Howarth v. Universal CIT Credit Corporation

• Decision Date: 05 March 1962
• Docket Number: Civ. A. No. 17876.
• Citation: 203 F. Supp. 279
• Parties: Walter O. HOWARTH, Trustee in Bankruptcy of Spohn Motor Co., also known as Spohn Motor Company, Inc., Plaintiff, v. UNIVERSAL C.I.T. CREDIT CORPORATION, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

203 F. Supp. 279

Walter O. HOWARTH, Trustee in Bankruptcy of Spohn Motor Co., also known as Spohn Motor Company, Inc., Plaintiff, v. UNIVERSAL C.I.T. CREDIT CORPORATION, Defendant.

Civ. A. No. 17876.

United States District Court W. D. Pennsylvania.

March 5, 1962.

COPYRIGHT MATERIAL OMITTED

Harry R. Levy, Pittsburgh, Pa., for plaintiff.

Robert A. Doyle, Duff & Doyle, Pittsburgh, Pa., for defendant.

MARSH, District Judge.

The plaintiff, trustee in bankruptcy of Spohn Motor Company, Inc. (Spohn), brought this action, pursuant to § 60 of the Bankruptcy Act, as amended March 18, 1950, 11 U.S.C.A. § 96 (1961 Supp.), to recover from the defendant, Universal C.I.T. Credit Corporation (UCIT) the value of property transferred to UCIT from Spohn within four months of filing the petition in bankruptcy.

The underlying facts stipulated by the parties are adopted by the court. From these facts it appears that an involuntary petition in bankruptcy was filed against Spohn on January 6, 1958, and it was adjudicated a bankrupt on February 13, 1958.

On February 5, 1957, pursuant to a Loan Agreement (Ex. H), UCIT advanced to Spohn the sum of $75,000. On the same day, Spohn executed a Chattel Mortgage (Ex. I) covering certain chattels. Shortly thereafter UCIT perfected a security interest therein by properly filing a Financing Statement (Ex. J) under the provisions of the Uniform Commercial Code — Secured Transactions, Act of April 6, 1953, P.L. 3, § 9-101 et seq.; 12A Purdon's Pa.Stat.Ann. § 9-101 et seq. (hereinafter referred to as U.C.C.).

Prior to September 28, 1957, Spohn also executed in favor of UCIT used car Trust Receipts (Ex. D) and assigned to UCIT certain Bailment Leases (Ex. E).¹

During August of 1957, and for some months prior thereto, UCIT had advanced to Spohn, or to Ford Motor Company for the benefit of Spohn pursuant to an Agreement for Wholesale Financing (Ex. A), dated December 13, 1954, the principal sum of $437,972.84 for 201 new motor vehicles, each secured under the terms of new car Trust Receipts (Ex. G). On March 3, 1955, UCIT perfected a security interest in, inter alia, new and used motor vehicles, equipment, accessories or replacement parts, and proceeds by properly filing a Financing Statement (Ex. B).

Prior to September 28, 1957, 110 of the new motor vehicles had been sold out of trust by Spohn, leaving 91 new vehicles which UCIT repossessed and sold for $188,268.32, leaving a remainder of $249,704.52 due by Spohn to UCIT for new vehicles sold out of trust.

Between September 28, 1957 and October 31, 1957,² Spohn being thus indebted to UCIT, transferred to it the following items, to which the plaintiff-trustee concedes he has no claim: the proceeds of the sale of 15 vehicles subject to bailment leases;³ office furniture, fixtures and equipment;⁴ shop equipment;⁵ accounts receivable from UCIT;⁶ accounts receivable from Ford Motor Company for wholesale incentive;⁷ warranty and policy claims receivable from Ford Motor Company;⁸ and other receivables from Ford Motor Company.⁹ The facts show conclusively that UCIT had a perfected security interest in each of these items.

In addition to these items, during the same period, Spohn transferred to UCIT, either voluntarily or involuntarily the following: bank cash, shares of stock, customers receivables, 70 used vehicles, and motor parts and accessories. These transfers were made by Spohn for its antecedent debts, at a time when Spohn was insolvent and UCIT had reason to so believe. The plaintiff-trustee contends that these transfers constituted preferences within the meaning of § 60 of the Bankruptcy Act, since their effect was to enable UCIT to obtain a greater percentage of its debt than Spohn's unsecured creditors, except as to those items in which UCIT held a perfected security interest.

We take up the disputed items seriatim.

BANK CASH¹⁰

Spohn's bank account in the Peoples First National Bank & Trust Company in the sum of $6,734.21 was garnisheed and transferred to UCIT pursuant to a writ of attachment execution issued on a judgment in favor of UCIT in the sum of $75,000. The lien against the bank cash obtained by the attachment within four months of bankruptcy and while Spohn was insolvent is null and void. Section 67 of the Bankruptcy Act, 11 U.S.C.A. § 107.

