In re Komfo Products Corporation, 27055.

• Decision Date: 09 November 1965
• Docket Number: No. 27055.,27055.
• Citation: 247 F. Supp. 229
• Parties: In the Matter of KOMFO PRODUCTS CORPORATION, Bankrupt.
• Court: U.S. District Court — Eastern District of Pennsylvania

247 F. Supp. 229

In the Matter of KOMFO PRODUCTS CORPORATION, Bankrupt.

No. 27055.

United States District Court E. D. Pennsylvania.

November 9, 1965.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Peter P. Zion, Philadelphia, Pa., for reclamation petitioner.

Wexler, Mulder & Weisman, by Horace A. Stern, Philadelphia, Pa., for trustee.

JOSEPH S. LORD, III, District Judge.

The reclaimant in this bankruptcy proceeding asks us to review and reverse the decision of the referee. The reclaimant's petition asserts her right to certain accounts receivable of the bankrupt corporation and to proceeds of the sale of its inventory. The trustee claims title to the property, and the referee has upheld his claim.

The sequence of events which gave rise to this controversy is not really in dispute. On February 21, 1961 the reclaimant and the bankrupt, Komfo, entered into an agreement, by the terms of which the reclaimant was to make advances of money to Komfo, to be secured by an assignment of accounts receivable. Two days later, reclaimant filed with the Prothonotary of Philadelphia County a financing statement disclosing her security interest in the accounts receivable. On June 22, 1961 reclaimant and Komfo entered into a second agreement to the same effect, except that Komfo agreed to assign as security all of its inventory and the accounts receivable created out of such inventory to the reclaimant. A financing statement for this transaction was filed with the County Prothonotary on the same day. No such statement for either transaction was filed with the Secretary of the Commonwealth of Pennsylvania until October 19, 1961 when both were duly filed.

Pursuant to these agreements, reclaimant advanced a total of $14,800 to Komfo for the operation of its business, but it was not enough. On October 9, 1961 — ten days before the filing of financing statements with the Secretary of the Commonwealth — Komfo made an assignment of its assets for the benefit of creditors. On November 13, 1961 an involuntary petition in bankruptcy was filed against Komfo alleging the assignment for the benefit of creditors as the act of bankruptcy. Thereafter, reclaimant sought to reclaim the security for the unrepaid portion of her loans from the bankrupt's estate, but the trustee resisted on the ground that his rights are those possessed by the assignee for the benefit of creditors and that reclaimant's security interest was unperfected at the time the assignment for the benefit of creditors was made and thus subordinate to it.

The trustee's rights, if any, derive from Section 70 of the Bankruptcy Act, 11 U.S.C.A. § 110. He makes a three-pronged attack on the reclaimant's position, claiming title to the accounts and inventory under three separate subsections of Section 70. If he prevails under any one, title passed to the trustee and reclaimant's petition must be denied. Matter of Rosenberg Iron & Metal Co., 343 F.2d 527, 530 (C.A.7), cert. denied sub nom. Dempster Bros. v. Cohn, 86 S.Ct. 163 (1965). We shall consider them in order.

I.

The first prong is Section 70, sub. a (8), which gives the trustee title to "property held by an assignee for the benefit of creditors appointed under an assignment which constituted an act of bankruptcy * * *." The crucial question, therefore, is whether the assignee for the benefit of creditors had a property right superior to that of reclaimant, and this depends in turn on what the interest of reclaimant was in the accounts receivable and the inventory at the time of the assignment for the benefit of creditors.

While the Bankruptcy Act governs the respective rights of the parties, the initial relationships are created and determined by state law. Holt v. Crucible Steel Co., 224 U.S. 262, 32 S.Ct. 414, 56 L.Ed. 756 (1912); Pacific Fin. Corp. v. Edwards, 304 F.2d 224, 227 (C.A.9, 1962); Matter of Kravitz, 278 F.2d 820, 822 (C.A.3, 1960); In re Consorto Const. Co., 212 F.2d 676, 678 (C.A.3), cert. denied sub nom. Klein v. Equity Inv. Co., 348 U.S. 833, 75 S.Ct. 57, 99 L.Ed. 657 (1954). Article 9 of the Pennsylvania Uniform Commercial Code applies to transactions "intended to create a security interest in personal property including goods, documents, instruments, general intangibles, chattel paper, accounts or contract rights." Act of April 6, 1953, P.L. 3, as amended by the Act of October 2, 1959, P.L. 1023, § 9-102, 12A P.S. § 9-102. The transactions in question between reclaimant and Komfo were intended to create such a security interest and so are within the purview of the Article.

