Filtercorp, Inc., In re
| Decision Date | 14 December 1998 |
| Docket Number | No. 97-35483,97-35483 |
| Citation | 163 F.3d 570 |
| Parties | , Bankr. L. Rep. P 77,854, 37 UCC Rep.Serv.2d 799, 98 Cal. Daily Op. Serv. 9077, 98 Daily Journal D.A.R. 12,691, 3 Cal. Bankr. Ct. Rep. 33 In re FILTERCORP, INC., Filtercorp Partners Limited Partnership, Debtor. Henry PAULMAN, Appellant, v. GATEWAY VENTURE PARTNERS III, L.P.; Gateway III Filtercorp, Inc.; Charles A. Brickman; Donald H. Eskes; Filtercorp, Inc.; Filtercorp Partners, L.P.; Meridian Properties, Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
William J. Murphy, Cairncross & Hempelmann, P.S., Seattle, Washington, for the appellant.
Edwin K. Sato, Bucknell Stehlik, Seattle, Washington, and Sheena R. Aebig and Eric S. Carlson, Williams, Kastner & Gibbs, Seattle, Washington, for the appellees.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Higdon, Meyers and Hagan, Judges, Presiding. BAP No. WW-96-01238-HiMHa.
Before: D.W. NELSON and KOZINSKI, Circuit Judges, and SCHWARZER, * Senior District Judge.
We must decide whether under Washington law a security agreement that grants an interest in "inventory" or "accounts receivable," without more, presumptively includes after-acquired inventory or accounts receivable. The bankruptcy court and Bankruptcy Appellate Panel (BAP) held that to secure after-acquired property, an express after-acquired property clause is required. We reverse, holding that Washington law would presume security interests in "inventory" and "accounts receivable" to include after-acquired property, absent evidence of intent to the contrary. Applying this rule to the security agreement at issue between Henry Paulman and Filtercorp, Inc., we hold that Paulman had a security interest in after-acquired accounts receivable, but not in after-acquired inventory because the security agreement demonstrated an intent to limit the inventory collateral by referencing an attached inventory listing.
We reject Paulman's other claims, in particular that the bankruptcy court's order of sale of Filtercorp, Inc.'s assets is not moot, that the bankruptcy court erred by refusing to subordinate or avoid the claims of other creditors, and that he was improperly denied adequate opportunity for discovery.
Filtercorp, Inc. was a Washington corporation which developed and distributed carbonated pads used in the food service industry to filter cooking oils. Beginning in November 1991, the company took out a series of loans from Paulman, an individual salesman, to help fund further development and meet large orders. The loans were short term, ranging from two to three months, and memorialized by promissory notes drafted by Paulman's attorney. The final note-the subject of this litigation-was a three-month note, executed on June 30, 1992, and due September 30, 1992.
The June 1992 note provided for the following security:
This note is secured by 75,000 shares of Filter Corp. [sic] stock owned by Robin Bernard, the accounts receivable and inventory of Filter Corp. [sic] (See UCC-1 filing and attached inventory listing.) and John Gardner personally.
The parties never executed a separate security agreement. However, Paulman perfected his security interest by filing a UCC-1 financing statement on October 5, 1992. The UCC-1 statement identified the collateral as (1) accounts receivable and (2) materials inventory. Despite the note's reference to an inventory listing, none was ever attached to the note or the financing statement.
There is no contemporaneous evidence shedding light on whether the parties intended to secure after-acquired inventory or accounts receivable with the June 1992 note. In the course of this litigation, the parties presented conflicting versions of their intent. Paulman claimed that he and Filtercorp, Inc. understood the security interest to attach to future rather than presently-held inventory and accounts receivable so as not to interfere with the company's ability to raise additional capital. Hence, he did not attach the inventory listing. In contrast, Robin Bernard, President of Filtercorp, Inc., stated that in light of the short, three-month term of the loan he did not contemplate an ongoing security interest.
Filtercorp, Inc. defaulted on the June 1992 note and Paulman initiated a suit in state court in early October 1992 to enforce it. Filtercorp defended on the ground that the note was usurious. Paulman ultimately prevailed
in November 1995 and obtained judgment in the amount of $710,572.81.
