Halmar Distributors, Inc., In re
| Decision Date | 05 March 1992 |
| Docket Number | No. 91-2017,91-2017 |
| Citation | 968 F.2d 121 |
| Parties | , 27 Collier Bankr.Cas.2d 292, 23 Bankr.Ct.Dec. 323, Bankr. L. Rep. P 74,759, 18 UCC Rep.Serv.2d 337 In re HALMAR DISTRIBUTORS, INC., et al., Debtors. GENERAL ELECTRIC COMPANY, Appellant, v. HALMAR DISTRIBUTORS, INC., et al., Appellees. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
George F. Parker, III with whom Audrey LaRowe Nee and Badger, Dolan, Parker & Cohen, Boston, Mass., were on brief for General Elec. Co.
Charles R. Bennett, Jr. with whom Kevin J. Simard and Riemer & Braunstein, Boston, Mass., were on brief for appellee BayBank Middlesex.
Before TORRUELLA, Circuit Judge, WEIS, and BOWNES, Senior Circuit Judges.
This appeal addresses a bankruptcy judge's allocation of priorities between two secured creditors and dismissal of a claim for conversion. We conclude that a petition for bankruptcy tolls the four-month period for filing a new financing statement that must be filed when secured property is transferred into a state. We also determine that until it affirmatively disavows its previous acquiescence in the practice, a senior secured creditor may not prevail in a conversion claim against a junior secured creditor for receipt of proceeds from sales of secured goods. We will accordingly reverse in part and affirm in part a district court order sustaining a bankruptcy judge's order adverse to the senior secured creditor.
The orders at issue here arose out of an adversary proceeding filed by General Electric in a Chapter 11 proceeding instituted on October 16, 1989, by Halmar Distributors, Inc. and Ralar Distributors, Inc. in the District of Massachusetts.
Halmar is a Massachusetts wholesaler that distributed merchandise including products manufactured by General Electric. That company retained a security interest in much of the inventory it sold to Halmar and filed financing statements with the appropriate Massachusetts authority.
General Electric also had filed appropriate financing statements in New York, perfecting a security interest in the inventory it had sold to Ralar, Halmar's affiliate, which did business in that state. In July 1989, however, Ralar transferred all of its inventory to Halmar's warehouse in Massachusetts. General Electric did not at that time file a financing statement in that state.
Until early 1989, Halmar and Ralar had maintained a revolving credit arrangement with Shawmut Bank, N.A., a Massachusetts financial institution. On March 27, 1989, they began a similar financing arrangement with BayBank. The bank made loans to the debtors in amounts determined by a formula based on the levels of current inventory and accounts receivable.
BayBank required that the debtors' customers make their payments directly to a lockbox under the control of the bank. Money thus received was applied to the amounts owed to the bank by the debtors. Periodically, the bank advanced new funds to the debtors who in turn were authorized to use the money in the general course of their business, including paying creditors.
Baybank also obtained a security interest in all of the debtors' inventory and filed financing statements in Massachusetts and New York in March 1989. The bank was on notice of General Electric's prior security interests.
In September 1989, General Electric learned that the debtors' revolving credit arrangement was in force with BayBank. On October 13, 1989, three days before the bankruptcy petition in this case was filed, General Electric sent a letter to BayBank objecting to the collection of Halmar's receivables through the lockbox, specifically the sums attributable to sales of General Electric products.
After the bankruptcy administration began, General Electric filed this adversary proceeding seeking to enforce its security rights in inventory, proceeds, and accounts receivable. BayBank intervened to protect its interest.
The bankruptcy court ordered BayBank to place in escrow the proceeds of all the debtors' sales of General Electric products that occurred after September 15, 1989. Amounts received from BayBank's foreclosure sales of General Electric goods in the debtors' inventory were to be included in the escrow account.
The escrow account now contains the proceeds from sale of bulbs, lamps, batteries, and wiring devices. The bankruptcy court found that the financing statements filed against Halmar covered lamps and bulbs, and thus General Electric had a priority interest in the proceeds from sales of those items. However, because those financing statements did not include wiring devices and batteries, the bank's security interest had priority on those items.
