In re Doughty's Appliance, Inc., Bankruptcy No. 398-34034-rld7. Adversary No. 99-3032-rld.

• Decision Date: 22 July 1999
• Docket Number: Bankruptcy No. 398-34034-rld7. Adversary No. 99-3032-rld.
• Citation: 236 BR 407
• Parties: In re DOUGHTY'S APPLIANCE, INC., Debtor. John Mitchell, Trustee, Plaintiff, v. Transamerica Commercial Finance Corporation and Amana Finance, Defendants.
• Court: U.S. Bankruptcy Court — District of Oregon

236 B.R. 407 (1999)

In re DOUGHTY'S APPLIANCE, INC., Debtor John Mitchell, Trustee, Plaintiff, v. Transamerica Commercial Finance Corporation and Amana Finance, Defendants.

Bankruptcy No. 398-34034-rld7. Adversary No. 99-3032-rld.

United States Bankruptcy Court, D. Oregon.

July 22, 1999.

COPYRIGHT MATERIAL OMITTED

Brad T. Summers, Portland, OR, for plaintiff.

Thomas A. Gerber, Portland, OR, for defendant.

MEMORANDUM OPINION

RANDALL L. DUNN, Bankruptcy Judge.

This adversary proceeding has risen from the wreckage of the Doughty's Appliance, Inc. bankruptcy case, Case No. 398-34034-rld7. The following are designated as the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, applicable in this adversary proceeding under Rule 7052 of the Federal Rules of Bankruptcy Procedure, in support of the court's grant of partial summary judgment at the hearing (the "Hearing") on the plaintiff chapter 7 trustee's ("Trustee") Motion for Summary Judgment, held on June 17, 1999. These findings and conclusions are based upon the record, consisting of the pleadings and affidavits on file in Adv. No. 99-03032-rld, and the arguments of counsel for the parties at the Hearing.

FACTUAL BACKGROUND

Doughty's Appliance, Inc. ("Doughty's") was in the business of selling home appliances and electronic equipment at retail. Transamerica Commercial Finance Corporation ("Transamerica") and Amana Finance ("Amana") provided inventory floor financing to Doughty's. Transamerica and Amana perfected security interests in Doughty's inventory and proceeds with Uniform Commercial Code ("UCC") financing statements filed in Oregon. After Doughty's defaulted in its payments to Transamerica and Amana on their inventory financing loans, Transamerica and Amana, during the period May 7, 1998, to May 12, 1998, repossessed their collateral. On May 29, 1998, Doughty's filed a voluntary chapter 11 petition. The case subsequently was converted to chapter 7 on June 24, 1998.

The Trustee filed this adversary complaint seeking a determination of the validity, priority and extent of Transamerica and Amana's liens on or interests in the repossessed collateral and in certain collateral items held in storage. In particular, the Trustee seeks a determination of the rights of Transamerica and Amana as inventory financers vis-à-vis the rights of Doughty's customers for whom Sales Orders exist with respect to the repossessed collateral or in whose names inventory items were tagged. This matter is before me on the Trustee's motion for summary judgment. Resolution of the dispute requires analysis of the interplay among various sections of the UCC, with particular emphasis on § 9-307.¹

Between July 25, 1997, and April 30, 1998, Doughty's sold to customers appliances which subsequently were repossessed by Transamerica and Amana. These sales are evidenced by Sales Orders which include the name of the manufacturer, the SKU number (an industry standard model number), the stock number, and a description of each appliance sold, including its color. Doughty's sold consumer appliances and electronic equipment in high volumes from several stores, and customer Sales Orders would be filled either from inventory on the floor or from inventory ordered from the manufacturers whose product lines were carried by Doughty's. Doughty's inventory was turning over constantly from customer sales and orders to manufacturers to restock.

Transamerica and Amana contend that the Sales Orders do not identify the appliances sufficiently for purposes of § 9-307. Transamerica and Amana further contend that one or more of the following events preclude some if not all of the customers from acquiring rights under the UCC superior to those of a secured inventory financer: (1) the closure of Doughty's inventory financing line with Transamerica on February 13, 1998; (2) the closure of Doughty's inventory financing line with Amana on April 10, 1998; and (3) the entry by the Clackamas County Circuit Court on April 17, 1998, of a temporary restraining order enjoining Doughty's from selling any inventory financed by Transamerica or Amana. Pursuant to a stipulation with Doughty's, during the period May 7 through May 12, 1998, Transamerica and Amana repossessed the inventory each had financed. In addition, Transamerica had a blanket security interest perfected in all of the remaining inventory of Doughty's, which currently is in storage.

