Greeneville Fed. Bank, FSB v. Fellhoelter (In re K&L Trailer Leasing, Inc.)

• Decision Date: 19 May 2021
• Docket Number: Case No. 3:20-bk-31620-SHB,Adv. Proc. No. 3:20-ap-3054-SHB
• Citation: 630 B.R. 81
• Parties: IN RE K&L TRAILER LEASING, INC., Debtor Greeneville Federal Bank, FSB, Plaintiff v. Kris Fellhoelter; First Bank; JB&B Capital, LLC; First Midwest Finance; ServisFirst Bank; Gary M. Murphey, Trustee; Marvin Fellhoelter, Defendants
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

630 B.R. 81

IN RE K&L TRAILER LEASING, INC., DebtorGreeneville Federal Bank, FSB, Plaintiff

v.Kris Fellhoelter; First Bank; JB&B Capital, LLC; First Midwest Finance; ServisFirst Bank; Gary M. Murphey, Trustee; Marvin Fellhoelter, Defendants

Case No. 3:20-bk-31620-SHB

Adv. Proc. No. 3:20-ap-3054-SHB

United States Bankruptcy Court, E.D. Tennessee.

Signed May 19, 2021

LAUGHLIN, NUNNALLY, HOOD & CRUM, PC, Jerry W. Laughlin, Esq., 100 South Main Street, Greeneville, Tennessee 37743, Attorneys for Plaintiff.

BRADLEY ARANT BOULT CUMMINGS LLP, William L. Norton, III, Esq., 1600 Division Street, Suite 700, Nashville, Tennessee 37203, Attorneys for Defendant Gary L. Murphey, Trustee.

WINCHESTER, SELLERS, FOSTER & STEELE, PC, Anthony R. Steele, Esq., 800 S. Gay Street, Suite 1000, Knoxville, Tennessee 37901, Attorneys for Defendant FirstBank.

MEMORANDUM ON MOTION OF GARY M. MURPHEY, TRUSTEE, FOR JUDGMENT ON THE PLEADINGS

SUZANNE H. BAUKNIGHT, UNITED STATES BANKRUPTCY JUDGE

Plaintiff, Greeneville Federal Bank ("GFB"), initiated this adversary proceeding on December 7, 2020, and filed the Amended Complaint for Adjudication of the Priority of the Security Interest of Greeneville Federal Bank in Certain Trailers and Lease and Sales Proceeds Therefrom ("Complaint") on December 23, 2020. [Docs. 1, 17.] GFB seeks a declaratory judgment that it possesses a first-priority security interest in certain trailers previously held as inventory of GFB's debtor, K&L Sales & Leasing, Inc. ("Sales"), notwithstanding Sales' transfer of the trailer-inventory to (1) K&L Trailer Leasing, Inc. ("Leasing"), Debtor in the underlying Chapter 11 case in which Defendant Gary M. Murphey was appointed the Chapter 11 trustee (the "Trustee"); (2) Kris Fellhoelter ("Kris"), who is the sole owner of Sales and 50% owner of Leasing; and (3) Kris's father, Marvin Fellhoelter ("Marvin"), who with Linda Fellhoelter¹ (Kris's mother), owns the remaining 50% of Leasing. The other defendants herein are the creditors of Leasing or other transferees of Sales' trailer-inventory who assert a security interest in the transferred inventory and have filed claims in Leasing's Chapter 11 case.

Pending before the Court is the Motion of Gary M. Murphey, Trustee, for Judgment on the Pleadings (the "Motion"), filed on February 1, 2021, with a brief in support [Docs. 25, 26], to which GFB responded [Doc. 29], with the Trustee filing a Court-authorized reply [Doc. 37]. Defendant FirstBank also filed a Reply of FirstBank in Support of Trustee's Motion for Judgment on the Pleadings [Doc. 39], to which GFB replied with Court permission on April 20, 2021 [Doc. 43]. Also with Court permission, the Trustee filed a final reply to GFB's April 20 reply. [Doc. 45.] The Motion is now ripe for adjudication.

Because GFB has properly pleaded that under Tennessee law, it retains a first-priority security interest in collateral initially held as inventory by Sales based on allegations that Sales transferred GFB's collateral to Leasing and others out of the ordinary course, the Motion will be denied.

I. ALLEGATIONS OF THE COMPLAINT

GFB's Complaint seeks an adjudication of the following:

[1] the priority of the lien of [GFB] in certain of those trailers or the proceeds from the sale or lease thereof, as well as the proceeds obtained by the Trustee from those particular trailers in th[e Court-authorized sale of the assets of Leasing to JPM Financial (the ‘Sale’)² ] only, or the lease of those particular trailers, and does not address the proceeds of the sale of trailers by the Trustee prior to the Sale [and]

[2] the priority of [GFB's] security interest in particular trailers and the proceeds from the Sale ..., or the lease thereof, over any claim of the Trustee pursuant to 11 U.S.C. § 544(a)(1), as well as all claims, or claims of ownership thereof, asserted by the other Defendants.

[Doc. 17 at ¶¶ 4-5.]

