In re Citation Corp.

• Decision Date: 27 June 2006
• Docket Number: Adversary No. 05-00045.,Bankruptcy No. 04-08130-TOM-11.
• Citation: 349 B.R. 290
• Parties: In re CITATION CORPORATION, et al., Debtors. JP Morgan Chase Bank, N.A., Plaintiff, v. AVCO Corporation, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

349 B.R. 290

In re CITATION CORPORATION, et al., Debtors JP Morgan Chase Bank, N.A., Plaintiff, v. AVCO Corporation, Defendant.

Bankruptcy No. 04-08130-TOM-11.

Adversary No. 05-00045.

United States Bankruptcy Court, N.D. Alabama, Southern Division.

June 27, 2006.

Michael Leo Hall, Birmingham, AL, for Debtors.

Memorandum Opinion and Order

TAMARA O. MITCHELL, Bankruptcy Judge.

This matter came before the Court for a hearing on May 22, 2006, on a Motion for Summary Judgment filed by AVCO Corporation, a Motion for Summary Judgment filed by JP Morgan Chase Bank, NA., as administrative agent for the Debtors' pre-petition and post-petition lenders, AVCO's Opposition to JP Morgan Motion for Summary Judgment, and JP Morgan Chase Bank's Response to Motion for Summary Judgment Med by AVCO. Appearing at the hearing were Jesse S. Vogtle, Jr. and Christie Lyman Dowling, attorneys for AVCO Corporation, Robert H. Adams and Kimberly B. Glass, attorneys for JP Morgan Chase Bank, and Thomas Corbett, Chief Deputy Bankruptcy Administrator. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151, and 157(a) (1994) and the district court's General Order Of Reference Dated July 16, 1984, As Amended July 17, 1984.¹ This is a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(A), (D) and (O).² This Court has considered the Motions for Summary Judgment, AVCO's Opposition, JP Morgan Chase Bank's Response, the pleadings, arguments of counsel and the applicable law and concludes as follows.³

I. Findings of Fact⁴

On December 11, 2002, Citation Corporation, Navasota (hereafter "Citation" or "Debtor")⁵ entered into a Consignment Agreement (hereafter "the Agreement") with Lycoming Engines, a division of AVCO (hereafter "AVCO" or "Defendant"). Pursuant to the Agreement, AVCO delivered and Citation received steel for the forging of airplane crankshafts. AVCO did not file a U.C.C. financing statement or any other type of lien regarding the steel that it delivered to Citation.

Pursuant to the Agreement, AVCO supplied the steel, and Citation was not required to pay either AVCO or the raw material supplier for the steel. Citation had no role in the purchase of the steel from the material suppliers. The Agreement provided that title to the steel was to remain with AVCO at all times and that Citation bore the risk of loss once the steel was in its possession. Citation, in compliance with the Agreement's terms, never used the steel for any purpose other than crankshaft forgings for AVCO based upon a production schedule dictated by AVCO. Once the steel was forged by Citation, the forgings were returned either to AVCO or to a company that machined the forging into its near-final shape at AVCO's direction before being returned to AVCO in Pennsylvania. There is no provision in the Agreement permitting the sale of the steel to Citation or by Citation to a third party. The Agreement further required that Citation and AVCO monitor monthly reports, packing slips and bills of lading to ensure that the same steel that AVCO provided to Citation was returned to AVCO in the form of crankshaft forgings. The parties operated under the Agreement until September 18, 2004, the date on which Citation and several of its affiliates filed petitions for relief under chapter 11 of the Bankruptcy Code (hereafter "the Petition Date").

Prior to the Consignment Agreement, JP Morgan loaned money to Citation, and consistent with the loan documents, a U.C.C.-1 financing statement was filed by Plaintiffs predecessor on December 7, 1999, granting Plaintiff a lien on various accounts and inventory of Debtor to secure this loan. (Proceeding No. 1, Exhibit B)

As of the Petition Date, in compliance with the Consignment Agreement, 306,000 pounds of steel (hereafter "the Steel") were located at Citation's Navasota, Texas, forging facility. On November 8, 2004, AVCO filed' a motion for relief from the automatic stay in order to obtain possession of the Steel: AVCO, JP Morgan, the Unsecured Creditor's Committee and Citation stipulated to the Amended Consent Order, which allowed AVCO to take possession of the Steel and reserved the rights of any party to contest AVCO's ownership of the Steel or to assert a lien on the Steel or the proceeds of the Steel. AVCO and JP Morgan also agreed in the Consent Order that should an adversary proceeding commence over the Steel, the burden of proof, in connection with the complaint, "shall be the same as it would be if the Debtors had retained the Steel and [AVCO] sought turnover thereon.'" (Proceeding No. 546) This adversary proceeding was commenced by JP Morgan on February 14, 2005, and the burden of proof is on AVCO to determine the ownership of the Steel.

