In re Michaels

• Decision Date: 21 June 1993
• Docket Number: Adv. No. 92-2239.,Bankruptcy No. 92-23498-JES
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin
• Parties: In re Gordon and Kathy MICHAELS, Debtors. Gordon and Kathy MICHAELS, Plaintiffs, v. FORD MOTOR CREDIT COMPANY, F & M Bank of Slinger, State Bank of Newburg, John Deere Company, P & L Leasing, and Dairyland Equipment, Inc., Defendants.

156 B.R. 584 (1993)

In re Gordon and Kathy MICHAELS, Debtors Gordon and Kathy MICHAELS, Plaintiffs, v. FORD MOTOR CREDIT COMPANY, F & M Bank of Slinger, State Bank of Newburg, John Deere Company, P & L Leasing, and Dairyland Equipment, Inc., Defendants.

Bankruptcy No. 92-23498-JES, Adv. No. 92-2239.

United States Bankruptcy Court, E.D. Wisconsin.

June 21, 1993.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Michael G. Trewin, New London, WI, for plaintiff-debtors.

Kevin D. Mathews, Milwaukee, WI, for F & M Bank of Slinger n/k/a Associated Bank.

Roy L. Prange Jr., Madison, WI, for John Deere Co.

Harvey G. Samson, Appleton, WI, for Dairyland Equipment, Inc. and P & L Leasing.

Thomas J. King, Oshkosh, WI, trustee.

DECISION

JAMES E. SHAPIRO, Bankruptcy Judge.

This case concerns priorities among conflicting security interests in the same farm equipment. It is a core proceeding under 28 U.S.C. § 157(b)(2)(K).

There are three disputes to be resolved in this case, each of which shall be separately addressed. They are identified as follows:

1. F & M Bank of Slinger n/k/a Associated Bank ("Bank") v. John Deere Company ("John Deere");

2. Bank v. Dairyland Equipment, Inc. ("Dairyland"); and

3. Bank v. P & L Leasing.

All of the farm equipment involved in these disputes was in the possession of the chapter 12 debtors, Gordon and Kathy Michaels ("Michaels"), when they filed their chapter 12 bankruptcy petition on May 26, 1992.

Bank v. John Deere

On July 20, 1988, the Bank obtained a blanket security interest in all of Michaels' farm equipment, then owned or after acquired, which was perfected by the filing of a UCC financing statement on July 21, 1988 with the Washington County Register of Deeds. John Deere claims a purchase money security interest in certain farm equipment resulting from various sales made by Dairyland, an authorized John Deere dealer, to Michaels and which were thereafter financed through Deere Credit Services Inc.¹ Issues of priority of liens exist in six of the contracts between Dairyland and Michaels. The farm equipment in these six contracts is more specifically identified in the annexed Schedule "A."²

The legal issue in all six transactions is whether, under Wis.Stat. § 409.312(4)³, John Deere's purchase money security interest ("PMSI") trumps the Bank's blanket security interest.⁴

Dairyland is a corporation engaged in the sale of John Deere equipment. It is owned and operated by Louis Neuville ("Louis") and his son, Peter Neuville ("Peter"). The Neuvilles also own and operate a separate corporation known as P & L Leasing ("P & L"). Michaels and the Neuvilles have had an on-going business relationship since 1977.

Michaels testified that he has purchased $600,000 to $700,000 worth of farm equipment from Dairyland, the bulk of which was financed through John Deere as installment sales and security agreements. These transactions were typically structured as follows: Michaels would sign a customer purchase order. Simultaneously or shortly thereafter, he would also sign various other documents including a John Deere loan contract-security agreement and a personal financial statement (not to be confused with a UCC financing statement) in anticipation of obtaining financing from John Deere. The equipment was delivered by Dairyland prior to approval of any financing. If John Deere approved the application, copies of the executed documents were returned to both Michaels and Dairyland. If the financing was rejected, Dairyland would be notified and alternate financing would be made. Peter testified that Dairyland would always be able to obtain other financing under those circumstances.

The parties have stipulated to the following facts:

1. All six UCC financing statements on the disputed contracts were filed more than 20 days after the purchase orders and loan contracts-security agreements were signed by Michaels.

2. The UCC financing statements in five of the six transactions (the only exception being the transaction involving the spreader) were filed more than 20 days after delivery of the equipment to Michaels.

There are other key facts which are in dispute and in which the parties have made the following assertions:

1. John Deere asserts that the spreader was delivered April 28, 1991, a date within the 20 day grace period for perfection under Wis.Stat. § 409.312(4).

2. The Bank and Michaels assert that (a) the spreader was delivered in November or December of 1990 (more than 20 days before John Deere\'s UCC financing statement was filed) and (b) the date on the purchase order for the spreader was altered to bring it within the 20-day grace period for filing of the UCC financing statement.