In December 1992, while the state court litigation was pending, Filtercorp, Inc. became the general partner in a limited partnership named Filtercorp Partners Limited Partnership (Filtercorp LP), in which several limited partners invested approximately $1.7 million. Filtercorp, Inc. transferred all of its operating assets to Filtercorp LP leaving its interest in the limited partnership as its only significant asset.
In early 1995, Filtercorp LP took out a series of loans that are the basis of Paulman's effort to seek equitable subordination or avoidance of competing creditors' claims. On three separate dates, Filtercorp LP borrowed a total of approximately $355,000 from Gateway Venture Lenders III, Charles Brickman and Donald Eskes (collectively Gateway Lenders), all of whom were either limited partners of Filtercorp LP or "insiders" for other reasons. The last loans were obtained on February 24, 1995. On that date, Filtercorp LP issued promissory notes for all the amounts borrowed and backdated each note according to its respective loan date. At the same time, Filtercorp LP granted Gateway Lenders a blanket security interest in all of its assets, specifically including after-acquired property. Gateway Lenders filed a corresponding financing statement on March 1, 1995, perfecting its security interest.
In November 1995, Paulman began efforts to collect on his judgment against Filtercorp, Inc. and Filtercorp LP (collectively, Filtercorp). In response, Filtercorp filed voluntary Chapter 11 petitions and immediately moved for approval to use cash collateral to cover expenses. The court held several cash collateral hearings, the last of which was on January 2, 1996. At that time, Filtercorp informed the court of a pending offer from Gateway Lenders to purchase all of Filtercorp's assets. Approximately one week later, Filtercorp moved to sell most of its assets free and clear of liens. Gateway Lenders' offer consisted of a credit bid of its $380,000 secured debt against all the assets subject to the security interest and $100,000 cash for the unsecured assets. At this point, the proposed sale also included a provision designed to deal with the conflicting liens between Gateway Lenders and Paulman, calling for an escrow of the proceeds from the sale of inventory pending resolution of priority. The next day, January 11, 1996, Filtercorp filed an adversary proceeding to resolve the competing lien claims between Gateway Lenders and Paulman.
Paulman filed his opposition to Filtercorp's motion for approval of the sale on February 5, 1996, claiming that the proposed sale was not an arm's-length transaction because the buyers were insiders of Filtercorp. Alternatively, he asked the court for a sixty-day deferral to analyze fully the proposed transaction. However, he did not serve any formal discovery requests or file a motion for a continuance pursuant to Federal Rule of Civil Procedure 56(f), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056.
At a February 9, 1996 hearing, the court scheduled a hearing on Filtercorp's motion to approve the sale proposal for February 27, 1996, to resolve first the adversary proceeding as well as to give Paulman additional time to come up with a competing offer. The court further found at the February 9 hearing that the assets of the company, appraised at between $400,000 and $600,000, were potentially wasting, and therefore directed the parties to file summary judgment motions on their competing liens and to provide each other with any relevant information, including a receivables list with customer names.
The bankruptcy court granted summary judgment to Gateway Lenders, holding that Paulman had no security interest in any of Filtercorp's assets because his liens did not attach to after-acquired property and none of the remaining assets could be traced to the assets in existence at the time that his security interest was created. In particular, the court ruled that there was no security interest in after-acquired inventory or accounts receivable because the note did not expressly Paulman did not seek a stay of the order of sale. Filtercorp completed the sale and transferred the assets to Gateway Lenders, who subsequently transferred the assets to a newly formed corporation called FiberCarb. According to Gateway Lenders and Filtercorp, they have since taken irreversible actions with the proceeds from the inventory and the receivables, including employment of personnel and signing and cancellation of leases.
grant such an interest. The court also found that it could not determine the intent of the parties when they signed the note because the conflicting declarations of Paulman and Filtercorp, Inc.'s President lacked any evidentiary support. The court went on to find Gateway Lenders' security interest valid and first in priority. It did, however, invalidate as preferential all security interests granted Gateway Lenders for the advances made prior to the signing of the security agreement on February 24, 1995. This left Gateway Lenders with $225,000 of secured debt. Thereafter, Gateway Lenders submitted a credit bid of $225,000 and a cash bid of $225,000. Paulman did not submit a revised bid. The court approved the...
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