In re Sherwood Ford, Inc.

• Decision Date: 12 April 1991
• Docket Number: Bankruptcy No. 89-5-0219-JS,Motion No. M89-1819-JS.
• Parties: In re SHERWOOD FORD, INC., Debtor. FORD MOTOR CREDIT COMPANY, Movant, v. SHERWOOD FORD, INC. and Joel I. Sher, Trustee, Respondents.
• Court: U.S. Bankruptcy Court — District of Maryland

125 B.R. 957 (1991)

In re SHERWOOD FORD, INC., Debtor.

FORD MOTOR CREDIT COMPANY, Movant, v. SHERWOOD FORD, INC. and Joel I. Sher, Trustee, Respondents.

Bankruptcy No. 89-5-0219-JS, Motion No. M89-1819-JS.

United States Bankruptcy Court, D. Maryland.

April 12, 1991.

Robert J. Thieblot, Robert D. Harwick, Thieblot, Ryan, Martin & Ferguson, P.A., Baltimore, Md., for movant.

Joel I. Sher, Baltimore, Md., trustee.

Robert A. Gordon, Shapiro & Olander, Baltimore, Md., for respondent, Joel I. Sher, trustee.

Edward L. Blanton, Jr., Blanton & McCleary, Towson, Md., for respondent, Sherwood Ford, Inc.

MEMORANDUM OPINION GRANTING MOTION TO MODIFY AUTOMATIC STAY

JAMES F. SCHNEIDER, Bankruptcy Judge.

The question presented in this motion to modify automatic stay is whether a creditor's prepetition security interest in a debtor's inventory and proceeds extends to postpetition inventory and proceeds. The instant motion is entitled "Motion for Relief from Automatic Stay to Permit Setoff," but Ford Motor Credit Company, the movant, has acknowledged that the setoff it seeks is not the same brand referred to in Section 553 of the Bankruptcy Code. This is fortunate for the movant, because the right of setoff is generally not available to a creditor who seeks to setoff prepetition obligations of a debtor in bankruptcy against postpetition assets. See Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030, 1036-37 (8th Cir.1987). In a memorandum filed with the Court, Ford Motor Credit made the following statement in the nature of a "mea culpa":

Ford Credit\'s Motion was inartfully drafted because it speaks, in part, of a setoff under 11 U.S.C. § 553. In actuality, setoff is not an issue in this case. While the debtor\'s obligation to Ford Credit arose prepetition . . . Ford Credit\'s "obligation" to the debtor arose postpetition . . . Setoff under 11 U.S.C. § 553(a) involves only mutual prepetition debts. What Ford Credit seeks to do here is "setoff" the monies it is holding against the remaining balance on the account of the debtor, but that is not a setoff in the bankruptcy sense.

This is, instead, a straightforward case of a secured creditor seeking relief from the automatic stay to foreclose its security interest in property. The evidence establishes that Ford Credit holds prepetition security interests in the debtor\'s vehicles and other property, and in the proceeds hereof.

Memorandum, P. 16, pp. 9-10. The Court agrees with the movant's statement, which represents a fair summary of its cause of action in this motion. For the reasons stated, the motion will be granted.

FINDING OF FACTS

1. On January 24, 1989, the debtor, Sherwood Ford, Inc., filed a voluntary Chapter 11 petition in this Court.

2. On February 2, 1989, Ford Motor Credit Company, ("Ford Motor Credit") filed a motion for relief from automatic stay and to reclaim property, or for adequate

protection, and to prohibit or condition use of cash collateral Motion No. M89-0258-SD.

3. On June 2, 1989, the Court Derby, B.J. approved a consent order modifying automatic stay, the text of which follows:

CONSENT ORDER MODIFYING AUTOMATIC STAY

Upon consideration of the Motion Seeking Relief from Automatic Stay and to Reclaim Property, or for Adequate Protection, and to Prohibit or Condition Use of Cash Collateral filed by Movant, Ford Motor Credit Company, and the Court having heard the submissions of the parties, after Notice and without objection, and it appearing that Movant holds a perfected security interest in assets of Respondent, Sherwood Ford, Inc., it is, this 2nd day of June, 1989, by the United States Bankruptcy Court for the District of Maryland,

ORDERED, that the automatic stay be, and it hereby is, terminated as follows:

1. All vehicles shall be made available to Movant, for sale in a commercially reasonable manner. Movant shall return to Ford Motor Company such vehicles as are acceptable to Ford Motor Company, for credit and to be removed from Respondent\'s floor plan; and

2. All parts, tools, inventory and signs shall be made available to Movant, for sale in a commercially reasonable manner. Movant shall return to Ford Motor Company such items as are acceptable to Ford Motor Company, for credit; and

3. All equipment, machinery and office furnishings and equipment shall be made available to Movant, for sale in a commercially reasonable manner; and

4. All cash collateral funds, including proceeds and general intangibles, now in Respondent\'s possession or control or hereafter received by it shall be turned over to Movant.

