In re Annde Foods, Inc.
| Decision Date | 27 July 1989 |
| Docket Number | 89 B 2274.,Bankruptcy No. 89 A 243 |
| Citation | 110 BR 346 |
| Parties | In re ANNDE FOODS, INC., Debtor. WILSON MUSHROOM COMPANY, Plaintiff, v. ANNDE FOODS, INC. and Cole Taylor Bank/Main, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
LeRoy W. Gudgeon, Northfield, Ill., for Wilson Mushroom Co., plaintiff.
Donald E. Geiger, Waukegan, Ill., for Annde Foods, Inc., defendant.
Dennis E. Quaid, and Michael L. Stone, Fagel, Haber & Maragos, Chicago, Ill., for Cole Taylor Bank/Main, defendant.
This matter is before the Court on the Plaintiff's, Wilson Mushroom Company Wilson, complaint to determine the validity, priority and extent of liens and motion for the segregation of the Debtors' assets pursuant to the Perishable Agricultural Commodities Act P.A.C.A., 7 U.S.C. § 499a et seq., and the Court, having considered the record and pleadings on file in this case, having considered the memoranda of law submitted by the parties in support of their respective positions, and being fully advised in the premises, now enters its ruling;
This is a core proceeding over which the Court has jurisdiction, pursuant to Title 28 U.S.C. § 157(b)(2)(A) and (K). For the reasons set forth below, Wilson's motion for segregation of assets is granted and the ruling as to the complaint to determine the validity, extent and priority of lien is continued. The following constitutes the Court's findings of fact and conclusions of law, pursuant to Bankruptcy Rule 7052.
BACKGROUND.
On February 9, 1989, the Debtor filed for relief under Chapter 11 of the Bankruptcy Code. The Debtor remained in possession of its assets and continued to operate its business as debtor-in-possession.
In March 1989, Wilson filed its complaint and motion alleging that it is entitled to the sum of $39,428.80, plus interest, costs and attorneys' fees from the assets of the Debtor pursuant to P.A.C.A., 7 U.S.C. § 499e. The Debtor denies the essential allegations of the motion and complaint, claiming, among other things, that Wilson was paid for the invoices in question and that Wilson has failed to comply with the requirements for establishing a trust under P.A.C.A. The Debtor also argues that mushrooms are not covered by P.A.C.A. At the conclusion of the hearing held on the complaint and motion, the Court informed the parties that it would find and conclude that mushrooms fall within the meaning of perishable agricultural commodities.
Cole Taylor Bank has joined with the Debtor in responding to Wilson's complaint and motion because of a loan and security agreements that it has with the Debtor.
Prior to the filing of the Chapter 11 case, the Debtor and Cole Taylor were engaged in a financing relationship whereby Cole Taylor made advances to the Debtor under a revolving line of credit which was not to exceed $300,000. These advances and credits are evidenced in a promissory note dated April 29, 1988. As security for payment, the Debtor executed a loan and security agreement granting Cole Taylor a security interest in all of its existing accounts and subsequently acquired accounts, inventory, equipment, furniture and other property. Cole Taylor also holds certain guarantees and collateral securing those guarantees. A balance of approximately $260,000 is due and owing to Cole Taylor. Cole Taylor has perfected its security interest by filing financing statements with the Secretary of State of Illinois. In March 1989, the Court entered an order authorizing the Debtor to use Cole Taylor's cash collateral.
As a result of the Debtor's financing arrangements with Cole Taylor and the instant matters, Cole Taylor and Wilson have competing interests in certain of the Debtor's assets, assuming that Wilson is entitled to the benefits of a trust. In a separate proceeding, Cole Taylor seeks relief from the automatic stay, having withdrawn its consent to the use of its cash collateral.
On about July 20, 1989, this case was converted to a case under Chapter 7. Shortly thereafter, the Trustee abandoned the estate's interest in the assets subject to these proceedings.
FINDINGS OF FACT.
The Debtor, Annde Foods, Inc., was formerly known as Annde Food Products, Inc. In October 1987, Robert Fronberry, the current owner, purchased the business from Ray McMullin and Ron Krueger. Annde Food Products was dissolved some time around March of 1988, and reincorporated as Annde Foods, Inc. The Debtor also purchased a produce business, Mushroom Sales, and assumed its debt to Wilson, a purveyor of mushrooms, of approximately $56,000. The record does not reveal just when the Debtor purchased Mushroom Sales.
