In re King-Porter Company

• Citation: 446 F.2d 722
• Decision Date: 19 July 1971
• Docket Number: No. 30976.,30976.
• Parties: In the Matter of KING-PORTER COMPANY, Inc., Bankrupt. MILLS MORRIS COMPANY OF MISSISSIPPI, INC., doing business as Appliance Distributors of Mississippi, Appellant, v. Pat H. SCANLON, Trustee in Bankruptcy, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

446 F.2d 722 (1971)

In the Matter of KING-PORTER COMPANY, Inc., Bankrupt.

MILLS MORRIS COMPANY OF MISSISSIPPI, INC., doing business as Appliance Distributors of Mississippi, Appellant, v. Pat H. SCANLON, Trustee in Bankruptcy, Appellee.

No. 30976.

United States Court of Appeals, Fifth Circuit.

July 19, 1971.

COPYRIGHT MATERIAL OMITTED

A. Spencer Gilbert, III, Jackson, Miss., for appellant; Wise, Carter & Child, Jackson, Miss., of counsel.

Robert G. Nichols, Jr., Pat H. Scanlon, Jackson, Miss., for appellee.

Before O'SULLIVAN^*, THORNBERRY and DYER, Circuit Judges.

DYER, Circuit Judge:

In this bankruptcy case, the District Court, on a petition for review filed by claimant Mills Morris Company, sustained the referee in bankruptcy's denial of claimant's reclamation petition and granted the counterclaim of the trustee. The reclamation petition sought to recover eleven air conditioners from the bankrupt King-Porter Company, Inc.'s estate, and the counterclaim prayed for $27,494.07 representing the value of other air conditioners repossessed by claimant a few days before bankrupt filed a voluntary petition in bankruptcy. Finding that claimant perfected a security interest in the property before the bankruptcy petition was filed and that no preferential or fraudulent transfer was made within the meaning of the Bankruptcy Act, we reverse.

On February 14, 1969, a security agreement was executed between bankrupt, an appliance dealer in Hinds County, Mississippi, and claimant, an appliance distributor, granting claimant a security interest in all of bankrupt's inventory. The purpose of the agreement was to secure the payment of purchase money, including any existing and future indebtedness to claimant. The agreement described in detail the various covered appliances, which included air conditioners of the type claimed in this action, and any after-acquired inventory. At the same time, claimant and bankrupt executed financing statements as required by the Mississippi Uniform Commercial Code.¹

One financing statement was filed February 18, 1969, in the office of the Hinds County Chancery Clerk, and another February 25, 1969, in the office of the Secretary of the State of Mississippi. Both financing statements indicated that the Deposit Guaranty National Bank of Jackson, Mississippi, was the assignee of the secured party.

Pursuant to the security agreement and financing statements, claimant began on February 17, 1969, selling appliances on credit to bankrupt. Each time a sale was made, claimant's agent and employee, Maness, prepared a note and trust receipt² covering the appliances of the particular sale, which he purported to execute under a power of attorney given claimant in the security agreement.³ Claimant and bankrupt continued to transact business in this manner until bankrupt closed its doors May 31, 1969. The trust receipts covering appliances sold February 17 were assigned to the Deposit Guaranty National Bank, but none of the trust receipts covering any subsequent transactions were ever assigned.

On April 15, 1969, Kelvinator Incorporated, an appliance manufacturer, authorized claimant to act as its distributor in Mississippi. Although the written agreement creating the distributorship did not provide for claimant's purchase from Kelvinator of any outstanding accounts receivable, it is undisputed that, as a part of the agreement, claimant assumed liability for these debts to Kelvinator. The King-Porter accounts had been held by Kelvinator on "open account," affording Kelvinator the status of an unsecured creditor. Kelvinator had intended to create a security interest in the goods sold to bankrupt, but these financing arrangements never materialized.⁴

Explaining the assignment of accounts to claimant, Kelvinator's credit manager testified:

When we established Appliance Distributors claimant as our distributor in Jackson, Mississippi the arrangement made with them was that we would turn over to our distributor all existing air conditioning business that we had, and where we already had made shipments to a dealer we intended to and did issue credit memos to wash out the transaction and rebill that particular shipment to the distributor and he in turn would have the benefit of the gross profits on these particular transactions.

Among the accounts receivable purchased by claimant was the right to payment from bankrupt for the 112 air conditioners Kelvinator sold directly to it under an order placed September 27, 1968, and subsequently shipped March 28, 1969. Claimant was not involved in this original sale.