GFB pleaded the following facts.³ Sales granted GFB a security interest in all assets in connection with an October 1, 2010 loan in the amount of $2.5 million. [Doc. 17, at ¶ 7.] GFB perfected its security interest by the filing of a UCC-1 with the Tennessee Secretary of State, which UCC-1 was continued by amendment filed on October 1, 2015. [Id. ] At all pertinent times, Sales was engaged in the sale of "big rig trailers" so that GFB's filing of the UCC-1 perfected its blanket inventory lien on all used trailers owned by Sales. [Id. at ¶ 8.]

In addition to being the sole owner of Sales and 50% owner of Leasing, Kris also is president of both entities. [Id. at ¶ 9.] Marvin and Linda are officers and members of the board of Leasing, and they also were active employees of both entities. [Id. at ¶ 10.] Sales and Leasing share other officers and employees, some of whose salaries were paid by Sales. [Id. at ¶ 11.] Kris, Marvin, and through them, Leasing were "fully aware of the terms of the security interest of [GFB] in all trailers of ... Sales and the obligation of ... Sales" to GFB, including the duty to pay GFB when any used trailer was transferred by Sales, after which GFB would release its security interest in the transferred trailer. [Id. at ¶ 12.]

Leasing was in the business of leasing to third parties the trailers acquired primarily either by purchase from Sales or by lease from Kris and Marvin. [Id. at ¶ 3, 13.] The trailers that Kris and Marvin leased to Leasing also had been acquired primarily from Sales. [Id. ] The transfers of trailers from Sales to Leasing "ordinarily occurred only after [Leasing] had a potential third party willing to lease that trailer." [Id. at ¶ 15.] In the three years before Sales and Leasing filed for bankruptcy protection, notwithstanding that the companies' chief financial officer ("CFO") generally was responsible for maintaining the records of both companies, Kris had insisted on personally entering transactions between the two companies on the companies' records. [Id. at ¶ 14.]

During May 2020, the month before Sales and Leasing filed their bankruptcy petitions, Sales transferred trailers that were subject to GFB's inventory lien to Kris and Marvin at a rate that was more than twenty times the historical average monthly volume of such transfers, with such transfers in May 2020 exceeding $2 million in value. [Id. at ¶ 16.] Transfers by Sales to Leasing, Kris, and Marvin in June (at the end of which the bankruptcy petitions were filed) also far exceeded the previous monthly average for such transfers. [Id. at ¶ 17.] Sales' records for "virtually all of the transfers" from Sales to Leasing or Marvin reflect that Kris was the salesperson. [Id. at ¶ 18.] For many of the trailers transferred from Sales to Leasing, Kris, and Marvin in May and June of 2020, the CFO "could find no evidence of any funding." [Id. at ¶ 19.]

GFB asserts in the Complaint the legal conclusion that transfers from Sales to Leasing or any other transferee for which Sales did not receive payment of the purchase price were not transfers to a buyer in the ordinary course of business as defined in Tennessee Code Annotated section 47-1-201(9) so that such transfers remained subject to the first-priority inventory lien of GFB under Tennessee Code Annotated section 47-9-320. [Id. at ¶ 20.] GFB also asserts that Leasing is imputed with knowledge of GFB's continuing inventory lien because Kris, as an owner of and the president of both Sales and Leasing, was fully aware of Sales' obligations to GFB. [Id. at ¶ 22.] GFB also asserts that Kris and Marvin took ownership of trailers from Sales subject to GFB's inventory lien because neither Kris nor Marvin were buyers in the ordinary course of business. [Id. at ¶ 23.]

Leasing, Marvin, and Kris pledged to lenders that are defendants herein some of the trailers transferred to them by Sales, with Kris signing the certificates of title for the transferred trailers on behalf of Sales, after which those lenders noted their liens on the titles. [Id. at ¶ 24.] Because Kris signed the titles to transfer ownership from Sales, the lenders "knew or should have known that the transferee was not a ‘buyer in the ordinary course of business,’ " which knowledge created a duty in the lenders to ensure that GFB's lien was released. [Id. ] As a result, GFB concludes that such lenders' security interests are junior to GFB's continuing perfected lien on the inventory of Sales. [Id. ]

In sum, GFB seeks a judgment declaring that its blanket inventory lien continued in the trailers that were transferred by Sales to Leasing, Kris, or Marvin outside of the ordinary course of the business of Sales and that GFB is entitled to all proceeds (whether from the Sale or from any other sale or lease) arising out of trailers that were transferred by Sales to Leasing, Kris, or Marvin out of the ordinary course. [Id. at ¶¶ A-D.]

II. RULE 12(c) STANDARD

Courts apply the same standard for Rule 12(c) motions as for Rule 12(b)(6) motions, which are granted only when the court finds, after taking as true "all well-pleaded material allegations of the pleadings of the opposing party ..., [that] ‘no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law.’ " Jackson v. Prof'l Radiology, Inc., 864 F.3d 463, 466 (6th Cir. 2017) (quoting S. Ohio Bank v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 479 F.2d 478, 480 (6th Cir. 1973) ; Paskvan v. City of Cleveland Civil Serv. Comm'n, 946 F.2d 1233, 1235 (6th Cir. 1991) ). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).

Those allegations that are well-pleaded, when taken together, must "give notice to the defendant as to what claims are alleged" and must contain " ‘sufficient factual matter’ to render the legal claim plausible, i.e., more

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