Clean Burn Fuels, LLC v. Purdue Bioenergy, LLC (In re Clean Burn Fuels, LLC), Bankruptcy No. 11–80562.

CourtUnited States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina
Writing for the CourtTHOMAS W. WALDREP JR.
Citation492 B.R. 445
PartiesIn re CLEAN BURN FUELS, LLC, Debtor. Clean Burn Fuels, LLC, Plaintiff, v. Purdue BioEnergy, LLC, Defendant.
Docket NumberBankruptcy No. 11–80562.,Adversary No. 11–09046.
Decision Date16 May 2013

492 B.R. 445

Clean Burn Fuels, LLC, Plaintiff,
Purdue BioEnergy, LLC, Defendant.

Bankruptcy No. 11–80562.
Adversary No. 11–09046.

United States Bankruptcy Court,
M.D. North Carolina,
Durham Division.

May 16, 2013.

[492 B.R. 449]

John A. Northen, Stephanie Osborne–Rodgers, Vicki L. Parrott, John Paul H. Cournoyer, Chapel Hill, NC, for Debtor and Plaintiff.

Frederick W.H. Carter, C. Carey Deeley, Jr., Towson, MD, Gregory Byrd Crampton, C. Carey Deeley, Jr., Raleigh, NC, Benjamin A. Kahn, Greensboro, NC, for Defendant.


THOMAS W. WALDREP JR., Bankruptcy Judge.

Before the Court are cross motions for partial summary judgment filed on January 24, 2013, one filed by the Chapter 7 trustee for Clean Burn Fuels, LLC (the “Trustee Motion”) and the other filed by Perdue BioEnergy, LLC (the “Perdue Motion”). In November of 2009, Clean Burn Fuels, LLC (the “Debtor”) and Perdue BioEnergy, LLC (“Perdue”) entered into a series of agreements regarding the supply and delivery of corn to the Debtor's ethanol plant. Perdue supplied corn to the plant until the plant closed in early 2011. Thereafter, the Debtor filed a Chapter 11 bankruptcy petition and initiated this adversary proceeding, which seeks a declaratory judgment that the corn being housed in the bins at the Debtor's plant (the “Corn”) was property of the estate. The case was converted to Chapter 7 in 2012, and Sara A. Conti, Chapter 7 trustee (the “Trustee”) was substituted for the Debtor in this adversary proceeding.

The Trustee Motion contends that even though the contracts between the Debtor and Perdue provide that Perdue is the owner of the Corn, because the Corn was

[492 B.R. 450]

delivered to the Debtor, the Uniform Commercial Code limits Perdue to the retention of a security interest in the Corn. Furthermore, because Perdue did not perfect a security interest in the Corn, its interest is avoidable pursuant to Section 544. The Perdue Motion asserts that delivery to the Debtor did not occur until the Corn was removed from the bins and crossed a weighbelt. Therefore, because the Corn remained in the bins, Perdue retained possession and ownership of the Corn. Perdue also seeks summary judgment on the Trustee's breach of contract claim, asserting that it had a right to setoff that cannot be avoided by the Trustee.

Upon consideration of the pleadings and the statements of counsel, and for the following reasons, the Court concludes that the Corn is property of the estate, Perdue holds an unperfected security interest in the Corn and its proceeds, and the Trustee may avoid Perdue's unperfected security interest pursuant to Section 544(a) of the Bankruptcy Code. As to Perdue's right of setoff, the Court concludes that there are material facts in controversy. Thus, the Trustee Motion will be granted and the Perdue Motion denied.

A. The Ethanol Plant

The Debtor owned and operated an ethanol plant in Raeford, North Carolina, for the production and sale of ethanol. (Pl.'s Br. Ex. L, Ex. J.) On March 31, 2008, the Debtor entered into a credit agreement with Cape Fear Farm Credit, ACA (“Cape Fear”) that provided up to $63,000,000.00 in term loans for construction of the ethanol plant and a $6,000,000.00 revolving line of credit for working capital after construction. (Cape Fear POC.) To secure the loans, Cape Fear perfected a lien encumbering all of the Debtor's assets, including the Debtor's real property and personal property. (Cape Fear POC.)

The ethanol plant consists of multiple structures. (Pl.'s Br. Ex. H, Def.'s Br. Ex. 33.) The first building on the road leading into the Debtor's real property is an administrative building. (Pl.'s Br. Ex. H, Def.'s Br. Ex. 33.) The administrative building provided, inter alia, office space for a Perdue employee who procured corn locally and monitored and maintained the corn in inventory. (Pl.'s Br. Ex. E § 2(d)(iv), Pl.'s Ex. M.) Train tracks run parallel to the road and lead into a building that houses receiving pits. (Pl.'s Br. Ex. H, Def.'s Br. 33.) The building housing the receiving pits also contains switches that control the electricity in the plant and can be locked in an off position. (Pl.'s Br. Ex. M.) Conveyor belts run from the receiving pits to two large bins designed to hold 1.4 million bushels of corn. (Pl.'s Br. Ex H, Def.'s Br. Ex. 33.) An additional set of conveyor belts run from the storage bins into the plant; at the end of these belts is the weighbelt. (Def.'s Br. Ex. 1–A ¶ 27(f).) After crossing the weighbelt, corn is deposited into machinery, and the ethanol production process begins.1 (Def.'s Br. Ex 1–A ¶ 27(h).)

