Avant Petroleum, Inc. v. Banque Paribas

• Decision Date: 04 August 1988
• Docket Number: D,No. 511,511
• Citation: 853 F.2d 140
• Court: U.S. Court of Appeals — Second Circuit
• Parties: 6 UCC Rep.Serv.2d 593 AVANT PETROLEUM, INC. and Mitsui & Co. (U.S.A.), Inc., Plaintiffs, v. BANQUE PARIBAS, BP North America Petroleum Inc., and Crysen Trading and Marketing, Inc., Defendants, Banque Paribas, Defendant-Appellee, BP North America Petroleum Inc., Defendant-Appellant. ocket 87-7786.

Page 140

853 F.2d 140

6 UCC Rep.Serv.2d 593

AVANT PETROLEUM, INC. and Mitsui & Co. (U.S.A.), Inc., Plaintiffs, v. BANQUE PARIBAS, BP North America Petroleum Inc., and Crysen Trading and Marketing, Inc., Defendants Banque Paribas, Defendant-Appellee BP North America Petroleum Inc., Defendant-Appellant.

No. 511, Docket 87-7786.

United States Court of Appeals Second Circuit.

Argued Jan. 22, 1988.

Decided Aug. 4, 1988.

Irwin H. Warren, New York City (Bruce R. Zirinsky, Jacqueline Marcus, Jonathan S. Greenberg, Weil, Gotshal & Manges, New York City, on the brief), for defendant-appellee.

James H. Carter, New York City (Jonathan S. Geldzahler, Bonna L. Horovitz, Sullivan & Cromwell, New York City, on the brief), for defendant-appellant.

Before TIMBERS, KEARSE and PIERCE, Circuit Judges.

KEARSE, Circuit Judge:

In this interpleader action pursuant to 28 U.S.C. Secs. 1335 and 2361 (1982), defendant

BP North America Petroleum Inc. ("BP") appeals from so much of a final judgment of the United States District Court for the Southern District of New York, Edward Weinfeld, Judge, as awarded $6,300,000 of the interpleader fund to defendant Banque Paribas ("Paribas") instead of to BP 652 F.Supp. 542. The court recognized Paribas's claim on the basis of a security interest perfected by Paribas pursuant to the Uniform Commercial Code ("U.C.C.") prior to the filing of the interpleader action and prior to BP's acquisition of its lien on the property. BP contends that the court should have awarded the $6,300,000 to BP because Paribas allowed its U.C.C. filing statements to lapse during the pendency of the interpleader action, thereby subordinating Paribas's interest to that of BP. For the reasons below, we affirm.

I. BACKGROUND

The facts are not in dispute. In May 1986, interpleader plaintiff Avant Petroleum, Inc. ("Avant"), owed debts totaling some $16,000,000 to Crysen Trading and Marketing, Inc. ("Crysen"), for petroleum purchases. At that time, both Paribas and BP had claims against Crysen's assets.

On July 31, 1981, Crysen had entered into an agreement giving Paribas a general security interest in all Crysen assets, including accounts receivable. Paribas perfected its security interest in accordance with applicable state law by filing U.C.C. financing statements in New York on August 10, 1981, Texas on August 11, 1981, and California on September 4, 1981. Under U.C.C. Sec. 9-403(2), each filing was effective for five years.

In April 1986, BP instituted a breach of contract action against Crysen in Texas state court and obtained an order for a writ of garnishment providing, inter alia,

that the maximum value of property or indebtedness that may be garnished is $5,560,000.00. Further, the writ shall command the Garnishee [Avant] NOT to pay Crysen any debt or to deliver any effects to it, pending further order of this Court.

The writ was served on Avant on or about April 23, 1986.

On May 16 and May 20, 1986, Avant commenced interpleader actions in the Southern District of New York, asking the court to resolve the competing claims of Paribas, BP, and Crysen to debts of $13,385,925.76 and $2,763,816, respectively, that Avant owed Crysen. The court ordered that the funds be deposited into the registry of the court, and the two actions were consolidated.

In July 1986, all parties stipulated that $6,300,000 would suffice to satisfy BP's claim, including interest, and that the remainder of the interpleader fund should be paid to Paribas. Their stipulation was approved by the court on July 8, 1986, and the bulk of the interpleader fund was therefore released to Paribas. This left for adjudication only the competing claims of Paribas and BP to the remaining $6,300,000.

In August and September 1986, while the interpleader action was pending, Paribas's five-year U.C.C. financing statements, filed in 1981, lapsed. Paribas neglected to file new financing statements until November 1986. After the new filings, BP moved for summary judgment in its favor. Though conceding that at the time the interpleader actions were commenced in May 1986 Paribas's perfected security interest was superior to BP's judicially created lien, BP contended that under the so-called "retroactive unperfection" provision in U.C.C. Sec. 9-403(2), the filing lapses had caused Paribas's interest to become subordinate to BP's lien. Paribas cross-moved for summary judgment in its favor, contending that the unperfection provision was irrelevant and that its claims had priority.

