In re CJL Co., Inc.
| Citation | 71 BR 261 |
| Decision Date | 09 January 1987 |
| Docket Number | Adv. No. 86-0169-P.,Bankruptcy No. 385-04185 |
| Parties | In re CJL CO., INC., dba CJ Logging, an Oregon corporation, Debtor. CJL CO., INC., dba CJ Logging, Plaintiff, v. BANK OF WALLOWA COUNTY, and the United States of America acting by and through the US Forest Service, Defendants. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Oregon |
Ann K. McNamara, Portland, Or., for plaintiff.
Joel S. DeVore, of Mautz & Hallman, Pendleton, Or., for Bank of Wallowa County.
This is a proceeding by the Debtor-in-Possession, CJL Co., seeking an Order requiring the Bank of Wallowa County ("Bank") to turn over $19,904.82. CJL asserts that the Bank has no interest in the funds and wrongfully debited its account prior to the filing of the petition in bankruptcy. The Bank responds that it holds the funds pursuant to the agreement of the parties that $17,000 deposited in a certain money market account be held as security for the issuance of a letter of credit/performance bond by the Bank to the United States Forest Service. The Forest Service has made demand upon the letter of credit. CJL and the Bank have submitted cross motions for summary judgment. The Forest Service has submitted an amended answer denying that it has an interest in the particular funds in question, and thus will not be affected by the outcome of these motions.1 In essence, the Bank contends that it has a valid and enforceable security interest in the funds and seeks an Order allowing it to pay $17,000 to the Forest Service on its demand under the letter of credit. The Bank does not assert a claim in the interest that has accrued on the $17,000, and is willing to turn the interest payment over to CJL. The Debtor-in-Possession argues in its motion that it can take the position of the Internal Revenue Service, and through that position prevail over the Bank's interest in the funds. The Court finds that there are no issues of material facts concerning CJL's claim against the Bank, and based upon the findings and conclusions as stated herein, will render partial summary judgment in favor of the Bank.
In early March 1983, CJL was awarded a logging contract with the Forest Service for the Split Rock Timber Sale. As part of the contract, the Forest Service required CJL to furnish a performance bond. It had been CJL's practice to deposit cash directly with the Forest Service to guarantee performance and payment. The Forest Service, however, did not pay interest on those deposits. CJL's principals, Charles Johnson and Cathy Neal, decided that with this contract they would attempt to earn interest on the money used as the guarantee by placing the money in a bank, and having the bank issue a letter of credit/performance bond to the Forest Service.
CJL approached U.S. National Bank with inquiries about a bond. It then approached the Defendant Bank after learning that U.S. Bank, in addition to holding collateral, would take several weeks to process a bond and would charge a fee for its services. CJL proposed to the Defendant Bank that it issue a letter of credit to the Forest Service on the Split Rock contract, in return for the deposit of $17,000 into an account at the Bank. The parties understood that the Bank was going to hold the $17,000 as a security for the letter of credit.
On March 30, 1983, CJL deposited a check for $17,000 in a money market account with the Defendant Bank. On that same day, the Bank issued an irrevocable letter of credit for $17,000 to secure performance on the Split Rock Timber Sale. Although checks are usually issued with money market accounts, no checks were issued to CJL on this account # XXXXX. It was the parties' understanding that no checks would be issued and no withdrawals made from the account. CJL never attempted to withdraw money from the account. In short, it was the parties' intent and understanding that the $17,000 in account # XXXXX was to be held by the Bank as security for the letter of credit issued by the Bank for the Split Rock timber sale.
The intent to create a security interest in the funds is evident from the testimony of Mr. Johnson and Ms. Neal, as well as in the particulars of the transaction itself. The signature card signed by both Mr. Johnson and Ms. Neal states in typewritten capital letters: "THIS IS A RESTRICTED ACCOUNT UNTIL 3-31-86 being held for a PERFORMANCE BOND." Placing a hold on an account or restricting an account is the Defendant Bank's method of holding an account as collateral. The Bank's Stop/Hold Journal records show that the account was carried as collateral for the performance bond from the day it was created. The "hold" was to be released on March 31, 1986, the expiration date of the letter of credit.
