In re Flores De New Mexico, Inc.

• Decision Date: 08 March 1993
• Docket Number: Adv. 90-0144 M.,Bankruptcy No. 11-89-01033 M L
• Citation: 151 BR 571
• Parties: In re FLORES DE NEW MEXICO, INC., Employer ID No. 13-3324752 and State Tax ID No. 02-046825003, Debtor. FLORES DE NEW MEXICO, INC., Plaintiff, v. BANDA NEGRA INTERNATIONAL, INC., Defendant.
• Court: U.S. Bankruptcy Court — District of New Mexico

151 B.R. 571 (1993)

In re FLORES DE NEW MEXICO, INC., Employer ID No. 13-3324752 and State Tax ID No. 02-046825003, Debtor FLORES DE NEW MEXICO, INC., Plaintiff, v. BANDA NEGRA INTERNATIONAL, INC., Defendant.

Bankruptcy No. 11-89-01033 M L, Adv. 90-0144 M.

United States Bankruptcy Court, D. New Mexico.

March 8, 1993.

COPYRIGHT MATERIAL OMITTED

Holt Guysi, Albuquerque, NM, for plaintiff.

Arthur A. Greenfield, Albuquerque, NM, for defendant.

MEMORANDUM OPINION

MARK B. McFEELEY, Chief Judge.

This matter came before the Court for trial on the merits. Having considered the testimony of witnesses, the arguments of counsel, the applicable case law, the exhibits and memoranda of law submitted by the parties, and being otherwise fully informed and advised, this Court finds that the value of the assets auctioned is $900,000, which was the price paid for those assets by the successful bidder at auction. The Court finds that Banda Negra holds a valid perfected security interest in the prefabricated office building and the computer system. The Court finds that Banda Negra failed to properly perfect its security interest in the rose bushes. The Court further finds that Banda Negra failed to perfect its security interest in Flores' accounts receivable.

FACTS

Flores was organized as a floriculture operation with its facilities in Las Cruces, New Mexico. It subleased twenty-eight acres from the New Mexico State University Foundation, Inc., (the "University") and placed ten of those acres under greenhouse. Flores' primary product was cut roses. It also produced other types of cut flowers, as well as container grown plants. As a rose producer, Flores had approximately 60,000 rose bushes contained in three of the greenhouses. The rose bushes were planted in the ground and had relatively extensive root systems. The remaining seven greenhouses were used for growing other types of cut flowers and for the production of container grown plants.

On or about March 8, 1988, Flores entered into an agreement with Banda Negra whereby Banda Negra loaned $1,100,000 to Flores. The loan was to be secured by Flores' assets. Flores executed and delivered to Banda Negra a loan agreement and a security agreement, to secure the debt.¹ U.C.C. financing statements naming Flores as debtor and Banda Negra as secured party, and listing the collateral securing the loan were filed with the Secretary of State of New Mexico on April 18, 1988, bearing No. XXXXXXXXX, and with the clerk of Dona Ana County on April 19, 1988, bearing No. 726. The description of the collateral on each financing statement was identical to the description contained in the security agreement.

On June 2, 1988, a U.C.C. financing statement, naming Flores as debtor and Banda Negra as secured party, covering accounts receivable and proceeds of such collateral was filed with the clerk of Dona Ana County, bearing No. 937. On June 6, 1988, a U.C.C. financing statement covering the same collateral was filed with the Secretary of State, bearing No. XXXXXXXXX. No separate security agreement was executed between Flores and Banda Negra regarding the accounts receivable or their proceeds.

On April 12, 1989, Flores filed a voluntary petition under Chapter 11 of the Bankruptcy Code. On September 8 and 14, 1989, Flores filed motions to sell property outside the ordinary course of business free and clear of liens and other interests, and this Court entered its order authorizing the sale at auction of certain of the Debtor's assets. Liens, claims and encumbrances were to attach to the same extent and with the same validity to the proceeds of the sale, subject to later determination by this Court, save and except any charges incurred in connection with the sale.

Prior to the auction, each of the bidders at the auction had submitted written offers to purchase all of Flores' remaining assets. These bids ranged from $350,000 to $580,000.

The auction was held October 5, 1989. At auction, all of Flores' assets, including the greenhouses, rose bushes, equipment, and supplies were sold as a package for $900,000. The closing of the sale was contingent upon the ability of the successful bidder to obtain a new lease of the premises from New Mexico State University. The successful bidder, Aldershot of New Mexico, Inc. ("Aldershot") obtained that lease and the sale was consummated.