In an opinion dated January 28, 1987, Judge Weinfeld granted Paribas's motion. Noting that the issue appeared to be one of first impression, he held that, given "the nature of the deposit of an interpleader stake into the Registry of the Court, the point at which the rights to the stake were asserted, equitable considerations, and the policy behind the U.C.C. provisions," 652 F.Supp. at 548, an award to BP based on a Judgment was entered awarding the $6,300,000 to Paribas, and this appeal followed.

                ruling of retroactive unperfection of Paribas's security interest "would be clearly inequitable," id. at 546.  The court concluded that since Paribas had a valid, superior interest in the funds when the interpleader action was initiated and the funds were deposited with the district court, Paribas was the rightful owner of the funds.  The court observed also that the parties' answers filed with the court put each other and the public on notice of their claims, and that the court was "openly in possession and control of the funds for the express purpose of determining which party was the rightful owner."   Id. at 547.  Accordingly, it concluded that application of the unperfection provisions would not further the policies underlying U.C.C. Article 9
                

II. DISCUSSION

This case presents a question of first impression, the answer to which is not clearly provided by either the U.C.C. or the interpleader statute. For the reasons below, we conclude that in the circumstances of this case, the court did not err in focusing on the time at which the funds were deposited with the court and determining the relative rights of the parties as of that time.

A. U.C.C. Article 9's Recording and Priority Provisions

Article 9 of the U.C.C. provides a scheme for prioritizing the claims of secured creditors and lien holders to collateral, setting forth the means by which various types of security interests may be perfected, the priorities among interests of the same type or of various types, and ways in which those priorities may be altered. The parties are in agreement that the pertinent U.C.C. provisions in New York, California, and Texas are substantially the same.

Under Secs. 9-106, 9-302, and 9-306, a security interest in an account receivable or in the proceeds of an account receivable, such as Paribas's interest in Avant's debt to Crysen, may be perfected only through the filing of a financing statement. The purpose of the filing requirement is to provide a method by which prospective creditors may learn that a debtor's property is encumbered and to provide binding constructive notice of the encumbrance. See, e.g., In re McBee, 714 F.2d 1316, 1321 (5th Cir.1983); see generally 9 R. Anderson, Uniform Commercial Code Sec. 9-402:6 (1985); J. White & R. Summers, Uniform Commercial Code Sec. 23-5 (2d ed. 1980).

A "lien creditor" is a creditor, such as BP, who has acquired a lien on the subject property by a process such as attachment. U.C.C. Sec. 9-301(3). A perfected security interest is superior to a later acquired lien. U.C.C. Sec. 9-301(4). However, under U.C.C. Sec. 9-301(1)(b), a lien creditor is entitled to priority over a creditor whose security interest has not been perfected, regardless of whether the lien holder has knowledge of the unperfected security interest.

U.C.C. Sec. 9-403(2) provides that a filed financing statement is effective for five years. Unless a continuation statement is filed prior to the end of that period, the security interest becomes unperfected after five years and becomes subordinated to a theretofore junior lien:

[A] filed financing statement is effective for a period of five years from the date of filing. The effectiveness of a filed financing statement lapses on the expiration of the five year period unless a continuation statement is filed prior to the lapse.... Upon lapse the security interest becomes unperfected, unless it is perfected without filing. If the security interest becomes unperfected upon lapse, it is deemed to have been unperfected as against a person who became a purchaser or lien creditor before lapse.

U.C.C. Sec. 9-403(2). The principal impetus for Sec. 9-403(2)'s retroactive unperfection provision appears to have been prevention of a circular situation that could result if the security interest of a creditor whose filing statement lapsed were allowed to remain superior to the interest of a previously subordinate lien holder whose lien was acquired prior to the lapse, and a third creditor then entered the picture: If A had There was, of course, no potential problem of circularity here, for only two creditors, Paribas and BP, appeared as claimants to the Crysen funds held by Avant.

                a perfected security interest at the time B became a lien creditor, making the interest of A superior to that of B, and if the interest of A became unperfected and thereafter C became a lien creditor, if there were no change in the order of priorities as a result of the lapse, B 's interest would be superior to that of C, and C 's interest would be superior to that of A, but A 's interest would remain superior to that of B.    The provision that the lapse makes A 's interest subordinate to that of B avoids the potential circularity
                

B. The Nature of Interpleader Proceedings

To the extent pertinent here, Sec. 1335 of 28 U.S.C. allows a stakeholder to institute an interpleader action by depositing money or property worth $500 or more into the registry of the court...