In re Ken Gardner Ford Sales, Inc.
| Decision Date | 14 April 1981 |
| Docket Number | Adv. No. 1-80-0188.,Bankruptcy No. 1-80-00588 |
| Citation | 10 BR 632 |
| Parties | In re KEN GARDNER FORD SALES, INC., Debtor. FORD MOTOR CREDIT COMPANY, Plaintiff, v. KEN GARDNER FORD SALES, INC., and Kyle R. Weems, Trustee, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
COPYRIGHT MATERIAL OMITTED
Smith & Grisham and Brown, Ray & Dobson, Chattanooga, Tenn., for plaintiff.
Weill, Ellis, Weems & Copeland, Chattanooga, Tenn., for defendants.
Ken Gardner Ford Sales, Inc., (Ken Gardner) was a Ford dealer. Ford Motor Credit Company (FMC) financed the purchase of certain vehicles and retained a security interest. In March, 1980, Ken Gardner filed a petition in bankruptcy under the Bankruptcy Reform Act of 1978. This proceeding involves Ford Motor Credit Company and the trustee in bankruptcy for Ken Gardner. Property in which FMC claimed a security interest was sold by the trustee. Final distribution of the proceeds awaits the outcome of this litigation.
Part I of this memorandum will concern whether the creditor has secured claim; and if so, the amount.
Part II will concern preference questions raised by the trustee.
At the time of Ken Gardner's bankruptcy the amount of debt under the inventory financing agreement was $1,921,833.06. The trustee contends first that FMC has an unperfected security interest. Next the trustee argues, that if perfected, the security interest is limited to $1,250,000.
In 1970 Ken Gardner and FMC entered into an inventory financing agreement. Ken Gardner gave FMC a security interest in its inventory of motor vehicles and their proceeds. FMC filed a financing statement on October 23, 1970 and a continuation statement on October 15, 1975.
Neither the original financing statement nor the continuation statement stated the amount of the secured debt. FMC filed the continuation statement and paid a tax. FMC executed a sworn statement that the amount of the secured debt was $1,250,000 and paid a tax on that amount. The amount of the tax paid is shown on the face of the financing statement.
Before FMC paid the tax in 1975, the debt had reached a high of $1,830,000. At the time FMC paid the tax the debt was $181,375.82 more than the sworn amount. Between payment of the tax and Ken Gardner's bankruptcy, the debt reached a high of $3,179,000. Also, during that time the debt usually exceeded $1,250,000. At the end of only six of the intervening 52 months was the debt less.
More than two months after Ken Gardner's bankruptcy FMC paid the tax and penalties due on the largest amounts that Ken Gardner had owed it. FMC paid the tax and penalties for the purpose of bringing itself within the "escape" provision of the tax law. At the trial the trustee's accountant admitted that FMC's calculations under the escape statute were correct.
The trustee makes several arguments against FMC's security interest. The first argument derives from decisions under Article 9 of the Uniform Commercial Code (UCC) as enacted in Tennessee. Tenn.Code Ann. §§ 47-9-101 — -9-507 (Repl.Vol. 1979).
The following cases decided in this district have held a security interest unenforceable above the amount shown on the financing statement. In re HGS Technical Associates, Inc., 14 UCC Rep.Serv. 237 (Bankr.Ct.E.D.Tenn.1972) aff'd, 14 UCC Rep.Serv. 247 (U.S.D.C.E.D.Tenn.1972); In re Executive Airways, Inc., 15 C.B.C. 396 (Bankr.Ct.E.D.Tenn.1977).
The purpose of a financing statement is to give notice of the secured party's rights to others who might deal with the debtor. Tenn.Code Ann. § 47-9-402 Comment 2 (Repl.Vol.1979).1 A financing statement need not state the amount of the secured debt. Tenn.Code Ann. § 47-9-402(1) (Repl.Vol.1979).2 If, however, an amount is shown and others might reasonably think it is a limit on the size of the debt, then the secured party has given notice of a limit. Others dealing with the debtor could be misled by the apparent limit. For that reason the secured debt should be limited to the amount shown on the financing statement. That is the rationale of the cases. See Jackson County Bank v. Ford Motor Credit Company, 488 F.Supp. 1001 (M.D.Tenn.1980).
The court does not think the sworn statement that FMC filed should be given the same effect. The sworn statement was not part of the filed financing statement. It could not have misled anyone to believe there was a limit on the amount of the secure debt.3
The amount of tax paid is shown on the financing statement. The trustee argued that it should be given the same effect as showing the amount of the debt. The argument has validity. As the court points out later, the tax is to be paid on the maximum debt that will be secured. An experienced creditor can easily determine the amount of debt from the amount of the tax paid. The financing statement reflected FMC's payment on less than the maximum secured debt. It could have misled other creditors. Of course the amount of the tax shown on the financing statement was placed there by the Secretary of State. But if FMC had paid the correct amount of tax, the correct amount would have appeared. In any event, the court need not decide this question in light of its decision below on the effect of FMC's failure to pay the correct tax.
