Bluegrass Ford-Mercury, Inc., In re, FORD-MERCUR

• Decision Date: 20 August 1991
• Docket Number: INC,No. 90-6121,FORD-MERCUR,90-6121
• Citation: 942 F.2d 381
• Parties: Bankr. L. Rep. P 74,202, 15 UCC Rep.Serv.2d 369 In re BLUEGRASS, Debtor, BLUEGRASS, Plaintiff-Appellee, v. FARMERS NATIONAL BANK OF CYNTHIANA, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 381

942 F.2d 381

Bankr. L. Rep. P 74,202, 15 UCC Rep.Serv.2d 369

In re BLUEGRASS FORD-MERCURY, INC., Debtor,

BLUEGRASS FORD-MERCURY, INC., Plaintiff-Appellee, v. FARMERS NATIONAL BANK OF CYNTHIANA, Defendant-Appellant.

No. 90-6121.

United States Court of Appeals, Sixth Circuit.

Submitted May 20, 1991.

Decided Aug. 20, 1991.

Barry M. Miller, Taft McKinstry, Fowler, Measle & Bell, Lexington, Ky., for plaintiff-appellee.

Joseph M. Scott, Jr., Laura Day Carruthers, Stoll, Keenon & Park, Lexington, Ky., for defendant-appellant.

Before GUY and RYAN, Circuit Judges, and JOINER, Senior District Judge. ^*

RALPH B. GUY, Jr., Circuit Judge.

Defendant, Farmers National Bank of Cynthiana (Farmers), appeals the district court's decision, which affirmed the bankruptcy court's order, setting aside certain liens held on Bluegrass Ford-Mercury's (Bluegrass or debtor) property as preferential and allowing Bluegrass to recover certain payments made during the preference period from the bank.

Farmers argues that it was a perfected, secured creditor and, thus, did not receive any preferential transfers. Additionally, Farmers argues that the plaintiff has failed to prove all of the essential elements of a preferential transfer. Finally, Farmers argues that the exceptions to the rule against preferential transfers, as provided in 11 U.S.C. § 547(c), should apply and therefore Bluegrass is not entitled to avoid the payments made to Farmers. We find defendant's arguments without merit and affirm, essentially on the basis of the bankruptcy and district court opinions, although our rationale differs slightly from both the bankruptcy and district courts.

I.

Farmers entered into a floor plan financing arrangement with Bluegrass Ford, Bluegrass Ford-Mercury's predecessor, in the mid-1970s.

"Floor planning is a form of inventory financing." Ruda, Floor Planning, Commercial Finance, Factoring, and Other Asset-Based Lending 1984, 339 PLI/Comm. 135, 135 (1984) (hereinafter Floor Planning). It provides a means of "lending to a dealer against the security of its automobile inventory." Id. Generally, "[t]he borrower is a seller or lessor of personal property...." d "[t]he lender may be a bank or finance company." Id.

As new vehicles were shipped to Bluegrass Ford, it would forward a draft for payment to the bank. A representative of the dealership would go to the bank upon its receipt of these drafts and execute a 90-day "Precomputed Installment Note, Disclosure & Security Agreement." Once these notes were executed, the bank would pay the drafts directly to the Ford Motor Company. The notes covered one or more cars, depending on the number of drafts. As the vehicles were sold, the principal amount of the note was paid to the bank. Upon the sale of the last vehicle covered under the agreement, or when the 90-day period had expired and the agreement was up for renewal, the interest was paid.

To perfect its security interest in the proceeds from the sales of the automobiles, Farmers filed a Uniform Commercial Code (UCC) financing statement on June 7, 1977. This financing statement covered "all new cars and demonstrators in the inventory of Bluegrass Ford, Inc." Although new floor plan notes were executed, no new financing statements were filed.

In August of 1979, the assets of the dealership were sold by William A. Webber to James A. Morris. These assets included all new cars in Bluegrass Ford's inventory. As part of the same sales contract, Bluegrass Ford conveyed its real property to James A. Morris and his wife, Betty C. Morris.

After the sale, the dealership was transferred to a new corporate entity called Bluegrass Ford-Mercury, Inc., the plaintiff in this action. James Morris executed new notes and security agreements with the bank in order to assume the indebtedness of the old dealership. The floor plan financing arrangement continued as before, until just before Bluegrass Ford-Mercury filed its petition for relief. No new financing statement to perfect Farmers' security interest in Bluegrass Ford-Mercury's inventory was filed as a result of the change in ownership or corporate name of the dealership.

In the spring of 1981, Bluegrass developed financial problems and stopped paying proceeds from sold vehicles to the bank. In total, the amount of income realized by Bluegrass Ford-Mercury from vehicles sold out of trust ¹ was $160,220.39.

On April 9, 1981, Bluegrass Ford-Mercury, Inc., owed Farmers $232,084.24 on floor plan vehicles that were subject to installment notes. This includes the proceeds owed for the sales of vehicles out of trust.