The bankruptcy court further decided that General Electric had lost its priority status as to the Ralar inventory because of a failure to file financing statements within four months after those goods had been moved into Massachusetts.
Consequently, General Electric was adjudged to have a priority interest only in the proceeds from the sales of Halmar's lamps and bulbs. Baybank was awarded priority as to the remaining General Electric products.
The bankruptcy court rejected General Electric's conversion claim, which was based on allegations that the bank had improperly reimbursed itself from payments in the lockbox attributable to purchases of General Electric products. The court reasoned that General Electric had not restricted the debtors in their use of proceeds from the sale of its products--General Electric's agreements with the debtors "required payment only under credit terms and not by in-kind remittance of proceeds." Additionally, the bankruptcy judge concluded that the lockbox arrangement was in the ordinary course of business. Finally, the bankruptcy judge asserted that General Electric was guilty of laches in not asserting its rights at an earlier time. The district court affirmed, agreeing that General Electric had acquiesced in the bank financing procedures.
General Electric has appealed, arguing that the four-month period to file the financing statement as to the Ralar inventory was tolled by the bankruptcy filing. General Electric maintains, therefore, that it retained its security interest in Ralar's inventory, which included wiring devices and batteries. In addition, General Electric asserts that Baybank, by its use of the lockbox, converted payments for General Electric products. Finally, General Electric contends that its security interest extended to proceeds and inventory in addition to that which the bankruptcy court awarded.
The controversy between General Electric and BayBank is divided into two areas--the respective priorities of the two security holders and, second, the conversion claim. We will address the issues in that order.
The financing statement General Electric filed to secure an interest in Halmar's inventory establishes a priority interest in the goods that are listed. Batteries and wiring devices were not covered by the filing. As to these items, the bank gained priority because of its more expansive description of the goods in its financing statement. The bankruptcy court properly concluded that the Bank held a priority interest in Halmar's inventory as to products that General Electric did not list in its financing statement.
The situation with respect to Ralar's inventory, however, is more complex. In the New York financing statement applicable to that company, General Electric included wiring devices and batteries, as well as lamps and bulbs.
Generally speaking, when a debtor transfers property from one state to another, the Uniform Commercial Code requires the security holder to file a new financing statement in the transferee state within four months. Mass.Gen.L. ch. 106, Sec. 9-103(1)(d). In this case, the bankruptcy judge found as a fact that Ralar's entire inventory, including General Electric products, arrived in Massachusetts by July 3, 1989. General Electric did not file a financing statement covering that inventory in Massachusetts until November 7, 1989, some four days beyond the four-month period.
The bankruptcy judge rejected General Electric's argument that Ralar's bankruptcy filing tolled the four-month period. He observed that the Uniform Commercial Code provision, Mass.Gen.L. ch. 106, Sec. 9-103(1)(d), was intended to protect creditors in Massachusetts who might not have received notice of an out-of-state security interest despite the bankruptcy filing.
The bankruptcy judge reasoned that when property was transferred from one state into another, potential creditors would not know in which part of the country the property had originated and where financing statements might be on file. He therefore held that the bank had the priority interest in Ralar's inventory.
In arriving at that conclusion, the bankruptcy judge did not take into account several factual matters that we believe are material. The documents establishing the revolving credit agreement reveal that BayBank was aware of the interlocking relationship between Halmar and Ralar. Moreover, the bank was on notice of General Electric's security interest in Ralar inventory, but proceeded with the arrangement nevertheless. Indeed, BayBank also filed a financing statement in New York in March 1989.
In October 1989, during the four-month grace period, General Electric had sent formal notice of its security interests to BayBank and expressed dissatisfaction with the revolving credit agreement. In addition, General Electric filed an adversary proceeding in the bankruptcy court on October 23, 1989, in which the bank intervened.
Like many matters in the bankruptcy courts, the dispute here is governed by state law--in this instance the Uniform Commercial Code as adopted in Massachusetts.
In pertinent part, section 9-103(1)(d) provides that "[w]hen collateral is brought into and kept in the commonwealth while subject to a security interest perfected under the law of the...
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