Spohn's bank account was not under the control of UCIT, and the source of this money has not been identified. Apparently UCIT has not been able to trace any of the money in the bank to proceeds from the sales of collateral on which it held a security interest. The defendant argues that the money must have come from the sale of property in which it had a security interest. This is an unwarranted assumption for all of it could have come from services rendered, sale of Spohn's common stock, or loans to Spohn.

The court may not assume the source of the money in the bank. The burden is upon UCIT to trace cash proceeds received by Spohn from the disposition of secured collateral into the bank deposits. This it has not done. This cash was received by Spohn, the debtor, and deposited more than 10 days prior to the bankruptcy proceeding (cf. U.C.C. § 9-306(2)); it is not identifiable cash proceeds received from the sale or disposition of any collateral. Thus it is free from any security interest of UCIT and is subject to the claims of general creditors represented by the plaintiff-trustee.

We hold the bank cash garnisheed by UCIT is a voidable preference and the plaintiff-trustee is entitled to recover $6,734.21.

SHARES OF STOCK¹¹

The sum of $869.42 was realized from the sale of 20 shares of Ford Motor Company common stock transferred to UCIT within four months of Spohn's bankruptcy. There is no tracing to indicate where the money came from to enable Spohn to purchase these shares. The stock is not "identifiable proceeds". We hold that the transfer to defendant is a voidable preference and that the plaintiff-trustee is entitled to recover $869.42.

ACCOUNTS RECEIVABLE¹²

Spohn collected customers receivables by cash and checks in the sum of $10,847.75 and transferred this amount to UCIT within four months of bankruptcy. Of this sum $1,100.00 was identified as cash proceeds from the sale of two new vehicles on which UCIT held a perfected security interest,¹³ leaving in dispute the sum of $9,747.75. This remainder comprises commingled cash proceeds arising from the sale of motor vehicles, parts and services.

From the Stipulated Facts and Exhibit L, it cannot be ascertained whether any of the articles sold were covered by a perfected security interest in favor of UCIT. Exhibit L gives only the name of the person owing the account, the amount paid, and the date the money was transferred to UCIT. Moreover, even if it were to be assumed that some of the accounts arose from the sale of parts and vehicles, it still could not be ascertained whether or not any portion of any account arose from services performed by Spohn. As UCIT did not hold a security interest in proceeds received from the sale of services, it is not entitled to retain proceeds which may have come from this source.

Furthermore, as we understand the Uniform Commercial Code, in insolvency proceedings the secured creditor is only entitled to commingled cash when it is received as proceeds of collateral within ten days of the filing of the petition.¹⁴

For these reasons, we hold that the plaintiff-trustee is entitled to $9,747.75.

11 USED VEHICLES¹⁵

These 11 used vehicles were financed by UCIT as is evidenced by used car Trust Receipts (Ex. D). UCIT obtained a security interest in these used vehicles held by Spohn for resale by virtue of the Agreement for Wholesale Financing (Ex. A), covering new and used merchandise, and the used car Trust Receipts (Ex. D). This security interest was perfected by filing Financing Statements (Exs. B and J) in the offices of the Secretary of the Commonwealth and the Prothonotary of Allegheny County where Spohn did business.

The plaintiff-trustee argues that the only way to obtain a perfected security interest in used motor vehicles is by noting the lien on the title certificate of each car pursuant to the Pennsylvania Motor Vehicle Code.¹⁶ We do not agree.

It is true that § 203(b) of the Motor Vehicle Code in effect during the wholesale transactions involved in this litigation "clearly established a method of creating liens on motor vehicles" by showing a lien or encumbrance on the certificate of title. Mellon National Bank & Trust Company v. Cabin, 177 Pa.Super. 417, 110 A.2d 888, 889 (1955), citing the Motor Vehicle Code of June 27, 1939, P.L. 1135, § 203(b).¹⁷

Notwithstanding, it seems certain that a finance company which advances money for wholesale financing of new cars can perfect a valid security interest therein by filing a financing statement in the offices of the Secretary of the Commonwealth and the Prothonotary of the County in which the dealer does business. U. C.C. §§ 9-302(1), 9-401(1) (a); Sterling Acceptance Co. v. Grimes, 194 Pa.Super. 503, 168 A.2d 600 (1961); Taylor Motor Rental, Inc. v. Associates Discount Corp., 196 Pa.Super. 182, 173 A.2d 688 (1961); cf. Girard Trust Corn Exchange Bank v. Warren Lepley Ford, Inc. (No. 1), 12 Pa. Dist. & Co.2d 351, 357 (1957). As we see it, this is because the Motor Vehicle Code of 1939 at § 201(b) provides that a dealer, such as Spohn, "need not obtain certificate of title for new motor vehicles * * * until and before sale thereof."

Likewise, § 207(c) of the Motor Vehicle Code, which was in effect at the time Spohn's used cars were sold (Act of June 29, 1937, P.L. 2329, § 207(c)), provided that a dealer in used cars "shall not be required to apply for a certificate of title" but shall notify the Department of the acquisition of the vehicle within ten days. Therefore, it is our opinion that a company such as UCIT engaged in wholesale financing may perfect a valid security interest in used cars by filing a financing statement pursuant...