In re Owensboro Canning Co., Inc., Bankruptcy No. 4-84-00074
| Decision Date | 19 February 1985 |
| Docket Number | Bankruptcy No. 4-84-00074,Adv. No. 4-84-0034. |
| Citation | 46 BR 607 |
| Parties | In re OWENSBORO CANNING CO., INC., Debtor. CONTINENTAL CAN COMPANY, INC., Plaintiff, v. OWENSBORO CANNING CO., INC., et al., Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Kentucky |
Michael A. Fiorella, Owensboro, Ky., for plaintiff.
Ronald J. Bamberger, Owensboro, Ky., for defendant.
William S. Reisz, Louisville, Ky., for Creditors' Committee.
The issue we consider in today's opinion is whether the Continental Can Company, Inc., holds a valid security interest in the receivables, inventory and raw materials of the Chapter 11 debtor, Owensboro Canning Co., Inc. Our determination hinges in major part on the measurement of an "agreement letter" against applicable state law.
In August, 1983, Continental's management, increasingly concerned over unpaid bills of $183,506 owed to it by Owensboro Canning, sent its house counsel, William Christopher, to meet with the debtor company in Owensboro, Kentucky. Christopher was instructed by Continental to immediately file suit against the debtor unless satisfactory arrangements were made for payment of the debt, and carried with him a lawsuit ready for filing.
On the morning of August 16, 1983, Christopher and another Continental representative met with Ron Bamberger, counsel for the debtor, to discuss the debt. Christopher advised Bamberger of Continental's position and stated the terms which Continental would consider satisfactory for the repayment of the debtor's obligation. After intensive negotiations the parties agreed that the debtor would make a series of installment payments, with the total debt to be secured by certain property of the debtor. Due to the lateness of the day, the parties agreed to have the essential terms of their agreement reduced to writing in letter form the next day. Both parties intended that a more formal security agreement and promissory note would be drawn and signed at a later date.
Early on August 17, Christopher arrived at Bamberger's office to receive the agreement letter. At Bamberger's office was George Panagos, president of the debtor company, who signed the agreement letter for the debtor and gave Christopher the initial $10,000.00 payment as called for in the agreement.1 Panagos also signed a financing statement which had been prepared by Bamberger. Christopher accepted both documents and properly filed the financing statement in the Daviess County Court Clerk's Office on August 17, 1983 before he returned to Continental's office in Connecticut.
After the signing of the letter agreement and the filing of the financing statement, the two parties exchanged several drafts of promissory notes and more formal security agreements which set forth considerably detailed provisions. None of the various drafts proved acceptable to both parties and none were ever signed. However, between August 17, 1983 and December 31, 1983, the debtor made the three $10,000.00 installment payments as required by the terms of the letter agreement.
In December of 1983, the debtor entered into a security agreement with another creditor, Heekin Can, Inc. That agreement provided in part:
Also in December of 1983, the debtor failed to make the $30,000.00 installment payment as required by the August 17, 1983 letter agreement. Continental wrote several letters to the debtor's counsel in an attempt to obtain compliance, but the debtor has failed to make any further payments on its obligation.
An involuntary Chapter 7 petition was filed against the debtor in March, 1984, and three weeks later Owensboro Canning was allowed to convert the case to a voluntary reorganization proceeding under Chapter 11 of the Bankruptcy Code. In its schedule of liabilities, Owensboro listed Continental as an unsecured creditor. Thus characterized, Continental promptly instituted the present action to determine the validity of its security interest.
* * * * * *
This matter is properly before the court under its "core proceeding" jurisdiction of 28 U.S.C. § 157 which provides in part that:
The sole issue we decide today is whether the August 17 agreement letter constitutes a security agreement within the meaning of KRS 355.9-203. That section provides that a security interest is not enforceable unless there is a "security agreement" which is (1) in writing; (2) signed by the debtor, and (3) contains a description of the collateral.3
The term "security agreement" is defined by KRS 355.9-105(1)(h) as "an agreement which creates or provides for a security interest." KRS 355.1-201(3) defines an "agreement" as "the bargain of the parties in fact as found in their language or by implication from other circumstances . . ."
According to the leading authorities on the Uniform Commercial Code, (U.C.C.), White and Summers, the language of the above sections of the U.C.C. requires a court to make two independent inquiries in determining whether a document or set of documents4 constitute a valid security agreement.5
First, a court must resolve, as a question of law, whether the language embodied in the writing6 objectively indicates that the parties may have intended to create or provide for a security interest. The standard for crossing this objective threshold is not particularly high,7 and is easily passed by the August 17th letter. The letter provides that:
This language clearly indicates that Owensboro Canning intended to grant Continental a security interest in its account receivable, inventory and raw materials.
The second inquiry a court must make is whether the parties actually intended to create a security interest.9 In this case the parties agree that they always intended to create a security interest. The precise issue we address is the matter of timing; that is, whether the parties intended to presently create a security interest with the August 17 letter agreement, or whether, contrarily, they intended at some later date to agree in a formal and highly detailed document.
A sizeable portion of Owensboro Canning's argument against the validity of Continental's security interest revolves around Continental's alleged intent as to the August 17 letter. The debtor contends that: "Continental did not assume that a valid security agreement was in force with the August 17, 1983 letter. . . ." It supports this contention by producing a subsequently prepared note and security agreement sent to Owensboro Canning by Continental as evidence of Continental's intentions toward the August 17 letter. We cannot accept the argument. While it is true that Continental's actions could be construed as the actions of an unsecured company attempting to achieve secured status, we believe the explanation offered by Continental to be more indicative of its intent. The evidence, including the uncontroverted testimony of house counsel William Christopher, indicates that Continental insisted upon a security arrangement with Owensboro Canning on August 17, 1983 with the signing of the letter agreement as an alternative to filing suit. Continental perceived the letter agreement as an informal but binding security agreement, even though it could have been buttressed later with a "boiler-plate" document. We perceive the letter in that same way. We therefore hold that Continental intended to enter into a security agreement with Owensboro Canning when it received the August 17, 1983 letter agreement, and filed the financing statement, both of which were prepared and signed by the debtor.
The remainder of Owensboro Canning's argument concerns its own intent concerning the August 17 letter agreement. The debtor correctly states that: "The burden of proof is on the creditor to establish the intention of the debtor" and argues that they did not intend the August 17 letter to be a security agreement. However, we are of the opinion that the great weight of evidence10 indicates that the objective intent of Owensboro Canning was to enter into a security agreement on August 17.11 Initially we note, and in so doing paraphrase applicable state law, that the letter was (1) in writing, (2) signed by the debtor, and (3) contains a description of the collateral.
The wording of the August 17 letter indicates the debtor intended to grant...
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