408 F.2d 209 (7th Cir. 1969), 17120, Grain Merchants of Indiana, Inc. v. Union Bank & Savings Co.

Docket Nº:17120.
Citation:408 F.2d 209
Party Name:GRAIN MERCHANTS OF INDIANA, INC., et al., Bankrupts, Mark L. France, Trustee, Appellants, v. UNION BANK AND SAVINGS COMPANY, BELLEVUE, OHIO, Appellee.
Case Date:March 13, 1969
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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408 F.2d 209 (7th Cir. 1969)

GRAIN MERCHANTS OF INDIANA, INC., et al., Bankrupts, Mark L. France, Trustee, Appellants,



No. 17120.

United States Court of Appeals, Seventh Circuit.

March 13, 1969

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George E. Fruechtenicht, Rothberg, Gallmeyer, Fruechtenicht & Logan, Fort Wayne, Ind., George M. Treister, Los Angeles, Cal., for appellants.

A. Bruce Schimberg, and H. Bruce Bernstein, Chicago, Ill., Eli S. Silberfeld, New York City, amicus curiae.

R. David Boyer, Paul W. Philips, Helmke, Philips & Beams, Fort Wayne, Ind., for Respondent-Appellee, Union Bank & Sav. Co., Bellevue, Ohio.

Loren M. Bobbitt, Rubin G. Cohn, Harold C. Havighurst, Richard G. Hershey, Albert E. Jenner, Jr., and Soia Mentschikoff, Illinois Com'rs on Uniform State Laws, Chicago, Ill., Amicus Curiae.

Before CASTLE, Chief Judge, and FAIRCHILD and CUMMINGS, Circuit Judges.

CUMMINGS, Circuit Judge.

In September 1965, Grain Merchants of Indiana, Inc. commenced its business of buying and selling grain and feed ingredients. On the 17th of that month, Grain Merchants entered into a security agreement with Union Bank and Savings Company of Bellevue, Ohio. Pursuant to Section 9-302 of the Uniform Commercial Code (5 Burns Ind.Stats.Ann., Title 19, § 19-9-302[), 1 appropriate financing statements were filed in the office of the Indiana Secretary of State and of the Allen County, Indiana, Recorder that same month. The security agreement granted the Bank a security interest in all of Grain Merchants' accounts receivable 'now or hereafter received by or belonging to Borrower (Grain Merchants) for goods sold by it or for services rendered by it.' This security interest was to secure loans to be made by the Bank to Grain Merchants, but the loans were not to exceed 60 per cent of the total of said accounts receivable which were not more than 60 days old.

During the October 1965-- September 1966 period that the Bank was lending working capital to Grain Merchants, on or about the 20th day of each month

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Grain Merchants submitted to the Bank a financial statement as of the end of the previous month, a list of all accounts receivable, and a promissory note in the sum of 60 per cent of the outstanding accounts receivable as of the last day of the previous month. As the proceeds of accounts receivable were collected by Grain Merchants, they were deposited in an account with the Bank, and, prior to October 3, 1966, Grain Merchants was permitted to draw on this account in order to satisfy its day-to day expenses of doing business.

For the purposes of this case, three promissory notes executed by Grain Merchants in the Bank's favor are pertinent. Two notes in the amounts of $30,000 and $20,000 were executed in December 1965, and a $100,000 note was executed on September 20, 1966. Upon receipt of this last note, the Bank cancelled a note for a like amount which had been executed by Grain Merchants the previous month. All parties concede that the cancellation of this August note on September 20 constituted the last formal extension of new value to Grain Merchants.

On September 30, 1966, Grain Merchants, which had become insolvent in June of that year, ceased doing business. On October 27, 1966, it filed its petition in bankruptcy.

On October 3, the Bank took various steps to apply assets in the hands of Grain Merchants toward payment of the $152,255.55 balance, including interest, owed on these three notes. Out of an October 3 deposit by Grain Merchants with the Bank, $13,575.53 appropriated by the Bank represented collections on accounts receivable which came into existence after September 20, 1966. On October 3, Grain Merchants turned over to the Bank its then outstanding uncollected accounts receivable. The Bank then proceeded to collect these accounts, and $38,865.96 of these collections were on accounts receivable which arose after September 20, 1966.

In Grain Merchants' bankruptcy proceedings, the referee ordered the Bank to turn over to the bankruptcy trustee the aforesaid amounts totaling $52,441.49, less $7,116.52, which represents an excess over the total indebtedness to the Bank and is in escrow. Therefore, the present proceeding involves $45,324.97.