Generally a trustee in bankruptcy has a superior right to the debtor's property subject to a security interest unperfected on the date of bankruptcy. 11 U.S.C. § 544(a); Tenn.Code Ann. § 47-9-301(1)(b) (Repl.Vol. 1979).
It was necessary for FMC to file the financing statement to perfect its security interest in Ken Gardner's inventory and other collateral. Tenn.Code Ann. § 47-9-302(1) (Repl.Vol.1979); In re Vaughn, 283 F.Supp. 730 (M.D.Tenn.1968). To continue perfection it was necessary for FMC to file the continuation (financing) statement. Tenn.Code Ann. § 47-9-403(2) (Repl.Vol. 1979). Both financing statements contain the information required by Article 9 for perfection of a security interest. Tenn. Code Ann. § 47-9-402 (Repl.Vol.1979).
Tennessee imposes a tax on the privilege of filing financing statements, including continuation statements. Tenn.Code Ann. §§ 67-4101, -4102, Item S(b) (Repl.Vol. 1976); Carr v. Chrysler Credit Corp., 541 S.W.2d 152 (Tenn.1976); International Harvester Co. v. Carr, 225 Tenn. 244, 466 S.W.2d 207 (1971).
The tax is measured by the amount of indebtedness. Tenn.Code Ann. § 67-4102, Item S(b), ¶¶ 1 & 2. (Repl.Vol.1976).4 FMC paid the tax on $1,250,000 though the debt was greater at the time and had been greater in the past. Before Ken Gardner's bankruptcy the debt increased substantially but FMC did not pay any more tax. The question is how FMC's failure to pay tax on the larger amounts affects its security interest.
It is not disputed that before Ken Gardner's bankruptcy FMC had not paid the amount of tax required by the statute. Clearly the statute required payment on at least the amount of the principal debt at the time of execution of the continuation statement.5 International Harvester Co. v. Carr, above. Thus when FMC filed the continuation statement it paid less than the correct amount of tax.
The statute can be construed to require payment of more tax when the debt increases.6 The statutes provide little guidance on when it should be paid. That should be considered in determining whether additional tax was timely paid. Tenn. Code Ann. §§ 67-4010, 67-4102, Item S(c), 67-4303 (Supp.1980). But in this case FMC was not diligent in paying the correct amount of tax when it filed, much less the additional tax that became due thereafter. Thus FMC also failed to pay the tax that became due after it filed the continuation statement.
The trustee relies on the decision in Jackson County Bank v. Ford Motor Credit Company, 488 F.Supp. 1001 (M.D.Tenn. 1980). The decision does support the trustee's argument that FMC's filing was limited by the amount of tax paid. But FMC challenges the decision as being inconsistent with the Tennessee law on which it was based.
The court relied on decisions denying enforceability to contracts because of the plaintiffs' failure to pay a privilege tax.
In Stevenson v. Ewing the Tennessee Supreme Court laid down the rules for determining when failure to pay a privilege tax makes a contract unenforceable. 87 Tenn. 46, 9 S.W. 230 (1888). The first consideration is whether the statute expressly prohibits exercise of the privilege without paying the tax. If there is no express prohibition, then it is relevant whether the statute is a revenue measure or part of a regulatory scheme. The next consideration is whether the statute imposes a penalty. A penalty, particularly a recurring one, implies a prohibition.
Stevenson v. Ewing has been regularly followed. See, e.g., Bush Bldg. Co. v. Mayor & Aldermen of Town of Manchester, 189 Tenn. 203, 225 S.W.2d 31 (1949); Wright v. Jackson Construction Company, 138 Tenn. 145, 196 S.W. 488 (1917) rev'd on other grounds, sub. nom. Chalker v. Birmingham & Northwestern Railway Co., 249 U.S. 522, 39 S.Ct. 366, 63 L.Ed. 748 (1919); Pile v. Carpenter, 118 Tenn. 288, 99 S.W. 360 (1906); Singer Mfg. Co. v. Draper, 103 Tenn. 262, 52 S.W. 879 (1899); Anderson v. Sanderson, 25 Tenn.App. 425, 158 S.W.2d 374 (1942); Clayton v. Read House Co., 24 Tenn.App. 149, 141 S.W.2d 916 (1939). In Farmer v. Farmer, the court pointed out that as to revenue statutes, late compliance may make a contract enforceable because of the escape statute. 528 S.W.2d 539 (Tenn. 1975). The case did not change the law as stated in Stevenson v. Ewing. It merely pointed out that under regulatory statutes late compliance generally will not make an illegal contract enforceable.
The statutes that impose the tax on filing financing statements provide:
It shall be unlawful for any person to exercise any of the privileges made taxable by chapters 40 to 43 . . ....
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