Ettinger v. Central Penn Nat. Bank
| Citation | 2 BR 385 |
| Decision Date | 06 December 1979 |
| Docket Number | Civ. A. No. 78-3259. |
| Parties | Leonard L. ETTINGER, Trustee in Bankruptcy of John S. Milne, Inc. v. CENTRAL PENN NATIONAL BANK. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
James W. Adelman, Philadelphia, Pa., for plaintiff.
Robert A. Kargen, Philadelphia, Pa., for defendant.
Presently before the Court are the cross-motions of the parties for summary judgment, pursuant to Fed.R.Civ.P. 56. This action is brought by the trustee in bankruptcy, Leonard L. Ettinger ("plaintiff"), for John S. Milne, Inc. ("Bankrupt"), against defendant Central Penn National Bank ("Bank"), pursuant to section 60(b) of the Bankruptcy Act, 11 U.S.C. § 96, for recovery of the alleged preferential payment of $39,235 made by the Bankrupt to the defendant Bank.
The plaintiff is a resident of the Commonwealth of Pennsylvania. The defendant Bank is doing business in Pennsylvania and the Bankrupt is incorporated in Pennsylvania.1 The precise issue before the Court is whether monies received by the beneficiary of a fire insurance policy for damages to personal property, which was pledged as collateral under a security agreement and recorded in a financing statement, constitute "proceeds" within the meaning of § 9-306 of the Uniform Commercial Code (1964 version) ("UCC") as adopted by the Pennsylvania legislature. After careful consideration of the decisional law and the well-briefed arguments of counsel, for all of the reasons set forth below, the Court finds that insurance proceeds are "proceeds" under § 9-306 of the UCC. However, the Court also finds that the holding on the issue of proceeds should not be retroactively applied against the parties in the instant action. Therefore, the Court will refer the case to the bankruptcy court for further proceedings in respect to the issues raised by the parties under sections 60 and 70 of the Bankruptcy Act. Finally, the Court will certify, sua sponte for immediate appeal pursuant to 28 U.S.C. § 1292(b), the single issue of retroactivity.
The facts as stipulated to by the parties are as follows: On July 20, 1970, the Bankrupt and the Bank entered into a business financing arrangement whereby they executed and delivered to the Bank a security agreement granting to the Bank a security interest in all of the Bankrupt's furnishings, fixtures, inventory and proceeds thereof. The security interest was properly perfected by the timely filing of an appropriate financing statement, with continuation statements being subsequently filed.2
On July 20, 1977, the Bank loaned the sum of $41,762.64 to the Bankrupt and received in return a time note obligating the Bankrupt to repay the Bank within 30 days with interest. The loan was secured under the original-but-continued July 20, 1970, security agreement.
Prior to July 20, 1977, the Bankrupt had filed a Chapter XI petition in bankruptcy, 11 U.S.C. § 722. On July 11, 1977, and by order of the bankruptcy court, the Bankrupt was retained as debtor-in-possession. Subsequently, the Bank filed a complaint for relief from the automatic stay provisions of section 311, pursuant to Bankruptcy Rule 11-44, 11 U.S.C. § 711, seeking to collect the debt. On or about October 18, 1977, but before a hearing on that complaint, the Bankrupt's retail store suffered substantial damage as a result of a fire in an adjoining store. Included in the damages were the goods and inventory covered by the Bank's prior security agreement. As a result of the fire, the Bankrupt was forced to go out of business.
Four days after the fire, but without knowledge of it, the bankruptcy court, acting on the Bank's complaint, dissolved the automatic stay and thus enabled the Bank to proceed with enforcement of its security rights to collect its debt. At the same time, the court dismissed the Chapter XI proceedings due to the Bankrupt's lack of assets beyond those secured by the Bank.
The security agreement between the Bank and the Bankrupt had provided that the Bankrupt was to maintain fire insurance on the collateral. After the Chapter XI proceedings had begun, but five days prior to the fire, without actual notice to the bankruptcy court or to the other creditors, the Bankrupt designated the Bank as the loss payee under the insurance policy.
