U.S. For and on Behalf of Maritime Admin. v. Continental Illinois Nat. Bank and Trust Co. of Chicago

• Decision Date: 16 November 1989
• Docket Number: No. 1047,D,1047
• Citation: 889 F.2d 1248
• Parties: The UNITED STATES of America, representing the Secretary of Transportation, for and on Behalf of the MARITIME ADMINISTRATION, and representing At-Sea Incineration, Inc., Appellant, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO (individually and as agent for The Bank of California, N.A. and Canadian Imperial Bank of Commerce), the Bank of California, N.A., and Canadian Imperial Bank of Commerce, Appellees. ocket 89-5004.
• Court: U.S. Court of Appeals — Second Circuit

Page 1248

889 F.2d 1248

15 Fed.R.Serv.3d 972

The UNITED STATES of America, representing the Secretary of Transportation, for and on Behalf of the MARITIME ADMINISTRATION, and representing At-Sea Incineration, Inc., Appellant, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO (individually and as agent for The Bank of California, N.A. and Canadian Imperial Bank of Commerce) the Bank of California, N.A., and Canadian Imperial Bank of Commerce, Appellees.

No. 1047, Docket 89-5004.

United States Court of Appeals Second Circuit.

Argued April 19, 1989.

Decided Nov. 16, 1989.

Jeremy R. Paul, Atty., Civ. Div., U.S. Dept. of Justice, Washington, D.C. (John R. Bolton, Asst. Atty. Gen., Leonard Schaitman, Atty., Civ. Div., Dept. of Justice, Washington, D.C., Benito Romano, U.S. Atty. for S.D.N.Y., New York City, of counsel), for appellant.

Matthew Gluck, New York City (Herbert P. Minkel, Jr., Brent A. Friedman, Fried, Frank, Harris, Shriver and Jacobson, New York City, of counsel), for appellees.

Before LUMBARD, ALTIMARI and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

This adversary proceeding was commenced in the United States Bankruptcy Court for the Southern District of New York on November 1, 1985, shortly after Tacoma Boatbuilding Company ("Tacoma"), a Washington based manufacturer of high technology, high performance vessels, filed in the same court a petition for reorganization under chapter 11 of title 11 of the United States Code. In connection with approximately $32 million in loans which they have made to Tacoma, appellees Continental Illinois Bank and Trust Company of Chicago ("Continental"), The Bank of California, N.A. and Canadian Imperial Bank of Commerce (collectively the "Banks") are parties to a security agreement with Tacoma granting them a security interest in Tacoma's inventory, receivables, contract rights, general intangibles and related assets. The Banks initiated the adversary proceeding seeking, inter alia, a declaration that their liens in the Apollo One and Apollo Two (collectively the "Vessels"), two ocean-going vessels to be used for at-sea incineration of toxic wastes which had been partially constructed by Tacoma, were "supreme and paramount to any liens [in the Vessels] claimed by" At-Sea Incineration, Inc. ("ASI") and the Maritime Administration, ¹ and to the ownership interest therein claimed by Tacoma.

The Vessels were initially to be sold to the Apollo Company, L.P. ("Apollo"), to whose interest ASI succeeded, and the construction contracts granted Apollo a security interest in the Vessels. The contracts were contingent upon Apollo's obtaining a conditional commitment from MarAd to execute guarantees under Title XI of the Merchant Marine Act of 1936, as amended, 46 U.S.C.A.App. Secs. 1271-1280 (West 1975 & Supp.1989), with respect to the Vessels. The commitment was obtained, and MarAd guaranteed bonds issued by Apollo to finance the construction of the Vessels. MarAd was subsequently compelled to fulfill the guarantee upon default, and succeeded to Apollo's (and ASI's) security interest in the Vessels.

MarAd answered the complaint on its own behalf and on behalf of ASI. MarAd generally denied the allegations of the Banks' complaint, but "admit[ted] that the Construction contracts name [Apollo] as the purchaser [of the Vessels]" and that "ASI is now the purchaser under the Construction Contracts." In its answer, however, Tacoma asserted as affirmative defenses that (1) the sale of the Vessels was effected in the ordinary course of Tacoma's business and was authorized by the Bank's security agreement, with the result that the Banks had lost their security interest in the Vessels pursuant to section 9-306 of the Uniform Commercial Code; ² and (2) ASI was a buyer in the ordinary course of business under section 9-307 of the Uniform Commercial Code whose purchase of the Vessels was not subject to the Banks' security interest.

