In re Kelton Motors, Inc.

• Decision Date: 13 June 1990
• Docket Number: Bankruptcy No. 88-00255.
• Citation: 117 BR 87
• Parties: In re KELTON MOTORS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Vermont

117 B.R. 87 (1990)

In re KELTON MOTORS, INC., Debtor.

Bankruptcy No. 88-00255.

United States Bankruptcy Court, D. Vermont.

June 13, 1990.

N. Creswell, Paterson & Walke, P.C., Montpelier, Vt., for Freightliner Corp. and Mercedes-Benz Truck Co., Inc.

G. Glinka, Glinka & Palmer, Cabot, Vt., Trustee, pro se.

MEMORANDUM OF DECISION GRANTING RELIEF FROM AUTOMATIC STAY

FRANCIS G. CONRAD, Bankruptcy Judge.

Movants seek relief from the automatic stay¹ to apply a credit against an amount due them from Kelton Motors, Inc. (Debtor). Trustee objects and claims Movants were not properly perfected under Article Nine of Vermont's UCC, 9A Vt.Stat.Ann. §§ 9-101, et seq., because the "all inventory" descriptions in Movants' financing statements do not expressly include property Debtor may acquire after the execution of the financing agreements. We hold under the facts of this proceeding that the "all inventory" description in the financing statement is adequate to perfect the security interest in the "after-acquired" property.

The facts are stipulated and undisputed. Movants, Delaware corporations with their principal place of business in Portland, Oregon, are engaged in the manufacture and distribution of trucks, parts, and accessories for Freightliner and Mercedes-Benz.

Prepetition, Movants and Debtor entered into a "Freightliner Dealer Sales and Service Agreement." The dealer agreement appointed Debtor an independent dealer for Movants' products. Debtor operated Freightliner and Mercedes-Benz dealerships in South Burlington, Vermont and White River Junction, Vermont.

Movants and Debtor entered into identical Security Agreements, dated January 31, 1986 and July 25, 1986, for each of Debtor's dealerships. Pertinent terms of the security interest and description of collateral from the security agreements include:

1. SECURITY INTEREST. As security for the payment of all obligations of Dealer to Company now existing or hereafter acquired, including any extensions or renewal thereof, Dealer grants to Company a Security Interest in the collateral as hereinafter described, now existing or hereafter acquired; with respect to inventory purchased from Company, the security interest herein granted shall be a purchase money security interest. Company shall have the right to possession of any title, certificates or manufacturer\'s certificate of origin covering the collateral.

2. DESCRIPTION OF COLLATERAL. As used herein, the term `collateral\' shall mean all of Dealer\'s inventory purchased from Company or other vendors including, without limitations, all new or used vehicles, glider kits, parts, accessories, and other related items, and all proceeds of the sale or other disposition of said inventory. . . .

Movants' Exhibit B.

Movants and Debtor stipulated that the UCC-1 financing statements were properly executed and filed. The movants are perfected.

The financing statements contain an identical description of collateral:

All inventory including without limitation, all new or used vehicles, glider kits, parts, accessories, and other related items, and all proceeds of the sale or other disposition of said inventory.

Movants' Exhibit C. Each of the financing statements have checked the box "Proceeds of Collateral are also covered."

Debtor defaulted on its August, 1988 open account obligation to pay for Movants' parts. During the week of September 25, 1988, Debtor surrendered to Movants parts from its White River Junction, Vermont dealership. On October 6, 1988, Movants replevied the parts from Debtor's South Burlington, Vermont dealership under a Writ of Replevin issued by Chittenden Superior Court for the State of Vermont. (Exhibit D). The parties stipulated the amount of debt owed to Movants is $254,778.04 and value the replevied and repossessed parts at $85,329.02.

After the Writ of Replevin issued, an involuntary petition under 11 U.S.C. § 303 was filed against Debtor on October 27, 1988. Later, Debtor was converted to a case under Chapter 11, 11 U.S.C. §§ 101, et seq. And subsequently, Debtor was converted to a case under Chapter 7, 11 U.S.C. §§ 101, et seq.

Movants filed a motion for relief from the automatic stay and requested an order terminating or modifying the stay to permit Movants to credit the value of motor vehicle parts repossessed and replevied from Debtor's motor vehicle dealerships prior to Debtor's involuntary petition.