B. The Agreements

Initially, the Debtor intended to obtain corn through suppliers that would effectively

[492 B.R. 451]

act as brokers for the corn. (Def.'s Br. Exs. 7, 8.) However, in late 2008, Perdue and the Debtor discussed an arrangement whereby Perdue would supply the Debtor with all of the corn required for its ethanol production. (Def.'s Br. Ex. 5.) Perdue proposed a model that differed from a typical brokerage agreement. (Def.'s Br. Ex. 6.) The terms of the proposal provided that Perdue would source all of the corn required for the Debtor's operation, provide logistics for the transportation of the corn to the plant, provide support for corn handling and storage, retain ownership of the corn until it was transferred from the leased bins, and purchase all of the DDGS produced at the plant. (Def.'s Br. Exs. 9, 10.) This model was designed to reduce the amount of working capital and manpower necessary for the Debtor's operations, in part because the Debtor would not have to hire employees to manage transportation logistics. (Def.'s Br. Ex. 2, 17.) Following these discussions, Cape Fear required the Debtor either to enter into contracts with Perdue for the supply of corn or raise an additional $7,000,000.00 in equity. (Def.'s Br. Ex. 15.)

On November 2, 2009, the Debtor and Perdue entered into multiple agreements to arrange for the sourcing of corn, consisting of the Feedstock Agreement, the Co–Products Agreement, and the Master Agreement (collectively, the “Agreements”). (Pl.'s Br. Exs. E, F, G, Def.'s Br. Exs. 18, 19, 20.) The Feedstock Supply Agreement provided that the Debtor would buy corn exclusively from Perdue and that Perdue would sell and deliver all of the corn needed by the Debtor for ethanol production. (Pl.'s Br. Ex. E at RECITALS ¶ B.) Under the Feedstock Supply Agreement, a minimum of 600,000 bushels, the equivalent of ten days' worth of inventory, would be maintained at the ethanol plant. (Pl.'s Br. Ex. E at § 2(c).) The Feedstock Supply Agreement further provided that Perdue would manage the logistics relating to the origination and delivery of corn to the plant. (Pl.'s Br. Ex. E at § 2(d).) Pursuant to the Feedstock Supply Agreement, delivery of the corn was “complete once Perdue delivers the [corn] to [the Debtor's] site.” (Pl.'s Br. Ex. E at § 7.) It further provided that, with respect to rail deliveries, “Perdue shall deliver the Corn sold to [the Debtor] free on board (FOB) the loading origin set forth on the rail bill of lading.” (Pl.'s Br. Ex. E at § 7.) The Debtor would provide storage space in the form of bins, to be leased to Perdue. (Pl.'s Br. Ex. E at § 2(c).) Pursuant to the Feedstock Supply Agreement, Perdue would retain ownership of the corn in the storage bins until it crossed the weighbelt inside the plant. (Pl.'s Br. Ex. E at § 7.) Perdue was allowed access to the bins to inspect the corn and to prevent anyone else from obtaining possession of the corn, which could be done by cutting power to the equipment. (Pl.'s Br. Exs. E, H.) Perdue's full time on-site employee had access to the ethanol plant and the administration building. (Def.'s Br. Ex. 43.)

The Feedstock Supply Agreement was intended to be effective for three years from the “start-up date.” (Pl.'s Br. Ex. E.) The Master Agreement defined “start-up date” as “the date identified in a written notice delivered by [the Debtor] to Perdue as the date on which [the Debtor] will require Feedstock for the purpose of producing Ethanol and/or Co-product, which date is intended to be the date of the commencement of services under the Goods and Services Agreements.” (Pl.'s Br. Ex. F at § 1(a).) In other words, the “start up date” would be determined upon a notice given by the Debtor at a future time. All notices were required to be delivered

[492 B.R. 452]

to Perdue's general counsel. (Pl.'s Br. Ex. F at § 11(b).)

On June 8, 2010, the Debtor and Perdue executed a lease of the storage bins (the “Lease”), which was not recorded. (Pl.'s Br. Ex. H, Answer at ¶ 53). The Lease provided that Perdue would lease the two bins located on the Debtor's property for $1.00 per year. (Pl.'s Br. Ex. H at § 1.2.) Pursuant to the Lease, the Debtor was “to place notices on the Bins or otherwise display notice at the Ethanol Facility in such a manner that is reasonably sufficient to notify third-parties that the Bins have been designated exclusively to receive and store Feedstock owned by [Perdue], and that any Feedstock stored in such Bins are property of [Perdue] and not of [the Debtor].” (Pl.'s Br. Ex. H at § 1.3.) On June 25, 2010, Perdue paid the $1.00 rental payment due under the Lease. (Def.'s Br. Ex. 36 at ¶ 6.) No signs were ever erected on or near the bins. (Pl.'s Br. Exs. L, J.) The parties intended for the Lease to remain in effect for the term of the Feedstock Supply Agreement. (Pl.'s Br. Ex. H at § 1.1.) However, the Debtor did not provide the notice that, pursuant to the Master Agreement, would trigger the start up date. (Pl.'s Br. Ex. K.)

Also, on June 8, 2010, Perdue and Cape Fear entered into a Subordination, Attornment and Non–Disturbance Agreement, which subordinated Perdue's rights under the Lease to Cape Fear's lien. (Def.'s Br. Ex. 35 at § 1.) The Subordination Agreement provides that Cape Fear recognizes that Perdue would retain ownership of the corn...

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