In re Gordon Car and Truck Rental, Inc.

Decision Date15 June 1987
Docket NumberBankruptcy No. 85-00709,Adv. No. 86-0104.
Citation75 BR 466
PartiesIn re GORDON CAR AND TRUCK RENTAL, INC., Debtor. GORDON CAR AND TRUCK RENTAL, INC., Plaintiff, v. AMERICAN MOTORS LEASING CORPORATION, AMC Leasing Corporation and Bank of Utica, Defendants.
CourtU.S. Bankruptcy Court — Northern District of New York

Brett W. Martin, Utica, N.Y., for debtor.

Menter, Rudin & Trivelpiece, P.C., Albany, N.Y., for American Motors Leasing Corp. and AMC Leasing Corp.; Jonathan D. Deily, of counsel.

Penberthy, Kelly & Walthall, P.C., Utica, N.Y., for Bank of Utica; William W. Kelly, of counsel.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

STEPHEN D. GERLING, Bankruptcy Judge.

On August 18, 1986, Gordon Car and Truck Rental, Inc. ("Debtor") commenced this adversary proceeding against American Motors Leasing Corporation and AMC Leasing Corporation (collectively "AMC"). The action sought a declaration of AMC's security interest, if any, in certain automobile and truck franchise/license agreements ("licenses") entered into between the Debtor and Avis-Rent-A-Car System, Inc. ("Avis"). By Order dated October 29, 1986, the Bank of Utica ("Bank") was permitted to intervene as a party defendant, as it also claimed a security interest in the licenses. The Bank subsequently moved for summary judgment, and AMC moved to dismiss each of Debtor's causes of action, and the Bank's cross-claims. The parties have stipulated to having the Court render final determination on the merits of all outstanding claims to the licenses.

FINDINGS OF FACT

The Debtor was at one time the Avis franchisee for the cities of Binghamton, Corning, Elmira, Ithaca, and Utica, New York. The Debtor had operated the business pursuant to the licenses with Avis since at least 1956.1

At some point, the Debtor began leasing the motor vehicles used in its business from AMC, and entered into at least four separate "Master Fleet. Vehicle Lease Agreements" ("Master Fleet Agreements") with that party.2 Sometime in March, 1984, the Debtor executed an "Addendum" to each existing Master Fleet Agreement which read:

As further security for the performance of this lease, Lessee Debtor hereby grants, assigns and conveys to Lessor AMC a continuing security interest in any and all proceeds, accounts and general intangibles (as defined in the Uniform Commercial Code) now existing or hereafter arising as a result of the rental, lease or use by Debtor of any or all of the vehicles leased hereunder.

AMC had drafted and prepared the Addendum. By letter dated March 12, 1984, Debtor forwarded to AMC the executed Addendum, together with executed financing statements (UCC-1). The financing statements were presumably filed with the offices of the Clerk of Oneida County, New York, and the New York Secretary of State.3

On July 22, 1985, AMC commenced suit against Debtor in the New York Supreme Court, Oneida County, seeking money damages in the amount of $565,466.63 due to Debtor's alleged breach of the Master Fleet Agreements.4 Also on that date, the Honorable Edward S. Conway, Justice of the New York Supreme Court at Albany, New York, entered an order to show cause and temporary restraining notice in AMC's favor against Debtor. This order required Debtor and other individuals to show cause why an order should not be entered directing seizure of vehicles, proceeds, accounts, and general intangibles, pursuant to § 7102 of New York's Civil Practice Law and Rules (McKinney 1980) ("CPLR"). This order specifically restrained Debtor from in any way alienating or encumbering its interest in "any franchise, operating agreement, or lease and the proceeds thereof".

On the original return date of July 31, 1985, Justice Donald H. Miller of the New York Supreme Court entered a conditional seizure order on AMC's behalf. The order was to be effective five days hence in order to allow the parties room to negotiate. On August 7, 1985 the parties returned before Justice Miller, who amended the earlier seizure order to make it effective August 9, 1985 at 3:30 p.m.

By August 15, 1985, AMC had yet to exercise its rights under the seizure order, and Debtor's Board of Directors held a meeting to consider the corporation's future. An AMC representative attended the meeting, and raised the claim of a security interest in the licenses. Debtor's counsel avers this was the first time AMC ever sought to include the licenses within the collateral identified in the Addendum. For reasons unknown, AMC's representative was given possession of the original licenses for "safekeeping". Presumably, the transfer was made with the understanding that Debtor reserved its rights to dispute AMC's security interest in the licenses.