The issue presented is whether the descriptions in the financing statements are adequate to perfect Movants' security interest in parts acquired after the creation of the security agreements.²

The Bankruptcy Code defines a "security interest" as a "lien created by an agreement." 11 U.S.C. § 101(45). A "security agreement" is defined as an "agreement that creates or provides for a security interest." 11 U.S.C. § 101(44). State Law determines whether an agreement creates a lien. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct 914, 918, 59 L.Ed.2d 136, 9 BCD 1259, 19 CBC 481 (1979).

9A Vt.Stat.Ann. § 9-110, Sufficiency of description, provides:

For the purposes of this article any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described.

The Uniform Laws Comment for § 9-110 provides in part:

The requirement of description of collateral . . . is evidentiary. The test of sufficiency of a description laid down by this Section is that the description do the job assigned to it — that it make possible the identification of the thing described. Under this rule courts should refuse to follow the holdings, often found in the older chattel mortgage case, that descriptions are insufficient unless they are of the most exact and detailed nature, the so-called `serial number\' test. . . .

Hawkland summarizes five purposes a description of collateral serves:

1. To indicate clearly the property in which the debtor is giving up a security interest and in which the creditor is taking a security interest.

2. To avoid or settle disputes between the secured party and the debtor and between either of those parties and third parties.

3. To enable the creditor to identify and repossess the collateral in the event of a default by the debtor.

4. To provide reasonable notice to all interested third parties what property is or may be claimed as collateral.

5. To enable other potential or actual creditors to determine, upon inquiry, what collateral is subject to the security interest.

8 Hawkland, Lord & Lewis, UCC Series, § 9-110:02, Art. 9, page 295 (Supp.1989).

We had occasion to apply § 9-110 to test a description in a security agreement of a purchase money financier of inventory and determined the description of "all inventory . . . now or hereafter owned . . ." in the security agreement was adequate. In re Southern Vermont Supply, Inc., 58 B.R. 887, 891 (Bkrtcy.D.Vt.1986). It is clear the description of collateral in Movants' security agreements reaches after-acquired property.

Unlike the description in Movants' security agreements, however, their financing statements do not expressly mention after-acquired property.

Trustee takes the position that:

the phrase `all inventory\' necessarily means `all (present) inventory\' not `all inventory past, present, and future.\' If a creditor seeks to put others on notice of a claimed security interest in all inventory, now or hereafter acquired, it is hardly a paralyzing burden to require this creditor to include the words `now or hereafter acquired\' in the financing statement and, conversely, it is altogether reasonable for another creditor to assume that the absence of such language limits the creditor\'s interest to inventory existing at the time.

Trustee's Objection to Motion for Relief from Stay and Supporting Memorandum, pages 1-2.

While Trustee's point may be well taken for descriptions for security agreement, see, e.g., In re Middle Atlantic Stud Welding Co., 503 F.2d 1133, 1136 (3d Cir.1974) ("On the other hand, it is neither onerous nor unreasonable to require a security agreement to make clear its intended collateral,"); In re Taylored Products, Inc., 5 UCC Rep.Serv. 286, 290 (W.D.Mich.1968); Schechter v. Nelson (In re Nightway Transportation Co., Inc.), 96 B.R. 854, 857 (Bkrtcy.N.D.Ill.1989); Covey v. First National Bank In East Peoria (In re Balcain Equipment Co., Inc.), 80 B.R. 461, 462 (Bkrtcy.C.D.Ill.1987), it does not apply to financing statements.

Despite the fact that the purposes of the descriptions of collateral may overlap for both security agreements and financing statements:

nevertheless, these two documents serve essentially different functions and should be kept separate for purposes of analyzing whether a description contained in either of them is sufficient under the circumstances. Thus, the security agreement is, above all, an agreement, indicating the property in which the debtor has conveyed a security interest to the creditor. It is in the nature of a statute of frauds, designed to establish whether a security interest in fact exists and its scope or extent.

By contrast, the financing statement, which filed of public record, is primarily designed to put potentially interested third parties on notice that a security interest is or may be claimed in particular property owed by the debtor. Thereafter, the interested third party may obtain fuller information by making inquiry under other provisions of Article 9. Therefore, it may ordinarily be expected that the description of collateral in the security agreement will be somewhat more particular than that contained in the financing statement. . . .

8 Hawkland, Lord & Lewis, UCC Series, § 9-110:02, Art. 9, page 295 (Supp.1989) (footnotes omitted).

Moreover, a financing agreement cannot serve as a security agreement nor may a description contained in a financing statement have the effect of enlarging the security agreement so as to create a security interest in collateral not described therein. Se...