In re Ace Lumber Supply, Inc.

• Decision Date: 04 October 1989
• Docket Number: Bankruptcy No. 89-10570-007.
• Citation: 105 BR 964
• Parties: In re ACE LUMBER SUPPLY, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Montana

105 B.R. 964 (1989)

In re ACE LUMBER SUPPLY, INC., Debtor.

Bankruptcy No. 89-10570-007.

United States Bankruptcy Court, D. Montana.

October 4, 1989.

Craig D. Martinson, Billings, Mont., for debtor.

R. William Walsh, Great Falls, Mont., for Minot Builders.

Victoria L. Francis, Billings, Mont., trustee.

Neal G. Jensen, Great Falls, Mont., Asst. U.S. Trustee.

ORDER

JOHN L. PETERSON, Bankruptcy Judge.

In this Chapter 7 case, the Trustee has filed objections to the motion of Minot Builders Supply for relief from the automatic stay under § 362 of the Code. The basis for the objections is that Minot is not a secured creditor as alleged in the motion. The issue raised by the parties involves whether the Debtor executed a security agreement in favor of Minot to entitle Minot to perfect a security interest in Debtor's inventory, accounts receivable and equipment. Hearing on the motion and objections was held on September 12, 1989, and the parties have submitted memorandums in support of their respective position.

The facts show the Debtor pre-petition operated a retail building supply business and purchased a number of products at wholesale from Minot. By April, 1988, the Debtor's account with Minot was about $160,000.00 and was in default. On April 26, 1988, a telephone conversation took place between two representatives of Minot and Debtor's president, which discussed the delinquent account and future credit purchases between the parties. A copy of the financial statement of the Debtor was reviewed by the parties and Richard Winje, vice president of Minot took notes of the telephone conversation which reflect a series of numbers about Debtor's financial affairs. The parties decided the Debtor would pay cash on delivery for all future purchases and attempt to pay on the delinquent account in the ensuing two to three weeks.

On May 25, 1988, another three way conversation between representatives of both companies took place. Taylor, the Debtor's president, was in the office of Minot's credit manager, who arranged a telephone call with Winje in Minot, North Dakota. Again, Winje took personal notes about the delinquent obligation. Taylor agreed, and the notes of Winje reflect, that the Debtor would pay $35,000.00 per month, with interest at 1% over prime, on the delinquent balance, a cash discount would be granted on new purchases if payment was timely made, the current purchases would be limited to $10,000.00 per month, and both the delinquent account and current purchases would be secured by Debtor's inventory, accounts receivable and equipment. The Winje notes are attached to this Order. (Evergreen Exhibit # 2) Taylor represented no other security interest had been given to any creditor in such items. Minot's credit manager prepared a U.C.C.-1 financing statement, which was signed by Taylor. A copy was sent to Winje, who signed on behalf of Minot and the U.C.C.-1 financing statement was then sent to the Montana Secretary of State office, where it was filed on June 2, 1988. Subsequent to the agreement, one payment of $35,000.00 was made on the account by the Debtor, but no other payments were made. The agreed payment schedule was modified in November, 1988, but by the date of the bankruptcy petition on May 1, 1989, the Debtor was indebted to Minot in the sum of $162,031.00. Minot was scheduled as a secured creditor in the Debtor's Schedules. Other than the U.C.C.-1 financing statement, no other documents have been signed by the Debtor. All parties believed the execution of the U.C.C.-1 financing statement was sufficient to satisfy the Montana Uniform Commercial Code in order to create a valid security interest by Minot in Debtor's assets.

Based on these facts, Minot asserts in its Motion for Relief from the Automatic Stay that it has a valid security interest in the Debtor's assets described in the U.C.C.-1 financing statement. The Trustee contests such assertion on the basis that Section 30-9-203, Mont.Code Ann. requires a security agreement signed by the Debtor, and that execution of the U.C.C.-1 financing statement does not satisfy the requirement of Section 30-9-203.

Montana has adopted the provisions of the Uniform Commercial Code regarding perfection of security interests in property. As is pertinent to the present case, Section 30-9-203, supra, states:

"* * *, a security agreement is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless:

(a) * * * the debtor has signed a security agreement which contains a description of the collateral * * *."