The concerned customer Sales Orders fall into three categories based upon the down payments made by the customers: those for which no down payment was made, those for which some down payment was made, and those for which the entire purchase price was paid.² None of the concerned collateral items is unique or unusual. Over time, Doughty's had acquired and sold significant quantities of each appliance model concerned in this adversary proceeding.

LEGAL DISCUSSION

A. Summary Judgment Standards.

Granting a motion for summary judgment is appropriate only if there is no genuine dispute as to any material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Bankr.P. 7056; Fed.R.Civ.P. 56(c); State Farm Mutual Auto. Ins. Co. v. Davis, 7 F.3d 180, 182 (9th Cir.1993). Material facts are such as may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). In considering a motion for summary judgment, the court is required to draw all inferences from the evidence in the light most favorable to the nonmoving party. Id.

B. Disposition of Inventory Collateral.

1. Customers Who Have Made No Down Payment. At the Hearing, the parties both recognized that there was one category of Doughty's customers with respect to which their disputes were easily resolved. Those customers represented by Sales Orders who paid nothing for their purchases would have to pay the entire retail purchase price to Transamerica in order to receive their goods. Such payment would maximize the recovery to Transamerica upon disposition of its collateral. Accordingly, the parties are agreed that a notice will be sent to all such Doughty's customers setting a deadline for them to tender full payment in cash or cash equivalents for their merchandise. If full payment is not received by the deadline, Transamerica will be free to dispose of the merchandise covered by such customers' Sales Orders for its own account in a commercially reasonable manner.

2. Sales Prior to Line Closure. Section 9-306(2) provides that ". . . a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise. . . ." Emphasis added. The Inventory Security Agreements between Doughty's and Transamerica and Amana respectively, each allowed "sales of inventory at retail in the ordinary course of Doughty's business." See Declaration of Kathy Moody, Exhibit A, p. 2, ¶ 5(c), and Exhibit B, p. 1, ¶ 5(c).

Both Inventory Security Agreements provide that they are to be interpreted and enforced in accordance with Illinois law. See Declaration of Kathy Moody, Exhibit A, p. 3, ¶ 16, and Exhibit B, p. 3, ¶ 16. However, Transamerica and Amana take the position that the choice of law provisions in the Inventory Security Agreements control with respect to issues between Doughty's and the respective secured parties only. Transamerica and Amana argue that disputes between the secured parties and third party customers are governed by the law of the state where the collateral is located and where the security interests of Transamerica and Amana are perfected — in this case, Oregon.

I agree. Official Comment 1 to § 9-103 provides: "When conflicting claims to collateral arise, the question depends on perfection of security interests, and thus on the effect of perfection or non-perfection." Section 9-103(1)(b) provides that ". . . the effects of perfection or non-perfection of a security interest in collateral are governed by the law of the jurisdiction where the collateral is when the last event occurs on which is based the assertion that the security interest is perfected or unperfected."

Because the security interests of Transamerica and Amana were perfected in Oregon, Oregon law applies. Section 9-103(1)(b) recognizes that it would not be fair to require buyers of financed inventory collateral, who were not parties to the Inventory Security Agreements, to be bound by a choice of law provision to which they did not agree. ORS 79.3060(2), consistent with § 9-306(2), recognizes sales free of a security interest if the security agreement authorizes such sales.

The record indicates that all of the Doughty's customer Sales Orders in dispute in this proceeding were entered into in the ordinary course of Doughty's business. Transamerica and Amana do not contend otherwise, at least with respect to Sales Orders dated prior to line closure. Accordingly, I find that customer Sales Orders with respect to Transamerica collateral entered into prior to February 13, 1998, when the Transamerica inventory financing line was closed, were authorized by the security agreement between Transamerica and Doughty's. Likewise, I find that customer Sales Orders with respect to Amana collateral entered into prior to April 10, 1998, when the Amana inventory financing line was closed, were authorized by the security agreement between Doughty's and Amana. Customers with all such Sales Orders take their Doughty's merchandise free of the security interests of Transamerica and Amana, consistent with the provisions of ORS 79.3060(2).

3. Sales Subsequent to Line Closure. The difficulty inherent in resolving the competing claims of parties such as Transamerica and Amana and the Doughty's retail customers concerned in this adversary proceeding is that the "villain" of this piece has left the stage —...