In re Inc.

• Decision Date: 31 January 2011
• Docket Number: Related to Docket Nos. 719 and 745.,No. 09–10478 (BLS).,09–10478 (BLS).
• Citation: 456 B.R. 35
• Parties: In re ALERIS INTERNATIONAL, INC., et al., Reorganized Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

456 B.R. 35

In re ALERIS INTERNATIONAL, INC., et al., Reorganized Debtors.

No. 09–10478 (BLS).Related to Docket Nos. 719 and 745.

United States Bankruptcy Court, D. Delaware.

Jan. 31, 2011.

Jeffrey R. Waxman, Morris James LLP, Wilmington, DE, for Holt Equipment Company, LLC.Paul N. Heath, L. Katherine Good, Andrew C. Irgens, Richards, Layton & Finger, P.A., Wilmington, DE, for the Debtors and the Debtors–in–Possession.

OPINION ¹

BRENDAN LINEHAN SHANNON, Bankruptcy Judge.

Before the Court is a motion for relief from the automatic stay (the “Motion”) [Docket No. 719] filed by Holt Equipment Company, LLC (“Holt”), a creditor of Aleris International, Inc. (“Aleris” or the “Debtor”). The Debtor objected to the Motion (the “Objection”) [Docket No. 745], and the Court has conducted argument on the Motion. For the following reasons, the Court will deny the Motion.

I. INTRODUCTION

The Motion requires the Court to determine whether a seller of goods has any rights to the goods against a debtor who has retained possession of the goods pursuant to a sales contract but has not paid for them. Specifically, is a seller entitled to relief from the automatic stay to gain immediate possession of goods for which the debtor has not paid if the seller has neither possession of the goods nor a perfected security interest in them? Based on an analysis of the relevant provisions of title 11 of the United States Code (the “Bankruptcy Code”) and the Uniform Commercial Code (the “U.C.C.”), the Court concludes that under these circumstances the seller is not entitled to relief from stay for the purpose of gaining immediate possession of such goods because the seller's unperfected security interest is subject to avoidance.

II. BACKGROUND

On January 12, 2009, Aleris executed a customer purchase order form (the “Sales Agreement”) in Kentucky pursuant to which Holt sold a 2007 Deere 644J 4WD Loader, Serial No. DW844JX613081 (the “Equipment”) to Aleris for the sum of $141,173.98. Due to a prior rental arrangement between the parties, Aleris was already in possession of the Equipment since September 2008. The Sales Agreement included the following provision (the “Title Provision”).

ACKNOWLEDGMENTS: I (We) promise to pay the balance due (Line 9) shown hereon in case or to execute a Time Sale Agreement (Retain Installment Contract), or a Loan Agreement for the purchase price of the Equipment, plus additional charges shown thereon, or to execute a Lease Agreement, on or before delivery of the Equipment ordered herein. Despite physical delivery of the Equipment, title shall remain in the seller until one of the foregoing is accomplished.

Based on the evidence before the Court, the parties executed no other agreements with respect to the Equipment. According to Holt, Aleris has used the Equipment at Aleris's facility in Morgantown, Kentucky without remitting any payments to Holt as required by the Sales Agreement.

On February 12, 2009 (the “Petition Date”), Aleris, along with certain of its affiliates, voluntarily commenced its chapter 11 case in the United States Bankruptcy Court for the District of Delaware. On June 25, 2009, Holt filed the Motion seeking relief from the automatic stay to permit it to take immediate possession of the Equipment. On April 29, 2010, Holt filed a limited objection to the Debtors' First Amended Joint Plan of Reorganization (the “Plan”), pursuant to which it objected to any impairment of its rights in and to the Equipment under the Plan, thereby preserving its rights, if any, to the Equipment. On May 10, 2010, the Debtor stated in its omnibus reply to filed objections to Plan confirmation that it had communicated to Holt's counsel that the Debtor would honor whatever rights the Court determines Holt has in the Equipment. In reliance upon this communication, Holt withdrew its objection to Plan confirmation. On May 13, 2010, the Court confirmed the Plan. Pursuant to the Plan, the Debtor transferred all of its assets to the reorganized entity and was thereafter dissolved on June 1, 2010.

