In re Halmar Distributors, Inc.

• Decision Date: 10 July 1990
• Docket Number: Adv. No. 89-4075.,89-40975,Bankruptcy No. 89-40976
• Citation: 116 BR 328
• Parties: In re HALMAR DISTRIBUTORS, INC. and Ralar Distributors, Inc., Debtors. GENERAL ELECTRIC COMPANY, LIGHTING BUSINESS GROUP, Plaintiff, v. HALMAR DISTRIBUTORS, INC., Ralar Distributors, Inc. and Baybank Middlesex, Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

116 B.R. 328 (1990)

In re HALMAR DISTRIBUTORS, INC. and Ralar Distributors, Inc., Debtors.

GENERAL ELECTRIC COMPANY, LIGHTING BUSINESS GROUP, Plaintiff, v. HALMAR DISTRIBUTORS, INC., Ralar Distributors, Inc. and Baybank Middlesex, Defendants.

Bankruptcy Nos. 89-40976, 89-40975, Adv. No. 89-4075.

United States Bankruptcy Court, D. Massachusetts.

July 10, 1990.

George Parker, Parker & Cohen, Boston, Mass., for General Elec. Co., Lighting Business Group, plaintiff.

Paul Salvage, Bacon, Wilson, Ratner, Cohen, Salvage, Fialky & Fitzgerald, Springfield, Mass., for Halmar Distributors, Inc., Ralar Distributors, Inc., defendants.

Charles R. Bennett, Riemer & Braunstein, Boston, Mass., for Baybank Middlesex, plaintiff-in-counterclaim.

OPINION

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

This is a classic struggle over security between a lender and supplier. General Electric Company, Lighting Business Group ("G.E."), a supplier of the Chapter 11 Debtors, Halmar Distributors, Inc. ("Halmar") and Ralar Distributors, Inc. ("Ralar"), has brought an adversary proceeding against the Debtors to establish the validity and priority of its interests in the Debtors' inventory and the proceeds thereof. Asserting its own security interest in the same collateral, the Debtors' lender, BayBank Middlesex ("BayBank"), was allowed to intervene. G.E. in its amended complaint seeks damages against BayBank in an amount equal to the cash proceeds from the sale of G.E.'s products which BayBank received and paid to itself under its lending arrangement with the Debtors. Presented are novel questions of whether: (i) BayBank is liable for conversion of G.E.'s interest in these cash proceeds, (ii) G.E.'s interest in Ralar's inventory continued after the entire inventory was transferred from Ralar in New York to Halmar in Massachusetts, and (iii) G.E.'s interest in items of Halmar's inventory continued after they were commingled with identical items in Ralar's inventory. I set forth here my findings of fact and conclusions of law after trial.

The Chapter 11 Debtors, Halmar and Ralar, are affiliates owned by the same individuals. Halmar has been in business in Massachusetts for a number of years, selling at wholesale a wide variety of household and personal products to supermarkets, department stores, drugstore chains and other retail entities located throughout the northeast. Ralar was organized in 1987 to deal in hardware as well as household and personal items. It began business in Plainview, New York by purchasing the assets of a corporation bearing the same name which did business in New York as a subsidiary of Caldor, Inc. The expansion into hardware items, the dependence upon Caldor as a customer, and the resulting increased volume created a fiasco, requiring the termination of Ralar's business within two years and the transfer of its inventory in New York to Halmar in Massachusetts. The Chapter 11 filings of both corporations followed shortly thereafter. Left to sort out their respective rights are G.E. and BayBank.

G.E. has sold merchandise to Halmar since approximately 1964. The current "Distributor Agreement" between the parties, dated May 1, 1982 and amended three times, covers "Large lamps, PLP portable lighting products, Wiring Device Products, miniature lamps and product lines in Photo, Xmas and Battery." The agreement provides for the sale of some products outright to Halmar and the placing of other products on consignment with Halmar. G.E. is granted a security interest in all the products and in "all cash and noncash proceeds of all thereof, including accounts, contract rights, chattel paper and any other rights to the payment of money and security therefor." Payment for consigned inventory sold by Halmar in any month is due on the fifteenth day of the following month, except for inventory covered by a so-called deferred payment agreement, for which payment is due twelve months after sale out of consignment. The agreement specifies that products sold outright to Halmar are to be paid for under normal billing terms. It places no restrictions upon the use of proceeds from the sale of any of the products. Financing statements were filed in the appropriate offices in Massachusetts on or about January 8, 1976; successive continuation statements were duly filed on or about November 21, 1980, and November 4, 1985. The description in the financing statements, however, refers only to lamps and bulbs, reading:

A — Inventory consisting of electric lamps or light bulbs (light bulbs, tubes, and other types of electric lamps) sold or consigned to the debtor by General Electric Company, including, without limitation, incandescent lamps, fluorescent lamps, high intensity discharge lamps, quartz lamps and accessories or parts relating thereto; and

B — Accounts receivable, contract rights, chattel paper, and any other right to the payment of money and security therefor, arising from the sale, consignment, or other transfer by the debtor of said lamps, accessories or parts.

