In re Inofin

• Decision Date: 27 July 2011
• Docket Number: No. 11–11010–JNF.,11–11010–JNF.
• Citation: 455 B.R. 19,75 UCC Rep.Serv.2d 269
• Parties: In re INOFIN, INCORPORATED, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

455 B.R. 19

75 UCC Rep.Serv.2d 269

In re INOFIN, INCORPORATED, Debtor.

No. 11–11010–JNF.

United States Bankruptcy Court, D. Massachusetts.

July 27, 2011.

Inofin Incorporated, pro se.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.I. INTRODUCTION

The matter before the Court is the “Motion by Raymond C. Green, Inc. for Relief from the Automatic Stay and for Related Relief” (the “Motion”). Pursuant to its Motion, Raymond C. Green, Inc. (“RCG”) seeks a determination that the automatic stay does not apply to RCG's rights with respect to a portfolio of motor vehicle retail installment contracts, which were assigned to it by Inofin, Incorporated (the “Debtor” or “Inofin”) purportedly to secure loans to Inofin in excess of $8 million, or, in the alternative, relief from the automatic stay pursuant to 11 U.S.C. § 362(d) to obtain that portfolio which RCG contends was its collateral and the subject of valid, prepetition foreclosure sales. RCG seeks a finding that it is entitled to possession of the portfolio, including, without limitation, all of the proceeds of the portfolio and all documents, books and records in the possession of the Chapter 7 Trustee relating to the portfolio, by reason of two foreclosure sales conducted prior to the entry of the order for relief. ¹

The Chapter 7 Trustee filed an Objection to the Motion, and the Court conducted an evidentiary hearing on May 16, 2011. At the hearing, six witnesses testified and 38 exhibits were accepted into evidence.

The issues presented include whether RCG has a valid security interest in the portfolio of retail installment contracts assigned to the Debtor by various automobile dealers, and whether its foreclosure sales divested the estate of an interest in the portfolio. Resolution of those issues in RCG's favor will determine whether it has established a colorable claim to relief under 11 U.S.C. § 362(d). See Grella v. Salem Five Cent Savs. Bank, 42 F.3d 26, 32 (1st Cir.1994) (“The limited grounds set forth in the statutory language, read in the context of the overall scheme of § 362, and combined with the preliminary, summary nature of the relief from stay proceedings, have led most courts to find that such hearings do not involve a full adjudication on the merits of claims, defenses, or counterclaims, but simply a determination as to whether a creditor has a colorable claim to property of the estate.”).

The parties have extensively briefed the issues. The Court now makes the following findings of fact and rulings of law in accordance with Fed. R. Bankr.P. 7052.

II. FACTS

On February 9, 2011, approximately 38 creditors holding claims in the stated amount of $12,927,517.75 filed an involuntary petition against Inofin. In an Emergency Motion for the Appointment of an Interim Chapter 7 Trustee, they alleged that the Debtor was a licensed financial service company, specializing in providing financing for used motor vehicle sales that did not meet traditional financing criteria, that the Debtor primarily funded its lending activities through borrowings from numerous individuals and entities, including the petitioning creditors, and that it had loan obligations of approximately $70 million owed to approximately 200 creditors. RCG, the Debtor's largest lender, filed a Statement in Support of the Emergency Motion in which it observed that “[u]nless these loans are continually serviced, their value will decline precipitously.”

Although the Court initially denied the Emergency Motion for multiple reasons stated on the record, including the absence of a return of service of the involuntary summons, the Court, on February 16, 2011, entered an order for relief. Mark G. DeGiacomo (the “Trustee”) was appointed interim trustee and his appointment became permanent when creditors did not request an election of a trustee at the section 341 meeting of creditors held on April 19, 2011.

RCG and Inofin, then known as First Investors Factoring, Inc., commenced their lending relationship in April of 1996. During the 15 years in which they engaged in business, they executed a number of documents pertinent to the resolution of the issues before the Court. A discussion of the documents and the parties' practices follows.

The Promissory Notes

The documents executed by RCG and Inofin included four promissory notes in favor of RCG executed by Inofin as follows:

1) a $400,000 promissory note, dated April 18, 1996, due and payable on April 18, 2011 with a principal balance of $45,578.39 at the foreclosure date;

2) a $7 million promissory note, dated May 2, 2008, due and payable on May 2, 2010, with a balance of $1,970,339.15 at the foreclosure date;

3) an $8 million promissory note, dated August 21, 2009, due and payable on August 21, 2011, with a balance of $6,019,257.59 at the foreclosure date;

4) a $200,000 promissory note, dated January 8, 2010, due and payable on January 8, 2013, with a balance of $141,486.27 at the foreclosure date.