In an effort to solve its problems, Bluegrass Ford-Mercury, on April 9, 1981, obtained a loan in the principal amount of $250,000 from Farmers National Bank. The Small Business Administration (SBA) guaranteed this loan. The proceeds of this loan were deposited into Bluegrass Ford-Mercury's account at Farmers. A note for this amount, payable to the bank, was executed by Bluegrass Ford-Mercury. A security agreement was simultaneously executed and filed as a financing statement. This agreement is dated March 27, 1981. The security agreement stated that it was given to secure the $250,000 loan and listed specific types of collateral as security, including "all inventory, raw materials, work in process, returned goods, and supplies now owned or hereafter acquired." Additionally, the security agreement enumerated other items as collateral, such as machinery, equipment, furniture and fixtures, and accounts receivable. Farmers' security interest in the SBA loan was perfected when it filed a combined financing statement and security agreement in the Harrison County Court Clerk's Office on April 9, 1981.

The SBA authorization and loan agreement identified the collateral as a "[s]ecurity interest, under the Uniform Commercial Code on: all machinery, equipment (excluding licensed motor vehicles), furniture and fixtures; all inventory, excluding any floorplanned vehicles ..." and all accounts receivable.

On October 8, 1981, Farmers filed a financing statement in the Harrison County Court Clerk's Office showing Farmers as the secured party, and Bluegrass Ford-Mercury as the debtor, covering "[a]ll new & Used vehicles in the inventory of Bluegrass Ford Merc., Inc." By this time, Bluegrass Ford-Mercury had become indebted to Farmers in the amount of $230,985.53 on licensed and floor plan vehicles.

On January 5, 1982, Bluegrass filed a Chapter 11 bankruptcy petition. During the 89-day period between the October 8, 1981, filing of the financing statement securing the inventory and the filing of the bankruptcy petition on January 5, 1982, the debtor made principal payments of $91,950.31 and interest payments of $10,545.54 on the floor plan note debt incurred before October 8, 1981. As of January 5, 1982, Bluegrass owed a balance of $139,035.22 on floor plan loans originated before October 8, 1981. Vehicles financed pursuant to these notes (executed before October 8, 1981), which were in inventory on January 5, 1982, were sold in the Chapter 11 proceeding. The proceeds of this sale, $23,938.87, were paid to the defendant.

Also during this period the bank loaned an additional $109,733.61 to purchase more vehicles under the floor plan. Bluegrass executed notes for these loans as well. Of this debt, $29,877.88 had been repaid at the time of the bankruptcy filing, leaving $79,855.73 unpaid. After the bankruptcy filing, an additional $8,635.89 was paid on these loans. The vehicles, the subject of the post-October 8, 1981, loans, were sold for $31,810.95. These proceeds were held in escrow.

Additionally, Bluegrass Ford-Mercury made three payments of $4,667 on the SBA loan within 90 days of filing the Chapter 11 proceeding. After it filed the petition, Bluegrass made two further payments of $4,667 each. Thus, the total payments made on the SBA loan, within the 90-day period before filing and after the Chapter 11 filing, were $23,335.

Bluegrass, as debtor in possession, brought this proceeding to recover certain payments it made to Farmers as preferential. The bankruptcy court held in favor of Bluegrass. The bankruptcy court ordered Farmers to pay Bluegrass the following:

A. $91,950.31 for payments received by Defendant within ninety (90) days of the filing of Plaintiff's Petition under Chapter 11 of the Bankruptcy Code, on indebtedness evidenced by vehicle loans made by Defendant to Plaintiff more than ninety (90) days prior to the filing of said Petition.

B. $10,545.54 for interest payments received by Defendant within ninety (90) days of the filing of said Petition, on indebtedness evidenced by vehicle loans made by Defendant to Plaintiff more than ninety (90) days prior to the filing of said Petition.

C. $26,938.87 from the sale during the pendency of Plaintiff's Chapter 11 proceeding of vehicles acquired by the Plaintiff prior to October 8, 1981.

D. $23,335.00 for payments received by Defendant within ninety (90) days of and immediately following the filing of said Petition on the SBA loan of Defendant to Plaintiff.

E. $32,028.51 for prejudgment interest on $58,749.82 of the foregoing amounts set forth in A through D hereof, which $58,749.82 has been held on deposit by the parties pursuant to prior orders of this Court.

F. $90,319.45 for prejudgment interest on the remaining $94,019.90, of amounts set forth in A through D hereof, not mentioned in Item E hereof.

The bank appealed, and the district court affirmed the bankruptcy court's decision.

Farmers then appealed to this court.

II.

Farmers first argues that it is a perfected, secured creditor and, thus, the payments Bluegrass made could not be avoided as preferences. A preference is "a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankrupt estate." ...