In re Owensboro Canning Co., Inc., Civ. A. No. 85-0067-O(CS).

• Citation: 82 BR 450
• Decision Date: 08 February 1988
• Docket Number: Civ. A. No. 85-0067-O(CS).
• Court: U.S. District Court — Western District of Kentucky
• Parties: In re OWENSBORO CANNING CO., INC., Debtor. CONTINENTAL CAN COMPANY, INC., Plaintiff (Appellee), v. OWENSBORO CANNING CO., INC., et al., Defendants (Appellants).

82 B.R. 450 (1988)

In re OWENSBORO CANNING CO., INC., Debtor CONTINENTAL CAN COMPANY, INC., Plaintiff (Appellee), v. OWENSBORO CANNING CO., INC., et al., Defendants (Appellants).

Civ. A. No. 85-0067-O(CS).

United States District Court, W.D. Kentucky, Owensboro Division.

February 8, 1988.

Ronald J. Bamberger, Steven D. Crone, Owensboro, Ky., for Owensboro Canning Co., Inc.

William Stephen Reisz, Reisz, Brown & Rosenbaum, Louisville, Ky., for The Creditors Committee of Owensboro Canning Co., Inc.

Carl Stich, Jr., Cincinnati, Ohio, for Heekin Can, Inc.

Randy Hutchinson, Owensboro, Ky., for Crown Cork & Seal Co., Inc.

Michael A. Fiorella, John H. Helmers, Owensboro, Ky., for Continental Can Co., Inc.

MEMORANDUM OPINION

SIMPSON, District Judge.

This action is an appeal of a determination by United States Bankruptcy Judge Merritt S. Deitz, 46 B.R. 607 (Bankr.W.D. Ky.1985), that Continental Can Company (hereinafter "Continental"), plaintiff and appellee, has a valid and enforceable security interest in the accounts receivable, inventory and raw materials of debtor, Owensboro Canning Company, Inc. (hereinafter "Owensboro Canning"), defendant and appellant. The Creditor's Committee of Owensboro Canning also joins the appellant on appeal. This Court's jurisdiction is premised upon Title 28, United States Code, Section 158(a) (1984).

The facts may be stated as follows. During August of 1983, Continental's management became concerned over Owensboro Canning's failure to timely pay $183,506.00 in bills owed to Continental. William Christopher, Continental's in-house counsel, was sent to meet with officials of Owensboro Canning. He was instructed by Continental to either arrange satisfactory payment of the debt or file suit for payment.

On August 16, 1983, Christopher and another representative of Continental met with Ron Bamberger, counsel for Owensboro Canning. After Christopher had advised Bamberger of Continental's position, the parties began negotiation of the terms for repayment. Ultimately, they agreed that Owensboro Canning would make a series of installment payments with the total debt to be secured by certain property of the debtor. However, they did not reduce the letter agreement to writing until the following day.

On August 17, Christopher arrived at Bamberger's office to meet George Panagos, President of Owensboro Canning. Panagos signed the letter agreement and paid Christopher the first installment of $10,000.00 as required by the agreement. The agreement states, in pertinent part, as follows:

1. Owensboro agrees to pay the above indebtedness to Continental on an installment basis consisting of $10,000.00 to be paid when this letter is co-signed by Owensboro; and $10,000.00 to be paid monthly for three successive sic months; thereafter, $30,000.00 shall be paid each month commencing on the fourth month until the above indebtedness is paid in full with interest thereon at the rate of 1% above the monthly floating prime rate of First National Bank of Chicago, Chicago, Illinois.

2. The indebtedness shall be evidenced by an installment note of Owensboro secured by a lien on all accounts receivable, inventory and raw materials now or hereafter existing which shall be perfected by a UCC-1 Statement to be filed upon the signing of this letter and evidenced by a standard form financing statement. This lien shall be subject and subordinate to the lien of Crown Cork & Seal Co., Inc., dated June 4, 1980, in the current approximate outstanding balance of $120,000.00, respecting the accounts receivable and inventory only. It is expressly understood, however, that Owensboro may, in its discretion further pledge the security described herein to other creditors provided that such further pledges shall, at all times, remain subordinate to the interest of Continental.

* * * * * *

When signed by my client, George Panagos, on behalf of Owensboro Canning Company, Inc. and acting as President of said Company, this letter will form the basis for our preparing a financing statement.

The foregoing is understood and agreed by the undersigned.

Owensboro Canning Company, Inc. By: ___________________________ /s/George Panagos, President

In addition to signing the above letter agreement, Panagos also signed a financing statement prepared by Bamberger.¹ After receiving the documents, Christopher promptly filed the financing statement at the County Court Clerk's Office the same day.

