In Re Mid State Wood Products Company

• Decision Date: 19 February 1971
• Docket Number: No. 69 B 184.,69 B 184.
• Citation: 323 F. Supp. 853
• Parties: In the Matter of MID STATE WOOD PRODUCTS COMPANY, Bankrupt.
• Court: U.S. District Court — Northern District of Illinois

323 F. Supp. 853

In the Matter of MID STATE WOOD PRODUCTS COMPANY, Bankrupt.

No. 69 B 184.

United States District Court, N. D. Illinois, W. D.

February 19, 1971.

Kenneth F. Ritz, Alford R. Penniman, Williams, McCarthy, Kinley & Rudy, Rockford, Ill., for the bankrupt.

MEMORANDUM AND ORDER

CAMPBELL, Senior District Judge.

This matter comes before the Court on petitions filed by Daniel D. Doyle, Trustee of the Bankrupt Estate, ("Trustee"), Breece Plywood, Inc., ("Breece") and National Acceptance Company of America, ("NAC") to review an order entered by the Referee in Bankruptcy establishing the order of priority to an account or accounts receivable owed to the Bankrupt in which each of the petitioners claimed an interest.

The facts are stated in the briefs submitted by the parties and the Referee's Certificate As To The Record, which includes 35 enumerated documents, including the Bankrupt's petition and schedules and the pleadings. The Bankrupt was engaged in the manufacture of wooden cabinets in the city of Rockford, Illinois. Among the Bankrupt's customers was Ampex Corporation to which it had sold and delivered a quantity of cabinets for which Ampex was indebted at the date of bankruptcy in an amount claimed to be the sum of $47,265.22.

The Referee's order provides:

That from the proceeds realized from Ampex Corporation there shall be paid to the following parties the stated amounts in the order of priority listed:

1. To BREECE PLYWOOD, INC., the sum of $14,265.05 prior to the two parties hereinafter named.

2. To NATIONAL ACCEPTANCE COMPANY OF AMERICA, the sum of $13,745.65 prior to the Trustee hereinafter named.

3. To DANIEL D. DOYLE, Trustee the sum of $19,254.52.

All three parties have petitioned for review of the order.

A stipulation between Breece, the Trustee and NAC as to certain of the facts was filed on July 30, 1969. The Referee made certain findings which are dated September 15, 1969. Petitions for rehearing were filed by all three parties and on June 19, 1970 the Referee entered his Findings on Reconsideration.

In essence, the respective positions taken by the three claimants are as follows:

BREECE

In December, 1966 the Bankrupt entered into a security agreement with Breece to secure payment for plywood to be sold and delivered by Breece to the Bankrupt which would use it in the construction of cabinets for sale to the Bankrupt's customers. In October, 1968 the Bankrupt owed Breece $49,555.99 for plywood delivered up to that time. A new procedure was thereupon adopted whereby the Bankrupt upon receiving an order from its customer Ampex would immediately assign a portion of the order to Breece. Breece would then ship the plywood to the Bankrupt to construct the cabinets ordered by Ampex and the Bankrupt would notify Ampex to make payment at Breece's bank in New Albany (Union National Bank of New Albany, Indiana). The bank would deduct the amount assigned to Breece and forward the balance to the Bankrupt.

At the date of bankruptcy Ampex owed the Bankrupt $47,265.22 on nine orders for cabinets which the Bankrupt had constructed from plywood furnished by Breece. Breece filed an application to reclaim the nine accounts receivable, but the Referee held that Breece was entitled only to $14,265.05 and that the remaining $33,000.17 was an asset of the Bankrupt Estate, subject only to the lien of NAC (hereinafter discussed). Breece requests that it be found to have a first lien on the assets (accounts receivable) to the extent of its claim in the amount of $40,179.55.

NAC

NAC made a series of loans to the Bankrupt pursuant to security agreements beginning in June, 1963. NAC would advance money to the Bankrupt and in return would take "a security interest in all of the Bankrupt's present and after-acquired equipment, inventory, general intangibles and proceeds of the foregoing (as these terms are defined in the Uniform Commercial Code of Illinois)." (Application of NAC filed March 11, 1969.)

The Referee found that $13,745.65 still remains unpaid to NAC and that it is entitled to said sum from the proceeds realized from Ampex Corporation after payment of the first lien of Breece but prior to any payment therefrom to the Trustee. NAC requests that a hearing be held before the Referee to determine the amount of reasonable attorneys' fees and other costs and expenses which should be added to the $14,265.05.

THE TRUSTEE

The Trustee argues that Breece has waived its lien rights and is not entitled to any payment out of the proceeds of the Ampex accounts. He also contends that the validity of the liens claimed by NAC and the amount allowed to it were not correctly determined and that NAC is entitled at most to a lien in the amount of $915.20.

As is clear from the facts and theories of the parties recited above, the primary issue presented for review is that of the relative priorities of Breece, NAC and the Trustee to the Ampex account. The parties do not dispute that, as of the date of bankruptcy, Breece had a valid claim against the Bankrupt in the sum of $40,179.55 for plywood which it sold to the Bankrupt which in turn used it to fabricate the cabinets which it sold to Ampex. The Security Agreement entered into between Breece and the Bankrupt on December 6, 1966 covered, among other things, present and after acquired inventory and accounts, and a financing statement was filed on December 13, 1966.

On November 2, 1968, Breece sent to NAC a written notice that it would be acquiring a purchase money security interest in the plywood and cabinets of the Bankrupt.

It appears from the record and is apparently not disputed by the parties that NAC was first in point of time to file a financing statement covering present and after acquired inventory and proceeds of the Bankrupt.¹

Nevertheless, the parties, by their respective petitions and briefs, appear to agree that even though NAC was apparently the first to file, that fact is not determinative of the relative priorities as between NAC and Breece. Both NAC and the Trustee concede that until such time as the bankrupt executed its assignment to Breece of future accounts on November 7, 1969, Breece had a prior right in the Bankrupt's proceeds from its inventory by reason of its purchase money security interest in the inventory pursuant to § 9-312(3) UCC.

NAC and the Trustee contend, however, that Breece relinquished its purchase money priority portion with respect to at least a portion of its claim when it agreed to a new procedure for payment under the procedures adopted pursuant to the Assignment of Future Accounts for repayment of its advances.

Their theory is that by taking a specific assignment of certain Ampex accounts pursuant to the assignment of future accounts, Breece abdicated its priorities which it had as a purchase money lender under its pre-existing perfection of its security interest in these accounts. As stated above, this position was adopted by the referee in his order of June 25, 1970.

Upon review I find no basis in law to support this finding. The Assignment of Future Accounts document executed by the bankrupt for the benefit of Breece expressly reserves to Breece whatever rights and priorities which previously accrued to Breece under its previous perfection. The assignment expressly states that it is designed to supplement rather than supplant the earlier Security Agreement and filing. The manifest purpose of the Supplemental Assignment was to enhance Breece's policing...