On August 27, 1985, the Debtor executed and mailed to AMC a verified answer to AMC's amended complaint. However, it is possible that AMC had already entered a default judgment against the Debtor on August 26, 1985.5 On August 28, 1985 the Debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101-1330 ("Code").

By Memorandum-Decision dated January 16, 1986, the Court ordered AMC to return the original license agreements to the Debtor, as the documents were property of the bankruptcy estate. The licenses were then subsequently assigned to Robert Castle at the close of an auction sale on October 8, 1986, and the sale proceeds placed in escrow.

The Bank's claimed security interest in the licenses allegedly arises as a result of a security agreement with Debtor dated September 15, 1977. Pursuant to this security agreement, the Bank was granted security interests in

All motor vehicles, equipment, machinery, furniture, fixtures, tools, and inventory now owned or hereafter acquired. All accounts receivable now owned or hereafter created.

The Bank perfected its security interest by filing financing statements with the New York Department of State on October 11, 1977 (continued August 19, 1982), and with the Clerk of Oneida County, New York on October 12, 1977 (continued August 2, 1982).

CONCLUSIONS OF LAW

1. The Bank did not have a security interest in the licenses, or the sale proceeds thereof.

2. AMC did not have a security interest in the licenses, or the sale proceeds thereof.

3. The Bank is not entitled to an administrative priority or super priority claim against the Debtor's estate at this juncture.

I. NATURE OF THE COLLATERAL

As between AMC and the Bank, the crux of this decision turns upon the definition to be given the licenses for the purpose of collateral status under the New York version of the Uniform Commercial Code, N.Y.U.C.C. §§ 1-101 to 13-105 (McKinney 1964 & Supp.1987) ("N.Y.U.C.C."). The Bank contends the licenses are "accounts", while AMC argues the documents are "general intangibles".

N.Y.U.C.C. § 9-106 provides the following pertinent definitions:

"Account" means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. "General intangibles" means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money. All rights to payment earned or unearned under a charter or other contract involving the use or hire of vessel and all rights incident to the charter or contract are accounts.

This section had been revised by legislative amendment in 1977. L.1977, c. 866, § 10. The legislature's action reflected a change which had been made in the Official Text of the Uniform Commercial Code ("U.C.C.") in 1972. As the "Draftmen's Statement of Reasons for 1972 Changes in Official Text", U.C.C. § 9-106 (1972) makes clear:

The term "contract right" has been eliminated as unnecessary. As indicated by a sentence now being eliminated from Section 9-306(1), "contract right" was thought of as an "account" before the right to payment became unconditional by performance by the creditor. But the distinction between "account" and "contract right" was not used in the Article except in subsection (2) to Section 9-318 on the right of original parties to modify an assigned contract, and that subsection has been re-drafted to preserve the distinction without needing the term "contract right". The term has been trouble-some in creating a "proceeds" problem where a contract right becomes an "account" by performance; in the Code\'s former denial that there could be any right in an account until it came into existence (former Section 9-204(a)(d), not withstanding a security interest in the pre-existing contract right; and in the danger of inadequate description in financing statements by claiming "accounts" or "general intangibles" when before performance they should have been described as "contract rights"; and in other respects.
"Money" is expressly excluded from the catch-all definition, "general intangible", to preclude any possible reading that a security interest in money may be perfected by filing.

The Bank has confused the licenses with other contracts which are for the sale or lease of goods, or the rendition of services. The 1977 amendments to the N.Y.U.C.C. were not designed to erase the distinction between the discrete collateral species of "accounts" and "general intangibles". Rather, the legislature sought to eradicate the obscure distinction made between certain rights stemming from contracts for the sale or lease of goods or rendition of services, and the monies generated therefrom. As the Draftmen's Comment, supra, notes, secured parties desiring an interest in all rights arising from such an agreement often found themselves at a loss because certain of those rights (heretofore designated as "contract rights") had not matured to the form of right defined as an "account". This distinction was previously recognized in New York:

An "account" under the Code is the next thing to money in the till,. . . . A "contract right" is also concerned
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