Subsequent to the issuance of the letter of credit for the Split Rock contract, the Bank issued several other letters of credit for CJL. None of these letters of credit were secured by deposit accounts. In January 1985, the Forest Service demanded payment upon one of these subsequent letters of credit. The Bank became worried that because of CJL's worsening financial condition it might attempt to withdraw the funds in the collateral account, and a Bank employee might mistakenly allow such a withdrawal. To insure that this could not happen, on January 27, 1985 the Bank transferred the funds by a debit memo from the restricted account to the general ledger account of the Bank. The statement issued by the Bank to CJL on February 18, 1985 showed a balance of zero and the debit of $19,904.82 on January 27, 1985.
The amended complaint upon which these motions for summary judgment were filed seeks injunctive relief for the turnover of property of the estate.2 There was no suggestion in the first amended complaint that the Debtor was seeking to exercise the voiding powers granted to the Debtor-in-Possession in Chapter Five of the Bankruptcy Code, or under any other grant of authority. Yet, in its motion for summary judgment, the Debtor states that it is authorized by the case of Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931), to assume the position of the IRS and prevail over the Bank's interest in the funds. Its motion for summary judgment is based entirely on the assumption of the position of the IRS. The Court will not consider this argument in deciding the Plaintiff's motion, as it seeks summary judgment on a claim which had not been pleaded when the motion was made. Federal pleading is governed by very liberal rules of construction, see Fed.R.Civ.P. 8, but even construing the first amended complaint broadly, the Court cannot read into it a claim by the Plaintiff that it is seeking priority over the Bank's claim by exercising the specific voiding powers given to the Debtor-in-Possession. The claim as stated in that complaint is that the Bank has no valid interest in the funds; it cannot be construed as an attempt to avoid an existing interest. In order to assert a claim to void the Bank's interest, the Plaintiff needed to amend its complaint to add this claim.3 It had not done so prior to the submission of the motion for summary judgment, and thus this Court will not consider it as a basis for summary judgment. This ruling determines the Plaintiff's motion for summary judgment insofar as it concerns the validity of the Bank's security interest in the funds; it does not consider the arguments vis a vis the IRS's position.
Even if the complaint could be construed to state a claim to assert the IRS's position, the motion would have to be denied because the record in this case lacks proper evidence of the IRS's position. The only evidence in the record is an unverified copy of a taxpayer's copy of a notice of tax lien, and unsupported, conflicting statements by counsel in their memorandum. There is no competent evidence as to the filing or nonfiling of the notice of lien, or the status of the IRS at the time of the filing of the petition. The Court is in no position at this time to determine the validity of the Bank's interest vis a vis the IRS even if that claim was before it.
The issue to be decided by the motions for summary judgment is whether the Bank, at the time of the filing of the petition, was holding the funds pursuant to a valid security interest. The Plaintiff's claim that it is entitled to turnover is premised on its contention that the Bank did not have a valid security interest in the funds.
The Bank asserts it has a validly perfected possessory security interest in the funds under the provisions of Article 9 of the Uniform Commercial Code. The Court finds that the Oregon version of Article 9 does not apply to the Bank's security interest. ORS 79.1040(12) excludes from the scope of Article 9 transfers of interests in deposit accounts. Deposit accounts are defined as "demand, time, savings, passbook or like account maintained with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a certificate of deposit." ORS 79.1050(1)(e). Official comment seven to UCC 9-104 states that security interests in deposit accounts are excluded from Article 9 because "such transactions are often quite special, do not fit easily under a general commercial statute and are adequately covered by existing law."
The Bank seeks to avoid the exclusion created by ORS 79.1040(12) by asserting that this transaction does not involve a "transfer" of an interest in a deposit account. It contends that since the account was created solely to serve as collateral, there was no "transfer" of an account at all. The Court, while finding this argument logically appealing, cannot agree with the Bank's interpretation. It appears from the official comments, and the cases applying the exclusion, that Section 9-104(l), codified as ORS 79.1040(12), was intended to exclude from Article Nine all security interests, except for proceeds, in...
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