In subsequent motion papers filed in the Tacoma bankruptcy proceedings, MarAd contended that as successor in interest to ASI, MarAd was a buyer in the ordinary course of business of the Vessels and took free of the Banks' security interest. When the parties subsequently moved for summary judgment in the adversary proceeding, however, MarAd sought, but was denied, leave to amend its answer to assert as an affirmative defense its alleged status as a buyer in the ordinary course of business. The bankruptcy court ruled that the proposed amendment was dilatory and prejudicial. Summary judgment was then granted to the Banks because their security interest was prior in time to the security interest to which MarAd had succeeded.

We reverse and remand with the instruction to the district court to remand to the bankruptcy court with the instruction to allow MarAd to amend its answer to assert the "buyer in the ordinary course of business" defense.

Background

A. The Transactions.

In September, 1980, the Banks and Tacoma entered into a security agreement, in connection with a loan of approximately six million dollars to Tacoma, whereby the Banks received a security interest in Tacoma's inventory, receivables, contract rights, general intangibles and related assets. The agreement contained the following provision:

Until such time as the [Banks] shall notify [Tacoma] of the revocation of such power and authority, [Tacoma] (a) may, in the ordinary course of its business, at its own expense, sell, lease or furnish under contracts of service any of the Inventory normally held by [Tacoma] for such purpose, and use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by [Tacoma] for such purpose....

The Banks' security interest was perfected by the filing of a UCC-1 financing statement with the Washington State Department of Licensing (the "Department"), and a continuation statement was subsequently so filed. The loan agreements were later amended to allow for enhanced financing that eventually totalled over thirty-two million dollars.

On December 29, 1981, Tacoma contracted with Apollo to construct the Vessels and sell them to Apollo for $31,630,000 each. The contracts for the construction of the Vessels (the "Construction Contracts") provided that Tacoma was to retain title to the Vessels during construction, but that Apollo was granted a security interest in the Vessels and related materials (and contracts therefor) in order to secure performance. The security interest was perfected by the filing of a UCC-1 financing statement with the Department on October 20, 1982.

In October, 1982, Apollo issued ship financing bonds in the aggregate amount of $59,875,000 to raise a portion of the Vessels' construction costs. Simultaneously, Apollo entered into an authorization agreement and guarantee commitment with MarAd by which MarAd guaranteed payment of the bonds. As security for the guarantee, Apollo issued MarAd a promissory note in the amount of $59,875,000 and entered into a security agreement granting MarAd a security interest in Apollo's interest in the Vessels and Construction Contracts. On October 20, 1982, Apollo filed a UCC-3 statement with the Department to perfect the assignment. In January, 1985, Apollo assigned the Construction Contracts to ASI, seventy percent of whose common stock is owned by Tacoma and thirty percent by Apollo. The assignment provided that ASI's rights in the Construction Contracts were subject to MarAd's security interest.

On September 19, 1985, the Banks, in accordance with their loan agreement and security agreement with Tacoma, revoked Tacoma's authority to sell any of its property, including the Vessels. On September 23, 1985, Tacoma filed a petition for reorganization pursuant to chapter 11 of title 11 of the United States Code. At approximately that time, Tacoma ceased work on construction of the Vessels. Apollo One was then approximately ninety-five percent complete, and Apollo Two was approximately seventy percent complete. The bonds then went into default, and MarAd was required to pay the indenture trustee $59,390,000 in principal and $4,389,891.67 in accrued interest pursuant to its guarantee. In accordance with the terms of MarAd's security agreement with ASI, MarAd then foreclosed on ASI's right, title and interest in the Vessels and the Construction Contracts.

B. Legal Proceedings.

On November 1, 1985, the Banks commenced this action by filing a complaint seeking, inter alia, a declaration that their liens in the Vessels were superior to any liens therein claimed by ASI and MarAd, and to the ownership interest claimed by Tacoma. In its answer on behalf of itself and ASI, as previously noted, MarAd referred to Apollo, and subsequently ASI, as the "purchaser" under the Construction Contracts. The only separate defenses pleaded by MarAd, however, were that the Banks' complaint failed to state a claim for which relief could be granted, and that the bankruptcy court lacked jurisdiction of the subject matter. As also noted above, Tacoma filed an answer alleging affirmative defenses under sections 9-306 and 9-307 of the Uniform Commercial Code, including the defense that ASI was a buyer of the Vessels in the ordinary course of business.

On September 29, 1986, Tacoma filed a motion in its bankruptcy proceeding to reject the Apollo contracts, pursuant to 11 U.S.C.A. Sec. 365 (West 1979 & Supp.1989), on the grounds that the contracts were burdensome and that continued performance would cause financial loss and harm creditors. MarAd did not oppose the motion. In November, 1986, the bankruptcy court authorized the rejection of the Apollo contracts.

On October 31, 1986, Tacoma filed a motion in its bankruptcy proceeding seeking approval of a letter agreement with the Banks providing, inter alia, for a joint venture to complete and operate the Vessels in the event the Banks were determined to have a first lien on the Vessels. In opposing this...