On December 13, 1991, Flores, in its capacity as debtor in possession, filed its Second Amended Complaint Objecting To Secured Claim And Seeking Valuation. In that complaint, Flores asserted that Banda Negra had no validly perfected security interest in Flores' accounts receivable as Flores had not executed a security agreement relating to accounts receivable or their proceeds. Flores further alleged that Banda Negra had no validly perfected security interest in the rose bushes and the prefabricated office building because the financing statements filed by Banda Negra failed to adequately describe these assets. Flores also alleged that Banda Negra had no interest in the computer system owned by Flores because Flores had previously granted a security interest in the computer system to Circle Business Credit as security for the purchase of the computer. Finally, Flores alleged the value of the assets sold at auction was substantially less than the price obtained.

DISCUSSION

This case presents the Court with the competing claims of Banda Negra, a secured creditor of the Debtor, and the bankruptcy estate which, under the Bankruptcy Code, has "the rights and powers of . . . a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains . . . a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien. . . ." 11 U.S.C. § 544(a). The bankruptcy estate thus becomes a "perfect lien creditor," and as such, may have priority in the proceeds of the sale of the disputed assets. The resolution of the competing claims of the bankruptcy estate and Banda Negra involve several issues; the value of the assets sold at auction; interpretation of a poorly drafted security agreement and financing statement relating to the rose bushes, the computer system, and the prefabricated office building; and whether Banda Negra's filing of a financing statement relating to accounts receivable without a security agreement was sufficient to perfect a security interest in the accounts receivable.

Value Of The Assets Sold At Auction

Banda Negra holds a secured claim only to the extent its claim is secured by the collateral in which it holds a security interest. Section 506(a) of the Bankruptcy Code states:

"An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor\'s interest in the estate\'s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor\'s interest . . . is less than the amount of such allowed claim."

Flores granted Banda Negra a security interest in its assets to secure payment of a note in the amount of $1,100,000. Flores' assets sold at auction for $900,000. Thus, if the amount paid for Flores' assets is their true value and Banda Negra possesses a perfected security interest in all assets sold, Banda Negra has a secured claim in the amount of $900,000 and an unsecured claim in the amount of $200,000. If, however, as asserted by Flores, the value of the assets sold is substantially less than $900,000, or Banda Negra does not possess a perfected security interest in all assets sold, Banda Negra's secured claim will be reduced and its unsecured claim increased, thus benefiting the bankruptcy estate.

The price paid at a commercially reasonable sale is the best evidence of value, and the Court is not required to consider other possible methods of valuation. In Re Two "S" Corporation, 875 F.2d 240 (9th Cir.1989). No allegation has been made that the format of the auction conducted by the U.S. Trustee was not commercially reasonable. In In Re Two "S" Corporation, the court stated:

We have found no cases holding that after a single asset is sold at a commercially reasonable sale, the Court is still required to consider other possible methods of valuation. Rather, the cases state that the price paid at a commercially reasonable sale is the best evidence of value. (citations omitted).

Two "S", 875 F.2d at 243. Determination, however, that the proceeds of a sale constitute the best evidence of value is not tantamount to a determination that the proceeds of a commercially reasonable sale conclusively and irrebuttably constitute a determination of value. In re Durrett, 23 C.B.C. 95 (5th Cir.1980). Thus, while not specifically required to do so, this Court is free to consider other factors which may influence the value of the assets sold.

The Plaintiff lists eight factors that it asserts the Court should examine, in addition to the price obtained at auction, in determining the value of the assets sold. These factors are:

1. The Debtor\'s opinion as to the value of the properties;

2. The condition of the properties immediately prior to the auction;

3. Substantially divergent bids for the properties immediately prior to the auction;

4. Substantially divergent bids at auction;

5. The fact that the properties auctioned were auctioned subject to the successful bidder being able to effectuate a successful long term lease of the premises where the properties were located;

6. The bizarre withdrawal of the second highest bid;

7. The testimony of the successful bidder to the effect that the properties were worth substantially less than the amount bid; and

8. The competing interests of the creditors in this proceeding with respect to the values which will ultimately be attributed to those properties.

Each of these factors shall be addressed in turn. As to the first factor, the Debtor's opinion as to the...