On November 22, 1977, after receiving the payment under the insurance policy for losses due to the fire, the Bankrupt paid over to the Bank the insurance monies in the sum of $39,235, which the Bank credited against the outstanding indebtedness of the Bankrupt, leaving a balance due of $2,527.64. As a direct result of the Bankrupt's payment to the Bank, the other creditors filed an involuntary petition for bankruptcy on November 30, 1977, against the Bankrupt. By order of adjudication dated March 10, 1978, the bankruptcy court granted the petition. On June 8, 1978, the plaintiff was appointed trustee in bankruptcy by the bankruptcy court. This action was commenced on September 29, 1978, by the plaintiff-trustee on behalf of the Bankrupt's estate, pursuant to authority to initiate the action granted by the bankruptcy court.
Plaintiff maintains that the Bank does not have a perfected security interest in the insurance proceeds and is not entitled to the monies as a loss payee under the policy. First, plaintiff asserts that the insurance proceeds are not "proceeds" within the meaning of § 9-306 of the UCC (1964 version); and, therefore, the Bank does not have a continuing security interest in the insurance monies. Second, since the Bank was designated as a loss payee during the pendency of the Chapter XI bankruptcy proceedings without the consent or knowledge of the bankruptcy court, the designation was without force under section 70 of the Bankruptcy Act, 11 U.S.C. § 110, and is, therefore, subject to defeat by the trustee in bankruptcy. Third, the Bankrupt made a voidable preferential transfer to the Bank under section 60 of the Bankruptcy Act, 11 U.S.C. § 96. The defendant Bank, and the petitioner as amicus curiae, contend that proceeds under § 9-306 include insurance proceeds and, therefore, the Bank has a continuing perfected security interest in the insurance monies, irrespective of the loss payee designation. Upon careful review and consideration of the decisional law, arguments of counsel, scholarly commentaries and the UCC official commentary, this Court accepts the view of the Bank. Section 9-306 of the UCC (1964 version), as adopted by the Pennsylvania legislature, provides, in pertinent part, that:
12A P.S.Pa. § 9-306(1), (2) (emphasis added).
The inexactness of the UCC framers, in defining precisely what constitutes "proceeds" under § 9-306, has led to sharp controversy among the courts and has spawned numerous articles and commentaries. Initially, this Court must determine whether it should foray into this legal quagmire in light of: (1) the lack of applicable state law on the subject; and, (2) the recently proposed amendment to § 9-306,3 which clearly and expressly includes insurance proceeds within the definition of "proceeds," and which the Pennsylvania legislature has, to date, failed to adopt.
This is a case of first impression in both Pennsylvania state and federal courts. In deciding issues founded upon state law, federal courts must determine state law by looking to either state legislative pronouncements or the decisions of the state's highest court. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Where the highest court of the state or the legislature has not spoken, "federal authorities must apply what they find to be the state law after giving `proper regard' to relevant rulings of other courts of the state . . . thus it may be said to be, in effect, sitting as a state court." Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1783, 18 L.Ed.2d 886 (1967); Bernhardt v. Polygraphic Co., 350 U.S. 198, 203, 76 S.Ct. 273, 100 L.Ed. 199 (1956).
Furthermore, in addressing the precise issue of whether insurance monies constitute "proceeds" under § 9-306, the Fifth Circuit Court of Appeals recently held in Aetna Ins. Co. v. Texas Thermal Industries, Inc., 591 F.2d 1035 (5th Cir. 1979), that:
Resolution of the question of course requires us to look to state law. Unfortunately, there are no Texas decisions directly on point. We believe, however, that the Texas Supreme Court, were it presented with this question, would hold that the insurance fund constitutes proceeds of the secured collateral.
The sole Pennsylvania state court decision that relates tangentially to the issue of the status of insurance monies under § 9-306 is Hoffman v. Snack, 37 Pa.D. & C.2d 145, 2 UCC Rept. 862 (Allegheny County 1964), which the plaintiff urges us to follow as precedent. In Hoffman, plaintiff sued for personal injuries and property damages arising out of an automobile accident involving plaintiff's car. Before the court was a petition to intervene as a party-plaintiff filed by a finance company which held a security interest in the damaged automobile. The car was not insured at the time of the accident, although the debtor was required to maintain insurance on the car as part of the security agreement. The...
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