In re Armstrong

Decision Date10 January 1986
Docket NumberNo. 84-1024.,84-1024.
Citation56 BR 781
PartiesIn re Edward Milton ARMSTRONG, a/k/a Milton Armstrong, Debtor. APEX OIL COMPANY, Appellant, v. Doris I. TIMS, Appellee.
CourtU.S. District Court — Western District of Tennessee


W. Rowlett Scott, of Armstrong, Allen, Braden, Goodman, McBride & Prewitt, Memphis, Tenn., for Apex Oil Co.

George Googe, Jackson, Tenn., for Doris I. Tims.


TODD, District Judge.

This is an appeal from a decision of the Bankruptcy Court in the case of Edward Milton Armstrong. The scope of review in this appeal is determined by Rule 8013 of the Rules of Bankruptcy Procedure, which requires the court to accept the bankruptcy court's findings of fact unless clearly erroneous. Under Rule 8013, the district court is not bound by conclusions of law of the bankruptcy court. In re Day, 4 B.R. 750 (S.D.Ohio 1980), appeal dismissed, 633 F.2d 217 (6th Cir.1980). See also In re Multiponics, Inc., 622 F.2d 709, 713 (5th Cir.1980).

The facts of this case, as found by the bankruptcy court, are relatively simple. On April 1, 1978, Coleman L. Tims and his wife, Doris I. Tims, the appellee in this case, entered into a lease purchase agreement with Edward Milton Armstrong and his wife, Sandra Armstrong. The subject of this agreement was a collection of trucks and trailers used by the Timses in their operation of the Tims Oil Company in Bolivar, Tennessee. The agreement stated that the trucks and trailers were collectively worth $51,225 and provided for monthly lease payments of $990 for a period of five years. At the end of this period, the Armstrongs could purchase the trucks and trailers for $1 if all lease payments had been made. The bankruptcy judge found that the lease was intended for security and that liens were perfected on each of the four trucks by notations on the titles of the trucks in accordance with Tennessee law. No financing statements were ever filed with respect to the trucks, the trailers, or any proceeds resulting from sale of the collateral.

The debtor in this case, Mr. Armstrong, began to experience financial difficulty, and was asked by his lender, the Hardeman County Bank, to liquidate his business. In early 1982, Mr. Armstrong entered into an agreement to sell the business that he had purchased from the Timses to two individuals for a lump sum of $117,500. This sale was made in accordance with the Tennessee Bulk Sale Act, Tenn.Code Ann. § 47-6-101 — 111 (1979). Pursuant to Tenn.Code Ann. § 47-6-106(4), the purchasers filed an interpleader action on February 17, 1982, in the Hardeman County Chancery Court and paid the $117,500 to the clerk of that court. The interpleader complaint stated that Mr. Armstrong's creditors had been notified of the sale and requested that the funds deposited be applied to satisfy any tax liens, the Timses' liens, and the bank's liens, in that order. Some time before the interpleader was filed, Mr. Tims died and Mrs. Tims succeeded to all of his rights under his will. As of February 17, 1982, Mrs. Tims' liens on the trucks were still noted on the title certificates.

On May 20, 1982, the state court chancellor issued the following "Interlocutory Order:"

IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED by the Court that the motor vehicle titles which are the subject matter of this civil action held by the defendant, Mrs. Doris Tims, should be delivered to the plaintiffs, that Milton Armstrong should endorse same as seller and that the lien of Coleman Tims as noted on the motor vehicle title be released so that the plaintiffs may register and secure tags for the legal operation of the vehicles but this release shall not be determinative of the validity of the said lien. The consideration paid for the vehicles, the business bulk act transfer and all other matters are reserved pending a final hearing in this civil action and the transfer of these titles to the plaintiffs is in no way determinative of the validity of the lien of the defendant, Mrs. Doris Tims.

Pursuant to this order, Mrs. Tims endorsed the title certificates, thereby releasing her liens on the vehicles. Although no objection to this order appears in the state court proceedings, Mrs. Tims testified during the bankruptcy proceedings in this case that her endorsement of the title certificates and release of the liens were against her wishes and over her protest.

Before the state court could render a final decision in the interpleader action, Apex Oil Company (Apex), the appellant in this case, and two other unsecured creditors of Mr. Armstrong filed an involuntary Chapter 7 bankruptcy petition against Mr. Armstrong on May 27, 1982. On November 17, 1982, the chancellor ordered that the debtor's bank be paid $69,038.15 in partial satisfaction of its claim against the debtor. After that payment, $60,000 remained in the control of the chancery court clerk, who had invested the funds in a deposit account. This $60,000 exceeded the total amount claimed by the remainder of the debtor's creditors, including both parties to this appeal.