The bankruptcy referee held that the transfer of accounts receivable to the Bank took place at the time that the individual accounts came into existence and that therefore the transfer of accounts receivable post September 20, 1966, were transfers on account of an antecedent debt. He concluded that the transfers of such accounts receivable constituted preference within Section 60a of the Bankruptcy Act (11 U.S.C. § 96(a)). He also concluded that at the time of the transfers of such accounts the Bank had reasonable cause to believe that Grain Merchants was insolvent, so that the preferences were voidable under Section 60b of the Bankruptcy Act (11 U.S.C. § 96(b)). The district court set aside the referee's turnover order, holding that the transfers to the Bank of these accounts receivable did not constitute a preference. The facts are set out in more detail in Judge Eschbach's thorough opinion, reported at 286 F.Supp. 597 (N.D.Ind.1968). 2

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The Transfer Occurred a Year Before Bankruptcy.

The Bankruptcy Act permits a bankruptcy trustee to avoid a 'preference,' as defined in the Act, if the creditor had reasonable cause to believe that the debtor was insolvent at the time of the transfer (Section 60b; 11 U.S.C. § 96(b)). The referee found that the Bank had such cause, and the district court did not dispute this finding. The bankruptcy referee held that there was a 'preference' on the ground that there had been a transfer of property of Grain Merchants to the Bank within four months before the filing of the bankruptcy petition, on account of an antecedent debt (Section 60a(1); 11 U.S.C. § 96(a)(1)). 3 In its contrary holding that there had been no such transfer, the district court relied on Section 60a(2) of the Bankruptcy Act providing that a transfer of property is deemed to have been made 'when it became so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee' (11 U.S.C. § 96(a)(2); This is, in the first instance, a question of priorities between creditors rather than a question of complete perfection in the abstract. The district court concluded that Grain Merchants' transfer to the Bank of the security interest in the post September 20, 1966, accounts receivable was 'so far perfected' when the financing statements were filed in September 1965 that it must be deemed to have been made then by virtue of Section 60a(2). Therefore, there was no transfer within four months of filing the bankruptcy petition and consequently no preference within Section 60a(1) of the Act.

The agreement between Grain Merchants and the Bank was executed on September 17, 1965, and granted the Bank 'a security interest' in all of Grain Merchants' accounts receivable 'now or hereafter received.' The parties thus intended to accomplish a transfer to the Bank of a security interest in Grain Merchants' present and future accounts receivable. In conformity with Section 9-302 of the Commercial Code, appropriate financing statements were duly filed later that month.

Reference to state law is necessary essary to determine whether a secured creditor has 'so far perfected' his lien as to cut off the rights of a subsequent lien creditor under Section 60a(2) of the Bankruptcy Act. McKenzie v. Irving Trust Co., 323 U.S. 365, 370, 65 S.Ct. 405, 89 L.Ed. 305; Matthews v. James Talcott, Inc., 345 F.2d 374 (7th Cir. 1965), certiorari denied, 382 U.S. 837, 86 S.Ct. 84, 15 L.Ed.2d 79. Since the Uniform Commercial Code was in effect in Indiana at the time of this transaction, this question must be answered by reference thereto. Section 9-204(3) of the Commercial Code validates a floating lien by providing that 'a security agreement may (as here) provide that collateral, whenever acquired, shall secure all obligations covered by the security agreement'. This Section obviously permits a security agreement to create a lien in after-acquired accounts receivable.

Under Section 9-301(1)(d) of the Code, the Bank's unperfected security interest in the future accounts receivable would be subordinate to the rights of 'a person (lien creditor) who is not a secured party and who is a transferee to the extent that he gives value without knowledge of the security interest and before it is perfected' (emphasis supplied).

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A lien creditor is defined in Section 9-301(3) as 'a creditor (including a bankruptcy trustee) who has acquired a lien on the property involved by attachment, levy or the like * * *.' Thus we are presented with a situation where as soon as an account receivable comes into existence and is sought to be attached by a lien creditor, it has already become subject to a perfected security interest-- here that of the Bank. 4 The very occurrence which gives rise to the full perfection of the security interest prevents the subsequent lien creditor from obtaining a priority as to the property. Although the Code does not explicitly resolve this problem, we are persuaded by virtue of Section 9-301(a)(d), taken in conjunction with Section 9-204(3), that a secured creditor who has duly filed a financing statement covering after-acquired collateral is entitled to priority over a subsequent lien creditor seeking to levy on the same property. 5 Thus by promptly filing the financing statements required by the Code, the Bank's security interest in the future accounts receivable then became superior to subsequent liens obtainable by 'proceedings on a simple contract' as prescribed in Section 60a(2) of the Bankruptcy Act.

Our conclusion that this transfer occurred in September 1965 is...

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