement hold unperfected security interests that may be avoidable
under 11 U.S.C. § 544(a)(1). Some effort at valuing the collateral may be necessary in order to
allow the Noteholders’ secured claims under 11 U.S.C. § 506(a).
Accordingly, the disclosure statement and plan do not adequately describe the relationship
of the Noteholders to the debtor. The disclosure statement is therefore inadequate and cannot be
approved. Debtor is granted 10 days in which to amend its disclosure statement consistent with this
Court’s determination of the Noteholders’ secured status.
# # #
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