The Debtor and Wilson orally agreed that Wilson would make deliveries to the Debtor so long as the total outstanding balance did not exceed a certain amount. Wilson also required that the Debtor make payments prior to new shipments.
It is undisputed that payments were to be made prior to new shipments, but the parties vigorously dispute whether the pre-shipment payments were to be applied to new invoices or the assumed debt. The testimony was conflicting as to what, if anything, the parties agreed upon as to how payments would be applied. The copies of invoices and other exhibits prove that orders were placed and that payments were made prior to those orders. The invoices indicate that the terms were "net 10 days." Most, if not all, of the payments were for amounts different from the amounts due on the invoices. But the parties offer conflicting explanations as to what all of this means.
Although the parties agree that payments were to be made prior to new shipments, there is no evidence before the Court that would support a finding that the parties actually agreed upon application of the payments. The Debtor did not direct Wilson to apply the payments in any particular manner, and Wilson did not inform the Debtor that it was applying the payments to the oldest invoices. The most telling fact is that Wilson began to protect itself against non-payment on the invoices in question by sending letters to the Department of Agriculture. This convinces the Court that at least as for as Wilson was concerned the payments made after November 1988 were on account of the assumed debt. Wilson expected to be paid for current invoices shortly after deliveries were made. When those payments were not forthcoming Wilson sought the protection provided by P.A.C.A.
Therefore, the Court finds that the parties only agreed that the Debtor would make payments prior to shipments and that Wilson would make deliveries so long as the total outstanding debt did not exceed a certain amount; that is to say that any new order could not increase the total outstanding debt. There was no agreement as to how the payments would be applied. The Court also finds that there was no agreement as to when the current invoices would be paid and that Wilson reasonably expected to be paid within ten days after delivery.
As a means to insure payment on the invoices in question, Wilson sent letters to a representative of the Department of Agriculture which listed, among other things, the amounts due and dates of the invoices. Attached to the letters were copies of invoices dated from November 1988 to January 14, 1989, which indicate that the terms for payment was "net ten days." Wilson also sent copies of these letters and attachments to the Debtor.
The record does not reveal just what assets the Debtor has at this point, and therefore the Court is unable to determine the validity, extent and priority of liens.
DISCUSSION.
The issues before the Court are 1) whether P.A.C.A. applies to the invoices in question and, if so, whether Wilson complied with the requirements of that provision and is entitled to the beneficial interest of a trust; and 2) assuming that Wilson is entitled to the benefits of a trust, what is the extent and priority of its lien.
Application of Payments.
As a preliminary matter, the parties dispute whether Wilson was in fact paid for the invoices in question and whether Wilson properly applied the payments to the oldest invoices. The general rule applicable to payment on accounts is that when a creditor holds various accounts of a debtor, in absence of direction from the debtor, the creditor may apply payments to the best advantage of the creditor. Herget National Bank v. US Life Title Insurance Co., 809 F.2d 413 (7th Cir.1987). And where a creditor holds both secured and unsecured debts, the creditor may apply payments made to the unsecured debts because it would be contrary to public policy to require a creditor to apply unspecified payments to a secured debt and lose its lien. Skach v. Gee, 137 Ill.App.3d 216, 91 Ill.Dec. 882, 484 N.E.2d 441 (1985). Under Illinois law, this general rule will not be applied when it appears from the circumstances surrounding the case that application of the rule would work an injustice. Herget National Bank, 809 F.2d at 418 (citation omitted).
The Debtor contests Wilson's application of payments to the oldest invoices but offers no authority that suggests that the application was improper. Instead, the Debtor argues that enforcement of Wilson's right to apply the payments to its advantage should be conditioned because there is an equity in favor of a third party, namely Cole Taylor Bank. But the Debtor only makes a bare allegation and fails to even suggest how this is inequitable under the circumstances of this case. The gist of the Debtor's argument is that P.A.C.A. should not be used to usurp the collateral of preexisting secured creditors.
The circumstances presently before the Court are distinguishable from those cases where courts have conditioned the application of payments where the rights of sureties were adversely effected. The Debtor relies on Alexander Lumber Co. v. Aetna Accident and Liability Co., 296 Ill. 500, 129 N.E. 871 (1921). Alexander Lumber was reviewed in Herget...
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