In re Mayo

Decision Date23 March 1990
Docket NumberAdv. No. 86-00042.,Bankruptcy No. 86-146
Citation112 BR 607
CourtU.S. Bankruptcy Court — District of Vermont
PartiesIn re Rodney S. MAYO,[1] Debtor. MIDLANTIC NATIONAL BANK NORTH, N.A., Plaintiff, v. BORG-WARNER ACCEPTANCE CORP., Vermont National Bank, and John Larkin,[2] Defendants.




J. Anderson, and M. Burak, Goldstein, Manello, Burak & Gabel, Burlington, Vt., for Midlantic Nat. Bank North, N.A. (Midlantic).

G. Faris, and M. Schein, Hoff, Wilson, Powell & Lang, Burlington, Vt., for Vermont Nat. Bank (VNB).

D. Hill, Essex Junction, Vt., for Borg-Warner Acceptance Corp. (BWAC).


FRANCIS G. CONRAD, Bankruptcy Judge.

This adversary proceeding3 is before us on Midlantic's complaint to determine the validity, extent, and priority of conflicting security interests in a Boat. The complaint, counterclaims, and affirmative defenses allege inequitable conduct, negligence, and fraud. We hold that BWAC4 has a first priority interest in the Boat. We do not equitably subordinate any claims because the conduct of all parties does not justify its application.

There is an old Vermont wedding reception custom called the "Dollar Dance." Wedding guests form a line with a dollar in hand and pay to dance with either the bride or the groom. This adversary proceeding is similar to the Dollar Dance.

Mayo, the debtor, was a very attractive groom. As he wed himself to his various businesses creditors lined up to dance with him. Unlike the Dollar Dance, however, where money is paid only at the beginning of the dance, in this rendition each of the dancers also pays to quit dancing.


Although Mayo is the converted Chapter 7 debtor in this adversary proceeding, the dance also involves a related Chapter 7 debtor, Vermont Custom Boats, Inc., a Vermont domestic corporation. Vermont Custom Boats, Inc. is wholly-owned by Mayo. Prior to its incorporation in February, 1985 (T.1236),5 it operated as a sole proprietorship as Rodney S. Mayo, d/b/a Vermont Custom Boats. (T.1236). At the corporation's inception, assets were transferred into it from the d/b/a. The corporation operated using the d/b/a as a trade name. In this Memorandum of Decision we distinguish the corporation from the original d/b/a sole proprietorship by referring to the corporation by its corporate name.

There is some confusion in the record about what assets were transferred from the sole proprietorship to the corporation. We do know with some assurance, however, that furniture and fixtures went to the corporation (T.1332) and the inventory (boats) was left with the sole proprietorship. (T.1332). Mayo intended to transfer to the corporation the remainder of his sole proprietorship's assets in July of 1986 (T.1236-37), but his August, 1986 bankruptcy washed away his intentions.

Vermont Custom Boats, Inc. and the d/b/a proprietorship maintained several business office locations. One location was situated at Southside Lincoln-Mercury, Inc., Burlington, Vermont (T.1237), another Mayo related Chapter 7 debtor in this Court. Another business office was maintained in Shelburne, Vermont. Mayo himself lived in Colchester, Vermont. (T.1233). It is logical to conclude from the evidence that Mayo, as a d/b/a, and as Vermont Custom Boats, Inc., was in business to sell boats and accessories.

The transcript is brimming with references about Mayo's success as a boat dealer. We find this impressive considering Vermont's bountiful winter weather and the brevity of its summer season. Be that as it may, Mayo could sell boats. (T.688). Mayo was one of BWAC's largest dealers. (T-688). Mayo obtained inventory floor planning from BWAC, and working capital and long-term financing from VNB. Later, to enhance his business and possibly his self-esteem, he obtained financing from Midlantic via a boat "paper originator," Yegen Marine Company (Yegen), to purchase from his d/b/a sole proprietorship a beautiful large boat for his own personal use. The boat was a 48' Chris-Craft known as a 480 Corinthian (the Boat). Although there are a plethora of issues to be resolved, the ultimate issue to be decided is who is entitled to the proceeds of the Boat.


BWAC is the first dancer. BWAC is a well known inventory floor financier. It has branch offices located throughout the United States, with headquarters in Chicago, Illinois. (T.847). Two of its branches that did business with Mayo are located in Bradenton, Florida (T.687; BWAC-1),6 and Manchester, New Hampshire. (T.1139).

