In re Incor, Inc., Bankruptcy No. 87-5-1292

• Decision Date: 07 June 1989
• Docket Number: Adv. No. A88-0316-JS.,Bankruptcy No. 87-5-1292
• Citation: 100 BR 790
• Parties: In re INCOR, INC., Debtor. The FIRST NATIONAL BANK OF MARYLAND, Plaintiff, v. UNITED STATES WALL CORPORATION, Defendant.
• Court: U.S. Bankruptcy Court — District of Maryland

100 B.R. 790 (1989)

In re INCOR, INC., Debtor.

The FIRST NATIONAL BANK OF MARYLAND, Plaintiff, v. UNITED STATES WALL CORPORATION, Defendant.

Bankruptcy No. 87-5-1292, Adv. No. A88-0316-JS.

United States Bankruptcy Court, D. Maryland.

June 7, 1989.

Michael J. Schwarz, Schwarz, Greenblatt & Rafferty, Baltimore, Md. for defendant.

William L. Hallam, Paul J. Cohen, Gebhardt & Smith, Baltimore, Md. for plaintiff.

MEMORANDUM OPINION DENYING MOTION FOR RECONSIDERATION OF DISMISSAL OF ADVERSARY PROCEEDING

JAMES F. SCHNEIDER, Bankruptcy Judge.

The issue in this case is whether the bankruptcy court has jurisdiction to entertain a collection suit brought by a secured creditor against an account debtor of a Chapter 7 debtor to collect prepetition and postpetition receivables, after the modification of the automatic stay allowed the secured creditor to enforce its rights as to its collateral in the receivables. This opinion holds that there is no jurisdiction over such a suit in the bankruptcy court and that therefore the secured creditor must proceed, if at all, in a state court of competent jurisdiction or in a Federal district court based upon diversity of citizenship.

FINDINGS OF FACT

1. Incor, Inc., filed a voluntary Chapter 11 bankruptcy petition in this Court on June 10, 1987 (Case No. 87-5-1292). On the date of the filing of the petition, the debtor-in-possession was a corporation engaged in the business of owning and operating a steel mill located at 4601 North Point Boulevard, Baltimore, Maryland, which manufactured drywall studs, structural grade steel studs, wire mesh and related products.

2. Simultaneously filed with the petition on June 10, 1987 was a "Consent Order Authorizing Debtor to Use Cash Collateral and to Obtain Post-Petition Financing" P. 8 (Mannes, B.J.). By the terms of this Order, Incor, Inc., and The First National Bank of Maryland "First National" and/or "the Bank" acknowledged that the Bank was the debtor's only secured creditor by reason of the following provisions:

2. The First National Bank of Maryland (hereinafter "FNB") is the beneficiary of a Deed of Trust dated June 30, 1986 constituting a first lien on the Debtor\'s real property and securing repayment of the obligations of the Debtor under a Promissory Note dated June 30, 1986 in the original principal amount of $5,500,000 (hereinafter "IRB Note") and a demand Business Purpose Promissory Note dated June 30, 1986 in the original principal amount of $1,500,000 (hereinafter "Line of Credit Note").

3. FNB additionally holds a first perfected security interest in the Debtor\'s accounts receivable, intangibles, and all tangible property, including but not limited to, equipment, inventory, and fixtures, to secure repayment of the Debtor\'s obligations under the Line of Credit Note and a second perfected security interest in all of the Debtor\'s accounts receivable, intangibles, and all tangible personal property, including, but not limited to, equipment, fixtures, and inventory, to secure repayment of the debtor\'s obligations under the IRB Note. The IRB Note, the Line of Credit Note, and all related documents shall be referred to collectively herein as the "Loan Documents".

4. No creditor other than FNB holds a security interest in any assets of the Debtor.

Consent Order dated June 10, 1987 P. 8

3. The parties further agreed that the Bank would permit Incor, Inc., to use its cash collateral and the Bank would advance post-petition financing in accordance with certain conditions contained in the Order, including the following:

16. All advances made by FNB to the Debtor after the date of the filing of the Petition shall bear interest at the default rate provided for in the Line of Credit Note. All advances made by FNB to the Debtor after the date of the filing of the Petition pursuant to the terms of this Order shall have priority over any and all administrative expenses of the kind specified in §§ 503(b) and 507(b) of the Bankruptcy Code, shall have super priority over any and all secured, unsecured, and priority claims and expenses in this case, whether incurred or arising before or after the entry of an order of this Court converting this case pursuant to § 1112 of the Code, and shall be secured by the liens described in Paragraph 17 hereof. No cost or expenses of administration shall be imposed against FNB, its claims, or its collateral.