In August of 1989, about two months prior to the Chapter 11 filings, Halmar signed and G.E. filed in the appropriate Massachusetts filing offices amended financing statements containing this broader description:

A. Inventory Consisting of Lamps and Light Bulbs (Including, Without Limitation, Incandescent, Fluorescent, High Intensity Discharge, Quartz, Photo, Miniature, Holiday and Accessories And Parts Relating Thereto), Ballasts, Wiring Devices, And Portable Lighting Products Now Or Hereafter Sold Or Consigned To The Debtor By General Electric Company; and B. Accounts Receivable, Contract Rights, Chattel Paper, And Any Other Right To The Payment Of Money And Security Therefor, Now Or Hereafter Arising From The Sale, Consignment Or Other Transfer By The Debtor Of Said Inventory; C. Proceeds of "A" and "B".

On December 1, 1987, G.E. signed the same form of distributor agreement with Ralar, the new corporation organized to do business in New York. Included within this agreement were the following product lines: "Large lamps, Photo lamps, Miniature lamps, Holiday lamps, Battery, PLP, Wiring Device." On or about February 1, 1988, Ralar executed and G.E. filed financing statements with the appropriate filing offices in New York containing the following description:

A) Inventory Consisting of Lamps and Light Bulbs (Including Without Limitation, Incandescent, Fluorescent, High Intensity Discharge, Quartz, Photo, Miniature, Holiday and Accessories And Parts Relating Thereto), Ballasts, Wiring Devices, And Portable Lighting Products Now Or Hereafter Sold Or Consigned To The Debtor By General Electric Company; And B) Accounts Receivable, Contract Rights, Chattel Paper, And Any Other Right To The Payment Of Money And Security Therefor, Now Or Hereafter Arising From The Sale, Consignment Or Other Transfer By The Debtor Of Said Inventory. C) Proceeds of "A" and "B".

For many years, Halmar had a revolving loan agreement with Shawmut Bank of Boston, N.A. ("Shawmut"), which on March 27, 1989 was replaced by BayBank. On that date, Halmar and Ralar entered into a financing arrangement with BayBank involving a $3 million note and an agreement for a revolving line of credit under which loans were to be made in amounts determined by a formula based upon current inventory and account receivable levels. Halmar and Ralar informed BayBank that G.E. supplied them with light bulbs on consignment; BayBank consequently excluded light bulbs from the inventory borrowing base. BayBank was also aware of the contents of G.E.'s filed financing statements. BayBank obtained and perfected by appropriate filings in Massachusetts and New York a security interest in, among other things, all of the Debtors' accounts, inventory, chattel paper, equipment, fixtures, goods, and general intangibles, and the "proceeds" thereof. The loan documents required that Halmar and Ralar direct their customers to make all payments to a lock box under the control of BayBank; the checks were to be endorsed to BayBank, who would apply them against its debt. BayBank was to periodically advance new funds to the borrowers in accordance with the borrowing formula; Halmar and Ralar were authorized to use the funds in their business in their discretion.

The parties operated under this arrangement during the ensuing months in 1989 until the Chapter 11 filings on October 16, 1989. Included among the customer payments received by BayBank in the lock box were proceeds from the sale of various products which G.E. had sold or consigned to Halmar and Ralar. G.E. was aware over the years that Halmar had a similar revolving loan arrangement with Shawmut. It learned in September of 1989 that BayBank had taken over the financing of the Debtors.

After Halmar was unsuccessful in its attempt to sell its business during the Chapter 11 proceedings, I permitted BayBank to foreclose upon its collateral, subject to any rights of G.E., which have been protected by two orders requiring BayBank to hold in escrow proceeds from the sale of G.E. products. G.E. asserts claims against the Debtors totaling $2,201,220.29. As of May 5, 1990, BayBank held in escrow $436,661.07 of proceeds from the sale of G.E. products, pending resolution of the parties' rights thereto. These proceeds, plus additional sales of $30,902.44 uncollected as of May 5th, represent the following sales of G.E. products between September 15, 1989 and March 31, 1990:

                   Wiring Devices     $235,493.49
                   Batteries            11,801.69
                   Auto Head Lamps      50,257.88
                   Light Bulbs         170,010.45
                                      ___________
                      Total           $467,563.51
                

I.G.E.'s CLAIM AGAINST BAYBANK FOR CONVERSION OF CASH PROCEEDS

G.E. seeks to hold BayBank liable in damages for having paid itself from checks representing customer payments for the purchase of G.E. products. Although G.E. carefully avoids use of the term "conversion," only principles of conversion could support this...