The relevant facts as they relate to the Motion are undisputed. The parties agree that they entered into the Sales Agreement pursuant to which Holt sold the Equipment to Aleris. The parties also agree that Aleris has been in possession of the Equipment since September 2008, such that the Equipment had been delivered to Aleris prior to the execution of the Sales Agreement. The parties do not agree, however, on the legal consequences of this sequence of events.

Holt contends that it, and not Aleris, owns the Equipment, and that it seeks relief from the automatic stay simply “[o]ut of an abundance of caution ... to take possession of its own property.” Motion ¶ 6. In support of its ownership claim, Holt relies on the Title Provision in the Sales Agreement. Holt asserts that pursuant to this provision, Holt has retained title to the Equipment under U.C.C. § 2–401(3), and as such, the Equipment is not property of the Debtor's estate and is therefore not subject to the automatic stay.

In the alternative, Holt argues that 11 U.S.C. § 362(d)(1) entitles it to relief from stay for “cause” because the Debtor has not provided Holt with adequate protection of its asserted ownership interest in the Equipment even though the value of the Equipment depreciates daily due to the Debtor's continued use. Absent relief, Holt asserts that the Debtor will receive a windfall by being permitted to use the Equipment without being ordered to remit payments or relinquish possession to Holt.

The Debtor objects to the Motion on the grounds that Holt holds neither title to the Equipment nor any valid interest in the Equipment entitling it to relief from stay. First, the Debtor contends that Holt has failed to assert a valid ownership claim because title to the Equipment has already vested in Aleris notwithstanding the Title Provision in the Sales Agreement. Second, the Debtor asserts that Holt does not have a valid security interest in the Equipment and is thereby not entitled to relief from stay. Relying on U.C.C. § 2–401(1), the Debtor claims that Holt retained, at most, a security interest in the Equipment through the operation of the Title Provision. However, because Holt did not perfect its security interest, the Debtor argues that Holt's rights are limited to those of an unsecured creditor.

In the alternative, the Debtor insists that the Equipment is vital to its business operations. Therefore, should the Court find that Holt has a valid interest in the Equipment sufficient to warrant relief from stay, the Debtor requests an opportunity to provide Holt with adequate protection payments. This matter has been sufficiently briefed and argued, and it is ripe for decision.

III. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a “core proceeding” under 28 U.S.C. § 157(b)(2)(A), (E), (G), and (K).

IV. DISCUSSION

To prevail on the Motion, Holt may rely on one of two alternative legal theories: (1) Holt holds title to the Equipment; or (2) Holt holds a valid security interest in the Equipment. If Holt holds title to the Equipment, then it may be entitled to take immediate possession. If Holt holds an unassailable security interest in the Equipment, then Holt may be entitled to relief from stay or adequate protection payments.

A. The Effect of the Debtor's Possession of the Equipment under U.C.C. § 2–401

As a preliminary matter, Article 2 of the U.C.C. governs the transaction between Holt and Aleris pursuant to which the Equipment was sold under the terms of the Sales Agreement. The parties' respective interests in the Equipment are determined primarily by U.C.C. § 2–401, and both parties cite to this provision in support of their respective positions. As such, it is appropriate for the Court to begin with the text of the statute. As adopted in Kentucky, U.C.C. § 2–401 states, in relevant part:

(1) Title to goods cannot pass under a contract for sale prior to their identification to the contract, and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this chapter. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the article on secured transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.

(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place;....

(3) Unless otherwise explicitly agreed where delivery is to be made without moving the goods,

(a) if the seller is to deliver a document of title, title passes at the time when and the place where he delivers such documents; or

(b) if the goods are at the time of contracting already identified and no documents are to be delivered, title passes at the time and place of contracting.

Ky.Rev.Stat. Ann. § 355.2–401 (West) (citation omitted).

Several rules pertaining to the passage of title in the context of the sales transaction at bar are set forth in U.C.C. § 2–401. First, although parties may contract around the default rules articulated in § 2–401(1), (2), and (3), such latitude is bounded by the limitations set forth in § 2–401(1). Second, once a seller relinquishes possession of sold goods, § 2–401(1) mandates that any retention or reservation of title by the seller provided for in the sales contract is deemed only a reservation of a security interest in...