On May 15, 1969, claimant prepared and purported to execute for bankrupt a trust receipt on these 112 units. This trust receipt was prepared in the same manner as all other trust receipts covering sales made directly to bankrupt.

On May 21, 1969, Kelvinator invoiced claimant for the 112 units previously shipped to bankrupt. On July 2, 1969, claimant accepted trade acceptances drawn by Kelvinator on it for payment of the transfer of the Mississippi business.

On May 31, 1969, claimant repossessed from bankrupt all of the property described in the trust receipts that it could find in bankrupt's possession, including all but eleven of the 112 units subject to this action. On June 5, 1969, King-Porter filed its petition in bankruptcy.

Perfected Security Interests Under the Uniform Commercial Code

The "strong-arm" provision of the Bankruptcy Act, section 70c, 11 U.S.C.A. § 110(c), gives to the trustee the status of a lien creditor as of the date of the filing of the petition in bankruptcy.⁵ The Uniform Commercial Code hereinafter cited as U.C.C. provides that unless a security interest is perfected, it remains subordinate to the rights of a trustee in bankruptcy. U.C.C. § 9-301 (1) (b), (3). Thus a crucial issue in the case is when, if at all, claimant perfected a security interest in the property. It must be kept in mind that the only property involved in the action sub judice is the 112 air conditioners shipped by Kelvinator directly to bankrupt March 28, 1969.

A security interest is perfected only after it has "attached" and all the necessary steps required for perfection have been taken. U.C.C. § 9-303(1), Section 9-204(1) of the Code sets out the three required elements for attachment: (1) an agreement that it attach, (2) value given by the secured party, and (3) the debtor must have rights in the collateral.

The trustee concedes that the security agreement of February 14, 1969, covered all of bankrupt's inventory, thus satisfying the first element, see U.C.C. § 9-105 (1) (b) and 9-203(1) (b), and that the third element was satisfied shortly after March 28, 1969, when bankrupt received the shipment of air conditioners from Kelvinator. See U.C.C. § 2-401. The parties disagree however as to when "value" was given.

I.

Claimant initially argues that the referee erred in failing to find that value was given for the property in question April 15, 1969, when claimant became obligated to pay Kelvinator the purchase price for the property. The referee's opinion contains two conflicting findings on this issue. At one point he found that claimant gave value by assuming bankrupt's debt to Kelvinator, not April 15, 1969, the date of the agreement, but May 21, 1969, the date Kelvinator invoiced claimant for bankrupt's accounts receivable. At another point, however, the referee found that claimant gave value when it accepted the trade acceptances July 2, 1969. The District Court did not reach this issue, since it based its holding on the finding that the creation of a security interest in the property was a transfer which was both fraudulent and a voidable preference.⁶

We find that the referee was clearly in error. "Value"⁷ was given when claimant first extended credit to bankrupt pursuant to the February 14 security agreement. Moreover, value was also given April 15, 1969, when claimant assumed bankrupt's indebtedness to Kelvinator, thereby creating a purchase money security interest in the property.

In Redisco v. United Thrift Stores, Inc., 3 Cir. 1966, 363 F.2d 11, the debtor ordered appliances from Redisco and signed a security agreement naming it as the secured party. At Redisco's request, Kelvinator shipped the appliances by straight bill of lading to the debtor and invoiced Redisco. The court held that although the bill of sales from Kelvinator to Redisco was dated subsequent to the execution date of the security agreement and shipment of the goods, Redisco gave value, as required by the Code, at the time it agreed to sell on credit to the debtor. The advance of credit constituted the value given. Id. at 15.

Under the facts sub judice there was of course no direct sale of the 112 air conditioners from claimant to bankrupt. That sale occurred between Kelvinator and bankrupt September 27, 1968. Pursuant to the security agreement, however, claimant began on February 17, 1969, selling merchandise directly to bankrupt on credit. It was on this date that claimant first advanced value. It was not required for claimant to advance credit on the specific property in question to satisfy the value requirement of section 9-204 (1). The security agreement contained a perfectly valid after-acquired property clause, see U.C.C. § 9-204(3), which specifically covered inventory of the type in dispute. We hold that claimant "gave value" on February 17, 1969, and that a security interest attached in the 112 air conditioners when bankrupt received them shortly after March 28, 1969.⁸

The trade acceptances merely represented the method of payment for the accounts purchased. Claimant had already obligated itself on April 15 to pay Kelvinator.⁹ In any event, the value given by claimant in no way depended on the form of payment under which claimant obligated itself to Kelvinator.¹⁰

As we have said, while value given by extending credit beginning February 17, 1969, was sufficient under the Code to create a security...