17. Notwithstanding the provisions of § 552(a) of the Bankruptcy Code, and in addition to the security interest granted by § 552(b) of the Code, FNB shall have a security interest in any and all real and personal property of the Debtor, both tangible and intangible, which is or has been acquired, generated, or received after the filing of the Debtor\'s Petition, as security for any and all indebtedness of the Debtor to FNB, whether arising before or after the date of the filing of the Debtor\'s Petition.

18. The security interests granted in this Order shall become and are deemed perfected without the necessity for the filing or execution of the documents which might otherwise be required under non-bankruptcy law for the perfection of the security interests. Such perfection shall be binding upon any subsequently appointed trustee, either in Chapter 11 or under any other chapter of the Bankruptcy Code, and upon all creditors of the Debtor who have extended or who may hereafter extend credit to the Debtor or the Debtor-in-Possession.

Id.

4. Three subsequent consent orders PP. 28, 53 and 64 respectively dated July 24, 1987, September 8, 1987 and December 4, 1987, extended the debtor's use of cash collateral on an interim basis until March 7, 1988.

5. One hundred thirty-six (136) separate claims have been filed in the instant bankruptcy case since its inception. Of these, Claim No. 25 filed by the Bank on July 30, 1987, in the amount of $5,535,265.21 is the largest and the only secured claim.

6. On or about January 29, 1988, the business of the debtor ceased because of its inability to properly fund its manufacturing operations. Transcript of testimony of Francis L. Hunt, p. 18, Hearing of April 27, 1988 P. 121.

7. On February 11, 1988, Incor, Inc. filed a complaint in this Court (Adversary No. 88-0033B) against the Bank for declaratory and injunctive relief in which it alleged that because of the debtor's impending default on its cash collateral agreement, the Bank froze all funds in the debtor's payroll account, thereby causing the payroll checks payable to debtor's employees to be dishonored. (The complaint was dismissed pursuant to Fed.R.Civ.P. 12(b)(6) on October 12, 1988.)

8. On February 26, 1988, the Bank filed in this Court a motion seeking ex parte or emergency relief from automatic stay (Motion No. M88-0228B). The motion indicated that the Bank was not adequately protected due to the cessation of the debtor's business operations resulting in a diminution of the collectability of the debtor's accounts receivable and requested a modification of the automatic stay to permit the Bank to collect the debtor's receivables and apply them to the debtor's obligations to the Bank under its notes and cash collateral orders.

9. By Order P. 6 dated March 10, 1988, this Court granted the motion for cause, including a lack of adequate protection pursuant to 11 U.S.C. § 362(d)(1).

10. By Order dated April 28, 1988 P. 102, this Court authorized the sale outside of a Chapter 11 plan of all the real and personal property of Incor, Inc., to Dale Industries, Inc., for a purchase price of $2,225,000, from which an appeal was taken to the U.S. District Court and later dismissed.

11. On October 21, 1988, the U.S. Trustee filed a motion to convert the case to a proceeding under Chapter 7 by reason of the debtor's failure to pay quarterly fees as required under Chapter 11. After notice and a hearing, the motion was granted by Order entered on January 25, 1989 P. 136.

12. Meanwhile, on October 11, 1988, while the bankruptcy case was still in the posture of a Chapter 11 proceeding, the Bank filed the instant complaint against the United States Wall Corporation to recover accounts receivable. Count 1 refers to accounts receivable in the amount of $23,939.43 plus interest and costs owed to Incor, Inc. before the filing of its bankruptcy petition on June 10, 1987. Count 2 seeks the payment of post-petition accounts receivable in the amount of $45,181.01 plus interest and costs.

13. On November 21, 1988, the defendant, United States Wall Corporation, filed a motion to dismiss for want of jurisdiction P. 6. The motion alleged both a lack of subject matter jurisdiction over the cause of action for collection of accounts receivable and a lack of personal jurisdiction over the defendant and asserted that the instant complaint is a "non-core" proceeding. A memorandum was filed in conjunction with the motion.

14. The Bank filed its own memorandum P. 9 in opposition to the defendant's motion to dismiss. The memorandum asserted that the motion was filed eleven days after the deadline for filing an answer and during the pendency of the Bank's motion for default judgment. It challenged the defendant's allegation that the complaint is a non-core proceeding, at least as to the postpetition accounts sued for in Count 2 and asserted that this Court has jurisdiction to enter proposed findings of fact and conclusions of law to be submitted to the U.S. District Court as to the non-core cause of action contained in Count 1.

15. Nevertheless, this Court entered an Order dismissing complaint P. 10 on January 4, 1989. Thereupon the Bank filed a motion for reconsideration P. 11 upon which this opinion is based.

16. In response to the motion for reconsideration, the defendant United States Wall Corporation filed the following "Affidavit in Support of Dismissal for Want of Jurisdiction" P. 15:

David Belvitch, being first duly sworn on oath deposes and makes the following Affidavit:

1. My name is David Belvitch and I am

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