In November of 1983, Christopher sent Bamberger a letter along with a formal Promissory Note and Security Agreement. Both the Promissory Note and the Security Agreement stated that they were "made and dated August 17, 1983". By way of return letter, Bamberger stated that "I find your proposed Security Agreement acceptable and have recommended to George Panagos; President of Owensboro Canning that it be executed concurrently with the note." Although Bamberger also recomposed a part of the Note, he left the dates the same. Apparently, neither the Note nor the Agreement was ever signed. However, between August 17, 1983, and December 3, 1983, Owensboro Canning made the three (3) $10,000.00 installment payments as required by the terms of the letter agreement signed August 17, 1983.

In December of 1983, Owensboro Canning, debtor, entered into another security agreement with Heekin Can, Inc., another creditor, that stated, in pertinent part, as follows:

(3) Debtor warrants that is sic is the owner of the Collateral, free and clear of all liens and security interests excepting only (1) the security interest of Continental Can Company, Inc., dated August 17, 1983 in the original amount of $183,450.18 respecting the Accounts Receivable, Inventory and Raw Materials, and (2) the security interest granted hereby; that it has the right to make this Agreement, that the Collateral is used for business purposes and will be kept at the Debtor\'s address specified above.

(4) Debtor agrees to remain current in the repayment of its indebtedness to Continental Can Company, Inc. and shall not incur any further indebtedness to Continental Can Company, Inc., which is, or may be superior to the security interest granted herein.

* * * * * *

(5)(d) Except with respect to the present security interest of Continental Can Company, Inc. referred to above . . . (emphasis added).

Also in December of 1983, Owensboro Canning failed to make the $30,000.00 installment payment as required by the letter agreement executed on August 17, 1983. Although Continental wrote several letters to debtor's counsel in an attempt to obtain compliance, the communications were to no avail.

An involuntary Chapter 7 petition was filed against Owensboro Canning in March of 1984, and three (3) weeks later Owensboro Canning was permitted to convert the action to a voluntary reorganization proceeding under Chapter 11 of the Bankruptcy Code. In its schedule of liabilities, Owensboro Canning listed Continental as an unsecured creditor.

Subsequently, Continental instituted an action before the Bankruptcy Court to determine the validity of its security interest. After an evidentiary hearing and oral arguments, Judge Deitz, by Memorandum Opinion entered February 20, 1985, held as a matter of law that the letter agreement objectively indicated that the parties may have intended to create or provide for a security interest; and found as a fact, that the parties actually intended to create a security interest. In so ruling, Judge Deitz adopted the two-prong test espoused by J. White & R. Summers, Uniform Commercial Code, § 23-3, p. 905 (2nd Ed.1980), to determine whether the letter agreement constituted a valid security agreement. Thereafter, Owensboro Canning appealed the decision.

The issue to be presented on appeal, and as stated by Judge Deitz is as follows:

Whether the Appellee Continental is the holder of a valid or enforceable security interest in the accounts receivable, inventory and raw materials of the Appellant, Owensboro Canning Co., Inc.

In passing on the merits of this issue, this Court is required to subject the Bankruptcy Judge's conclusions of law to de novo review; In re Consolidated Bancshares, 785 F.2d 1249, 1252 (5th Cir.1986); In re Martin, 761 F.2d 472, 474 (8th Cir. 1985); In re Pizza of Hawaii, Inc., 761 F.2d 1374, 1377 (9th Cir.1985); In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985); Jefferson v. Mississippi Gulf Coast YMCA, Inc., 73 B.R. 179 (S.D.Miss.1986); In re Madill, 65 B.R. 729 (D.Mont.1986); and his "findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the Bankruptcy Court to judge the credibility of witnesses." Bankruptcy Rule 8013 (1984). See In re Southern Indus. Banking Corp., 809 F.2d 329, 331 (6th Cir.1987); In re Martin, 761 F.2d 1163, 1165 (6th Cir.1985); In re Troup, 730 F.2d 464, 466 (6th Cir.1984); In re Calhoun, 715 F.2d 1103, 1110 (6th Cir.1983).

In this regard, whether the writing or writings are sufficient to meet the statutory requirements for a valid security agreement is a question of law. S.E.L. Maduro (Florida) Inc. v. Strachan Shipping Co., 800 F.2d 1572, 2 UCC Rep.Serv. 687, 692-93 (11th Cir.1986). Whether the parties intended to create a security agreement is a "question of fact, or at best, mixed questions of law and fact"; Hyman v. Semmes, 26 F.2d 10, 12 (6th Cir.1928); see White & Summers, § 23-3 at p. 905 n. 5; and, "unless the Bankruptcy Judge has made a clear mistake applying the law to the facts, the judge's fact findings of intent must be affirmed." Sunset Enterprises, Inc. v. B & B Coal Co., Inc., 38 B.R. 712, 716 (D.C.Va.1984), aff'd. 798 F.2d 1409 (4th Cir.1986). With these standards in mind, this Court must turn to the law of Kentucky to examine the validity of Continental's security interest. In re Axvig, 68 B.R. 910, 3 UCC Rep.Serv. 312 (Bankr.D.N. D.1987).

Under the Kentucky Uniform Commercial Code (hereinafter "Code"), a security interest is not enforceable...