On November 23, 1982, the bankruptcy court entered an order for relief pursuant to 11 U.S.C. § 303(h). An interim trustee was appointed and notice of the proceeding was given to the state chancery court on November 24, 1982. On February 4, 1983, an order was filed pursuant to 11 U.S.C. § 543, ordering the chancery court to account for, and transfer to the bankruptcy court, all funds of the debtor in its possession. At the time the funds were transferred to the bankruptcy court, the balance was $61,409.33. Because of the bankruptcy proceedings, a final hearing was never held in the state interpleader action. The purchasers of the debtor's business were not affected by this premature termination of the state case, however, as they had already received the debtor's property unencumbered by any liens.

Mrs. Tims filed a proof of claim in the bankruptcy proceedings, alleging that she had a secured claim in the amount of $12,188.57, representing the amount due for the balance of the lease payments. This claim was later amended by Mrs. Tims to $12,366.80. Apex also filed a proof of claim, alleging that it had an unsecured claim in the amount of $17,626.14 arising out of sale of fuel oil to the debtor. Apex objected to Mrs. Tims' claim, alleging that she was not a secured creditor with respect to any proceeds from the bulk sale and then successfully moved to be permitted to exercise the avoiding powers of a trustee under 11 U.S.C. § 544(a) because the trustee declined to do so. After notice and hearing, the bankruptcy court allowed Mrs. Tims' amended claim but denied her request for interest and fees under 11 U.S.C. § 506(b). In a brief order, the bankruptcy judge stated that Mrs. Tims did have perfected security interests in the proceeds of the bulk sales under the "unique facts and circumstances" of the case. Apex's motion for reconsideration was subsequently denied by the bankruptcy court and this appeal followed.

The only issue in this appeal is whether or not Mrs. Tims' interest in the funds deposited in the state interpleader action should prevail over that of the trustee in bankruptcy. Apex contends that any interest that Mrs. Tims may have is governed by the Uniform Commercial Code (UCC), as enacted by Tennessee, Tenn.Code Ann. § 47-1-101 et seq (1979). Because Mrs. Tims did not file financing statements covering proceeds of any sales of the motor vehicles on which she held properly perfected liens, Apex contends that any interests she may have in such proceeds are unperfected. Mrs. Tims contends that motor vehicle liens are excepted from the UCC by 9-302(3)(b) and that filings regarding proceeds from the sale of motor vehicles are therefore not necessary. Mrs. Tims also asserts that the UCC provisions regarding proceeds are not applicable because the debtor never received the proceeds. Finally, Mrs. Tims argues that the bulk sales provisions of the UCC and general equitable principles compel the result reached by the bankruptcy judge in this case.

Under 11 U.S.C. § 544(a), the trustee in bankruptcy has the rights and powers of a lien creditor at the time the case is commenced. As such a lien creditor, the trustee has a superior right to any unperfected security interests existing in the debtor's property. 9-301(1)(b); Ford Motor Credit Co. v. Ken Gardner Ford Sales, Inc., 10 B.R. 632 (Bankr.E.D.Tenn. 1981), aff'd, 23 B.R. 743 (E.D.Tenn.1982).

The trustee's status as a hypothetical lien creditor extends only to property included in the estate, determined by 11 U.S.C. § 541. Property in which the debtor has any legal or equitable interest is included by 11 U.S.C. § 541(a)(1), even if liens on the property exceed the fair market value of the property. In re Brown, 734 F.2d 119, 123 (2d Cir.1984); In re Curry, 5 B.R. 282, 291-92 (Bankr.N.D.Ohio 1980), aff'd, 11 B.R. 716 (N.D.Ohio 1981), rev'd on other grounds, 698 F.2d 298 (6th Cir.1983).

Before the court can consider whether Mrs. Tims' interest in the proceeds of the bulk sale is superior to that of the trustee, it must first be determined that the funds are part of the debtor's estate. In its brief in this appeal, Apex contends that the bankruptcy court's order entered December 30, 1983, implied that the funds from the bulk sale were not part of the debtor's bankruptcy estate. This contention apparently derives from the court's statement that "The Debtor was not to receive any proceeds from the bulk transfer." Apex asserts that this statement is inconsistent with the court's order requiring the state chancery court to deliver the funds to the bankruptcy court, which Apex contends could have been entered only after finding that the proceeds were property of the debtor.

As noted by the bankruptcy court, whether or not property is included in the debtor's estate is a question of federal law. In re Matto's, Inc., 9 B.R. 89 (Bankr.E...

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