The parties' differing positions revolve around the proper interpretation of the words "receives possession" as used in Wis.Stat. § 409.312(4). The Bank and Michaels maintain that "receives possession" means delivery and that, in order for John Deere to qualify for protection under Wis. Stat. § 409.312(4), it must have filed its UCC financing statements within 20 days after the equipment had been delivered to Michaels. They assert that John Deere failed to do so in all six transactions, thereby making the Bank's security interest paramount.⁵

John Deere urges the court to adopt a more expansive interpretation of the words "receives possession" as used in Wis.Stat. § 409.312(4). It contends that these words mean either delivery of the equipment or John Deere's acceptance of the loan contract-security agreement, whichever is later. Therefore, John Deere reasons that, because it filed five of the UCC financing statements within 20 days of acceptance of the loan contract-security agreements, these five UCC financing statements were timely filed and superior. John Deere further argues that, because the sixth contract involving the spreader was filed within 20 days of the purported April 28, 1991 delivery date, its security interest in the spreader was also timely perfected. Under John Deere's rationale, it successfully complied with the requirements of Wis.Stat. § 409.312(4) and holds a validly perfected and paramount PMSI for all six transactions.

The key inquiry, therefore, centers on the meaning of "receives possession" as contemplated by Wis.Stat. § 409.312(4). This statute recites that the 20-day period within which a PMSI must be perfected begins when the buyer "receives possession" of the goods purchased. The word "possession" is not defined in the Uniform Commercial Code. Courts have interpreted "possession" either by the "physical control" standard or by the "obligation" standard. Jack T. Cornman, When Is the Debtor "In Possession" Under UCC § 9-312(4)?, 19 Ariz.St.L.J. 261, 263 (1987).

Under the "physical control" standard, possession takes place when the recipient physically acquires the property. This is based upon a policy of avoiding secret liens. Prompt perfection prevents others, including the first filed floating lienor, from being misled by the ostensible ownership of the person in possession. Peter F. Coogan, et al., Secured Transactions Under the Uniform Commercial Code, U.C.C.Serv. (Bender) § 7B.09(5)(A) (1992). Matter of Badger Aluminum Extrusion Corp., 7 B.R. 251 (Bankr.S.D.N.Y. 1980). Under the "physical control" standard, "to possess" means to "gain or exert influence or control, dominate; to cause to own (or) hold something, such as property." "Possession" is triggered by physical control. See Matter of Badger Aluminum Extrusion Corp., supra; In re Vermont Knitting Co., Inc., 98 B.R. 184, 188 (Bankr. D.Vt.1989), quoting from the American Heritage Dictionary, 9967 (2nd College Ed., 1985). See also Wis.Stat. § 402.103(1)(c) which defines the term "receipt" of goods as "taking physical possession of them." Michaels and the Bank rely upon this reasoning.

Under the "obligation" standard, upon which John Deere relies, it is the commitment to purchase by virtue of the underlying contract, rather than physical possession, which controls. Some courts have followed this approach. See, e.g., Brodie Hotel Supply Inc. v. U.S., 431 F.2d 1316 (9th Cir.1970); Matter of Ultra Precision Industries, Inc., 503 F.2d 414 (9th Cir.1974); Matter of Hooks, 40 B.R. 715 (Bankr.M.D.Ga.1984); and In re McHenry, 71 B.R. 60 (Bankr.N.D.Ohio 1987). This school of thought has been severely criticized as "undermining seriously the importance ascribed by § 9-312(4) to the fact of delivery for the purpose of determining priority of a purchase money security interest." Kennedy, Secured Transactions, 27 Bus.Law. 755, 768 (1972). See also Mark Products U.S., Inc. v. Interfirst Bank Houston, N.A., 737 S.W.2d 389 (Tex.Ct. App.1987); Comment, Uniform Commercial Code—Protection for the purchase money secured party under § 9-312, 49 N.C.L.Rev. 849 (1971).

Furthermore, the "obligation" standard cases are factually distinguishable from the case at bar. In Brodie, the prospective purchaser had the use of the restaurant equipment for five months before the purchaser was under any obligation to complete the transaction and during that period of time the parties were still negotiating. The court in Brodie held that, under those circumstances, the grace period for filing did not commence until the transaction had been completed. In Ultra Precision and Hooks, the property was conditionally shipped to the prospective buyers, who were afforded the opportunity to test the property before becoming committed to buy them. In McHenry, the debtor did not sign the note obligating him to purchase the property (an automobile) until after he was first given the use of the vehicle.

Unlike Brodie, Ultra Precision, and McHenry, Michaels became obligated to purchase the farm equipment when he signed each purchase order with Dairyland. In all sales transactions, this took place before delivery. The following language, contained in each purchase order, obligated Michaels to Dairyland for the purchase of the property:

I (We) promise

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