How BWAC and Mayo came to dance we may never know. Testimony from a BWAC employee indicates that the BWAC financing documents signed by Mayo could have been requested by Mayo, or could have been sent directly to Mayo by Chris-Craft. (T.887; BWAC-1; underscoring ours). The BWAC employee testified that the documents in this case would have been executed outside of Vermont because BWAC did not have an office in Vermont. (T. 888). On cross-examination she testified she didn't really know where the documents were executed (T.922) but was led to admit they were actually signed in New Hampshire. (T-933). The cross-examination was skillful; however, we find she didn't know where the BWAC/Mayo documents were signed. Mayo's testimony didn't tell us where the documents were signed either. A credit file review provided by Midlantic, MB-50, p. 6, indicates Mayo was personally interviewed in Florida by a BWAC employee at a Chris-Craft show in 1984. This is the only reliable evidence about where the transaction might have occurred. It does not reveal clearly, however, if Mayo signed any documents at that time. We must conclude from the paucity of evidence, and the contradictory testimony, that the operative documents between BWAC and Mayo were signed outside of Vermont. We must also conclude, again from the scarcity of evidence, that BWAC did not solicit, in person or by mail, Mayo's business in Vermont.

On April 25, 1984, Mayo, d/b/a Vermont Custom Boats, and BWAC executed an "Inventory Security Agreement" and Power of Attorney, BWAC-1. Mayo indicated his place of business was located at U.S. Rtes. 2 & 7, Colchester, Vermont. He testified Colchester was his personal residence. BWAC indicated its office was located at Bradenton, Florida. (BWAC-1). BWAC-1 is ordinary and usual in all respects for a Security Agreement and Power of Attorney. It is BWAC's standard form used throughout the country. (T.887).

Agreement terms pertinent to this adversary proceeding indicate Mayo is in the "business of buying, selling and generally dealing in goods of various types, at retail or otherwise, and from time to time may desire to finance the acquisition of goods for such purpose to obtain from Secured Party BWAC such extensions of credit as Secured Party in its sole discretion may decide to grant." (BWAC-1; brackets supplied for clarity; emphasis ours).

Paragraph 1 of BWAC-1 does not indicate if Mayo was conducting business as a corporation, partnership, or sole proprietorship because no one struck out the inappropriate terms as the document directed. Read as a whole, however, the document shows Mayo to be operating as a d/b/a sole proprietorship at the time the Inventory Security Agreement and Power of Attorney were signed. This fact is not in dispute. Mayo agreed to notify BWAC of any change in his "principal place of business, and any additions or discontinuances of other locations, and any change in name, identity, form of ownership or management." (BWAC-1, paragraph 1(b); brackets supplied).

Mayo also agreed to pay BWAC the amount due on any item of inventory financed immediately upon sale. (BWAC-1, paragraph 8(d)). He further agreed that for purposes of determining the rate of charge (interest rate), notwithstanding any other agreement, the charge would accrue from the date the inventory was shipped from the manufacturer. (BWAC-1, paragraph 9(c)).

Mayo granted BWAC a Power of Attorney to sign documents in connection with BWAC-1, and both parties agreed "the validity, enforceability and the interpretation of BWAC-1 and any promissory notes taken, charges made and sums paid in connection with BWAC shall be governed by the State of Illinois. . . ." (BWAC-1, paragraph 1; brackets supplied).

Finally, the agreement contains all the other terms and conditions one expects in a security agreement, including a description of the inventory (boats, etc.), grant of a security interest, terms of default, rights of the parties, no-waiver provisions, and so on.

UCC-1's were filed with the Vermont Secretary of State on May 1, 1984, with amendments filed September 6, 1984, January 3, 1985, and August 11, 1986. UCC-1's were also filed with the Colchester, Vermont Town Clerk (BWAC-3), the town in which Mayo resided. The UCC-1's are signed by BWAC and Mayo, individually and as d/b/a Vermont Custom Boats.7

All BWAC's floor planning for Mayo, applicable to this adversary proceeding, is based on a single security agreement (T.689-90) and one set of UCC-1 financing statements.

After a dealer has submitted a floor plan application (MB-25), and the security agreements are executed and filed, and before any credit is extended, a credit investigation is done and prior filers are notified by letter.8 (T.897).

In conjunction with its dealer agreements, BWAC also enters into agreements with manufacturers who want to put inventory into a dealer's showroom and warehouse. In this proceeding, the manufacturer is Murray Chris-Craft (Chris-Craft). (MB-9, MB-10).9 The agreement between BWAC and Chris-Craft in this proceeding is entitled "Chris-Craft Inventory Finance Program" and is administered by The Marine Division of Borg-Warner Acceptance Corporation. The purpose of the Chris-Craft program is to ensure the retail dealer that inventory will be available from a wholesaler. (MB-...

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