In order to perfect the security agreement and interest in the collateral against the Debtor and third parties, such as the Trustee in this case, Section 30-9-302, Mont. Code Ann. requires in most instances, a financing statement to be filed with the Secretary of State. Section 30-9-401, Mont.Code Ann. The formal requisites of a financing statement are detailed in Section 30-9-402, Mont.Code Ann.

In discussing the requisites of a security agreement required under U.C.C. § 9-203(1), the Official Code Comment reflects:

"1. Subsection (1) states three basic prerequisites to the existence of a security interest: agreement, value and collateral. In addition, the agreement must be in writing unless the collateral is in possession of the secured party. When all of these elements exist, the security agreement becomes enforceable between the parties and is said to `attach\'. Perfection of a security agreement (see Section 9-303) will in many cases depend on the additional step of filing a financing statement (see Section 9-302) or possession of the collateral (Sections 9-304(1) and 9-305).

* * * * * *

3. One purpose of the formal requisites stated in subsection (1)(a) is evidentiary. The requirement of written record minimizes the possibility of future disputes as to the terms of a security agreement and as to what properly stands as collateral for the obligation secured.

* * * * * *

5. The formal requisite of a writing stated in this section is not only a condition to enforceability of a security interest against third parties, it is in the nature of a Statute of Frauds. Unless the secured party is in possession of the collateral, his security interest, absent a writing which satisfies paragraph (1)(a), is not enforceable even against the debtor, and cannot be made so on any theory of equitable mortgage or the like. If he has advanced money, he is of course a creditor, and, like any creditor, is entitled after judgment to appropriate process to enforce his claim against his debtor\'s assets; he will not, however, have against his debtor the rights given a secured party by Part 5 of this Article on Default. The theory of equitable mortgage, insofar as it has operated to allow creditors to enforce informal security agreements against debtors, may well have developed as a necessary escape from the elaborate requirements of execution, acknowledgment and the like which the nineteenth century chattel mortgage acts vainly relied on as a deterrent to fraud.

Since this Article reduces formal requisites to a minimum, the doctrine is no longer necessary or useful. More harm than good would result from allowing creditors to establish a secured status by parol evidence after they have neglected the simple formality of obtaining a signed writing." Anderson, Uniform Commercial Code, Vol. 8, § 9-203:1, pp. 660-661. (3rd Ed.)

Anderson, supra, § 9-203:18, p. 670, further states:

"When the secured transaction is non-possessory, the security agreement must be in writing. * * * The requirement of a written security agreement is in the nature of a statute of frauds * * *. When a written security agreement is required but there is none, the creditor does not have a security interest in the collateral and can not enforce an oral agreement that he have such an interest as against the debtor or third parties."

The facts here show no formal security agreement was signed by the Debtor. What was signed by the Debtor was a standard U.C.C.-1 financing statement, attached to this Order. (Evergreen Exhibit # 8) The creditor contends such suffices as a security agreement, citing In re Amex-Protein Development Corporation, 504 F.2d 1056 (9th Cir.1974). In that case, a promissory note was signed by the debtor which included language that the note "is secured by a security interest in subject personal property as per invoices". A financing statement signed by the debtor was also filed of record describing items of personal property. There was no issue in the case that the parties intended, as they did in the present case, to create a security interest in the property described in the financing statement. Thus, two documents were signed, a promissory note and a financing statement. Under these facts, the Ninth Circuit Court of Appeals, adopting the district court holding, stated:

"The Court Evans v. Everett, 183 S.E.2d 109 found that since a security agreement could serve as a financing statement, there would be no sound reason why the converse should not be true. The court held that the financing agreement before it qualified as a security agreement.

* * * * * *

Accordingly, the promissory note herein qualifies as a security agreement which by its terms `creates or provides for\' a security interest."

Yet, Matter of Bollinger Corp., 614 F.2d 924, 927 (3rd Cir.1980), discussing the holding of Amex-Protein Development Corp., supra, states Amex "concluded that as long as the financing statement contains a description of the collateral signed by the debtor, the financing statement may serve as the security agreement and the formal requirements of Section 9-203(1) are met". The Third Circuit continued:

"Some courts have declined to follow the Ninth Circuit\'s liberal rule allowing the financing statement alone to stand as the security agreement, but have permitted the financing statement, when read in conjunction with other documents executed by

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