A. Contentions of Plaintiff

JP Morgan contends that the Agreement unambiguously sets forth the intent of the parties to create a consignment and asserts this position based in part on the fact that some variation of the term consign appears 68 times in the Agreement. Plaintiff also argues that because the Agreement is clear and unambiguous, no parole evidence is admissible under Texas law to determine the nature of the Agreement. Plaintiff alleges that this Agreement falls within the U.C.C., that it holds a perfected security interest and that it has a first priority lien on the Steel because of AVCO's failure to perfect a lien on this Steel. Finally, JP Morgan contends that AVCO owes the Debtor $306,000.00⁶ and that all of their pre-petition liens should attach to the Steel proceeds.

B. Contentions of Defendant

AVCO contends that the Agreement created in "plain language" a bailment rather than a consignment, and that it maintained ownership in the Steel at all times. Defendant asserts that the Agreement, notwithstanding the term "consignment," is not governed by the U.C.C., so that an Article 9 financing statement was not required to be filed. AVCO insists the Agreement is not ambiguous, but maintains that even if it were, the undisputed material facts support their position that the Agreement created a bailment. Defendant argues that if JP Morgan wants to call the Agreement a consignment, then there must be substantial evidence that the Steel was delivered for sale to Debtor, which it was not. Finally, as a bailment, AVCO contends that JP Morgan as a secured creditor is not entitled to any greater rights to the property than those possessed by Debtor.

II. Conclusions of Law

A. Summary Judgment

Summary judgment is only appropriate if no genuine issue as to any material fact exists and if the movant is entitled to a judgment as a matter of law. Fed. R. Bankr.P. 7056.⁷ Substantive law concludes which facts are material and which are irrelevant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining material facts, the court considers those facts that are outcome determinative. Id. Mere allegations of factual disputes are not enough to defeat "an otherwise properly supported motion for summary judgment." Id. at 247-48, 106 S.Ct. 2505. Rather, there must be "no genuine issue of material fact." Id. at 248, 106 S.Ct. 2505. The judge does not determine the truth or weigh the evidence, but identifies if there exists "a genuine issue for trial." Id. at 249, 106 S.Ct. 2505. The party moving for summary judgment has the burden of demonstrating that these conditions have been met. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The court, in determining whether the movant has met their burden of proof, must consider "the movant's evidence and all factual inferences arising from it in the light most favorable to the non-moving party." Allen v. Tyson Foods, Inc. 121 F.3d 642, 646 (11th Cir.1997).⁸ "`If reasonable minds could differ on inferences arising from undisputed facts, then a court should deny summary judgment.'" Id.⁹ Only when the movant satisfies its initial burden does the burden shift to the nonmovant. Id. at 646. According to the Consent Order between AVCO and JP Morgan, the burden of proof, as previously agreed by these parties, is on AVCO to prove its ownership of the Steel. (Proceeding No. 546)

B. Choice of Law

This Court is bound by the Erie Doctrine¹⁰ in this case and therefore will look to Alabama choice-of-law rules in its interpretation of the Agreement. Sunbelt Veterinary Supply, Inc. v. International Business Systems United States, Inc., 985 F.Supp. 1352, 1354 (M.D.Ala.1997); see In re Gillette, 248 B.R. 845 (Bankr.M.D.Fla. 1999) (applying the choice of law rules of the forum state, Florida, which directed the Bankruptcy Court to apply the state law of Wisconsin, where the property was located). The issues before this Court regard contract interpretation. "Alabama law follows the traditional conflict rules of lex loci contractus ... [and][u]nder lex loci contractus a contract is governed by the laws of the jurisdiction where the contract is made." Id. at 1355. In this case, AVCO drafted the Agreement in Pennsylvania, but it was actually accepted and entered into by Citation in Texas. (Proceeding No. 24, page 4) Thus, this Court will interpret the Agreement pursuant to the laws of Texas.

C. Contract Interpretation

Texas courts have held that when examining a contract, the court must "ascertain the intention of the parties" by examining the four corners of the contract and all its provisions therein. Charles M. Stieff, Inc. v. City of San Antonio, 130 Tex. 594, 111 S.W.2d 1086, 1093 (1938) (citing In re Galt, 120 F. 64, (7th Cir. 1903)); Garrett, et al v. International Milling Co., 223 S.W.2d 67, 71 (Tex.Civ. App.1949). Furthermore, the action on the contract must be between parties to it, the beneficiaries or their privies, and " the written instrument relied upon must itself contain a contract to do the thing for the nonperformance or which the action is brought." Teneha Oil Co. v. Blount, 368 S.W.2d 655, 657 (Tex.Civ.App.1963) (citi...