Under Article 9, the trustee, claiming under the assignee for the benefit of creditors, would have an interest superior to the reclaimant's if the reclaimant's security interest were not perfected, for § 9-301 provides, with exceptions not here material, that "an unperfected security interest is subordinate to the rights of * * * (b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected * * *." A lien creditor "includes an assignee for the benefit of creditors from the time of assignment * * *." § 9-301(3). The next problem is to ascertain whether reclaimant's interest was perfected by the time the assignment for the benefit of creditors was made.

"A security interest is perfected when it has attached and when all of the applicable steps required for perfection have been taken." § 9-303. Under Section 9-302, a financing statement "must be filed to perfect all security interests," except some which are not in question in this case. Section 9-401(1) (c) requires that the financing statement be filed in the office of the Secretary of the Commonwealth and, "if the debtor has a place of business in only one county of this state, also in the office of the prothonotary of such county * * *." Since the reclaimant had filed neither financing statement with the Secretary of the Commonwealth until after the assignment for the benefit of creditors had been made, she had not complied with the statutory requirements to perfect her security interest, and the rights of the assignee for the benefit of creditors would ordinarily be superior to hers.

The reclaimant maintains, however, that she falls within the ambit of § 9-401 (2) which allows a "filing which is made in good faith but not in all of the places required by this section" nevertheless to be "effective with regard to collateral covered by the financing statement against any person who has knowledge of the contents of such financing statement." She contends that all the creditors did in fact have such knowledge, were not prejudiced in any way by her failure to file in both of the appointed places, and ought to be subordinated to her secured claim.

The purpose of the filing requirements of the UCC, like recording requirements generally, is obviously to protect subsequent creditors who might not have extended credit had they known of an existing security interest. The Code requirements make that knowledge available and, at the same time, assure the prior security holder of his priority. Casterline v. General Motors Acceptance Corp., 195 Pa.Super. 344, 351, 171 A.2d 813 (1961). The filing puts subsequent creditors on notice. In the instant case there are no actual subsequent creditors and the failure to file would ordinarily be a harmless irregularity. But the UCC makes the assignee for the benefit of creditors a lien creditor from the time of the assignment, and he is consequently a creditor who, in the absence of notice of the prior security interest, would prevail. Cf. Matter of Dumont-Airplane & Marine Instruments, 203 F.Supp. 511, 513 (S.D.N.Y., 1962). Actual knowledge, however, on the part of any such creditor would be at least the equivalent of the notice that the statute requires. As the comment to § 9-401 states:

"When a secured party has in good faith attempted to comply with the filing requirements but has not done so correctly, Subsection 2 makes his filing effective in so far as it was proper, and also makes it good for all collateral against any person who actually knows from the improperly filed statement that a security interest was intended to be claimed in collateral wherever located. The subsection rejects the occasional decisions that an improperly filed record is ineffective to give notice even to a person who knows of it." 12A P.S. § 9-401, Comment, ¶4.

If all creditors represented by the assignee for the benefit of creditors had knowledge of the contents of the inadequately-filed financing statements at the time the assignment for the benefit of creditors was made, then clearly reclaimant's security interest would have been effective against the assignee and against the trustee under Section 70, sub. a(8) of the Bankruptcy Act. Actual knowledge is a question of fact on which reclaimant would have the burden of proof before the referee.¹

We have not found a case in which it was actually decided that the knowledge of all the creditors of an otherwise unperfected security interest defeated the claim of a subsequent lien creditor. But Matter of Smith, 205 F.Supp. 27 (E.D. Pa., 1962); Matter of Luckenbill, 156 F.Supp. 129 (E.D.Pa., 1957); and Matter of Leiby, Bky. No. 26455, E.D.Pa., Jan. 29, 1962, all of which are relied on by the trustee, do not establish the contrary proposition. In all of these cases, secured creditors whose filings had been found defective were denied reclamation relief against the trustee because their interests were unperfected under the Code. In none of these cases was there any evidence that any subsequent creditor knew the contents of the financing statements. Indeed, in Matter of Smith, supra, 205 F.Supp. at p. 29, the court expressly stated that "there is no evidence that any person, whether it be the trustee or the creditors, had knowledge of the contents of the financing statement which was filed in the Prothonotary's office." The intimation of the opinion is that...