The parties stipulated that “[a]s of May 16, 2011, the principal amount of RCG's debt shall be deemed to be $8,176,661.40 subject to a $4,000,000 credit if RCG's bid at the foreclosure sale is determined by this Court to be valid.” ²

The first three promissory notes expressly provide: “Secured by a Security Agreement dated April 17, 1996.” The most recent note dated January 8, 2010 provides: “Secured by a Security Agreement dated April 17, 1996 and by the accounts set forth on the Allonge attached hereto.” ³

Additionally, the notes contained provisions relative to defaults. They provided the following:

At the option of the holder, this note shall become immediately due and payable without notice or demand upon the occurrence at any time of the following events: (1) Default in any payment of principal or interest which is not cured within seven (7) days; (2) Default, for more than 21 days after notice thereof from holder to Marker, no cure having been effected, in the performance or observance of the terms or conditions of the Security Agreement or other instruments and documents ... securing this note; (3) Default for more than 21 days after notice thereof from holder to Maker, no cure having been effected, in the payment or performance of any other liability or obligation of the Maker to the holder; (4) Service, pursuant to trustee process, upon the holder hereof of a writ in which the holder is named as trustee of at least $10,000 of the Maker; (5) If the Maker is a corporation, trust or partnership, the liquidation, termination or dissolution of any such organization; or (6) If the Maker shall make an assignment for the benefit of creditors, or if a receiver of all or substantially all of Maker's property shall be appointed and not dismissed within 60 days, or if a petition in bankruptcy or other similar proceeding under any law for relief of debtors shall be filed by or against ... Maker.

The Security Agreement

The Security Agreement, dated April 17, 1996, referenced in all four promissory notes, provided in pertinent part the following:

First Investors Factoring, Inc., a Massachusetts corporation with a place of business at 55 Accord Park Drive, Rockland, MA 02370 (“Debtor”), subject to the terms and conditions hereof, hereby grants a security interest to Raymond C. Green, Inc. (the “Secured Party”), in and to the following property, whether now owned or hereafter acquired:

(i) all of the Debtor's rights in and to chattel paper, instruments and all motor vehicle installments sales contracts purchased by Debtor with the proceeds of loans from Secured Party and assigned and delivered to Secured Party;

(ii) all collateral security for and all guaranties of, and all proceeds of, any of the foregoing.

(iii) all documents, books and records relating to the foregoing.

The property described above shall hereafter be collectively referred to as the “Collateral”.

The Collateral is pledged, assigned, mortgaged and transferred, and a security interest therein is granted, to the Secured Party as security for payment of all sums due under a promissory note (the “Note”) of Debtor in the original principal amount of $500,000.00 of even date herewith and as security for any and all obligations and liabilities of Debtor to the Secured Party of every kind, direct or indirect, absolute or contingent, due or becoming due, now existing or hereinafter arising (hereinafter collectively referred to as the “Obligations”).

(emphasis supplied).

In addition to the provisions of the Security Agreement reproduced above, the Security Agreement contained additional provisions through which the Debtor 1) agreed to provide RCG the right to examine and inspect and make extracts from its books and other records and “to arrange for verification of accounts, under reasonable procedures, directly with account debtors or by other methods;” 2) irrevocably appointed RCG its “true and lawful attorney ... with full power of substitution, in the name of the Secured Party or in the name of the Debtor or otherwise, for the sole benefit of the Secured Party, but at the sole expense of the Debtor, in the event of default ...;” 3) granted RCG the rights and remedies of a secured party under the Uniform Commercial Code and agreed that any notification of a sale or disposition of the Collateral would be deemed reasonable “if given at least ten (10) days before the time of such public sale, or the date after which any such private sale or other intended disposition is to be made ...;” and 4) agreed, among other things, to waive demand and notices of any description. The Debtor expressly agreed to the following:

TO THE MAXIMUM EXTENT PERMITTED BY LAW DEBTOR ALSO WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO JUDICIAL HEARING IN ADVANCE OF THE ENFORCEMENT OF ANY OF THE SECURED PARTY'S RIGHTS HEREUNDER, INCLUDING WITHOUT LIMITATION, THE SECURED PARTY'S RIGHTS FOLLOWING AN EVENT OF DEFAULT TO TAKE IMMEDIATE POSSESSION OF THE COLLATERAL AND EXERCISE ITS RIGHTS WITH RESPECT THERETO.

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