AND IT IS FURTHER ORDERED, that Movant shall file a Report of Sale after liquidation, collection or crediting of all of the above-described collateral, and shall pay any surplus proceeds to Respondent.

AND IT IS FURTHER ORDERED, that Movant shall not exercise its rights to its collateral, as described above, until June 5, 1989, or earlier if one or more of the following events takes place:

a. Respondent closes its business; or

b. Any vehicle subject to Movant\'s lien is sold out of trust and not paid for within 24 hours of the sale; or

c. Respondent\'s parts inventory falls below a total value, at cost, of $325,000; or

d. Any equipment, machinery or other remaining collateral is sold, transferred or otherwise removed by Respondent from its premises.

AND IT IS FURTHER ORDERED, that if any of the events described in paragraphs a., b., c. or d., supra, takes place, then Movant may exercise its rights to its collateral upon its filing of an Affidavit of Default.

AND IT IS FURTHER ORDERED, that Movant shall at all times be allowed daily access to Respondent\'s premises for inspectional and verification purposes, including but not limited to records of receipts and disbursements.

/s/ E. Stephen Derby U.S. Bankruptcy Judge

Consent Order P. 16, June 2, 1989, filed in Motion No. M89-0258-SD. Ford Motor Credit Ex. 4.

4. The debtor closed its doors on or about October 17, 1989.

5. On October 23, 1989, this case was converted to a case under Chapter 7, and Joel I. Sher was appointed interim trustee.

6. On November 2, 1989, Ford Motor Credit filed the instant motion for relief from automatic stay to permit setoff.

7. A preliminary and final hearing were held on December 1, 1989 and January 19, 1990.

8. At both of these hearings, William F. Swift, assistant branch manager of Ford Motor Credit testified regarding the movant's

business relationship with the debtor since 1974.

9. Ford Motor Credit and the debtor were parties to a security agreement dated September 12, 1974 whereby Ford Motor Credit agreed to finance the debtor's purchase of motor vehicles for retail sale to the public. In exchange, the debtor granted to Ford Motor Credit a security interest in all furniture, fixtures, machinery, supplies and other equipment, motor vehicles, tractors, trailers, implements, service parts and accessories and other inventory of every kind, and all accounts, contract rights, chattel paper and general intangibles, owned or thereafter acquired and the proceeds thereof. Movant's Exhibit No. 2.

10. On August 29, 1984, Ford Motor Credit and the debtor entered into an "Automotive Wholesale Plan, Application for Wholesale Financing and Security Agreement" ("Wholesale Credit Plan," Movant's Exhibit No. 1).

11. The Wholesale Credit Plan contained the following provision:

4. Ford Credit\'s Security Interest

As security for all Advances now or hereafter made by Ford Credit hereunder, and for the observance and performance of all other obligations of Dealer to Ford Credit in connection with the wholesale financing of Merchandise for Dealer, Dealer hereby grants to Ford Credit a security interest in the merchandise now owned or hereafter acquired by Dealer and in the proceeds in whatever form, of any sale or disposition thereof; and Dealer hereby assigns to Ford Credit and grants to Ford Credit a security interest in, all amounts that may now or hereafter be payable to Dealer by the manufacturer, distributor or seller of the Merchandise by way of rebate or refund of all or any portion of the purchase price thereof.

Automotive Wholesale Plan dated August 29, 1984, paragraph 4 Ford Motor Credit Exhibit No. 1.

12. The Wholesale Credit Plan also provided that "Ford Motor Credit at all times, shall have a right to offset and apply any and all credits, monies or properties of Dealer in FMCC's possession or control against any obligation of Dealer to Ford Credit." Id., paragraph 7.

13. The debtor defaulted prepetition on its obligations under the Wholesale Credit Plan by selling approximately $1.3 million worth of vehicles financed by Ford Motor Credit out of trust and by failing to make required interest payments to Ford Motor Credit from February until the middle of October 1989, when the business closed.

14. Ford Motor Credit estimated its loss to be greater than $2.5 million as a result of (1) automobiles sold out of trust; (2) lien payoffs which it made to other banks to gain a security interest in vehicles sold by debtor; (3) titling and registration fees on vehicles necessitated by the failure of the debtor to complete title/registration work for customers; and (4) wholesale interest charges on inventory.

15. Ford Motor Credit is currently holding monies payable to the debtor in the amount of $249,789.38 in a non-interest bearing suspense account. These monies came from the following sources: (a) $27,476.37 is wholesale incentive money owed to debtor for giving Ford Motor Credit a certain percentage of debtor's consumer contracts per month versus the number of wholesale payoffs (a part of this money resulted from prepetition consumer contracts); (b) $3,342.33 is retail account overpayments resulting from early payoffs on trade-ins used by consumers who financed new cars through Ford Motor Credit; (c) $46,333.09 is wholesale overpayments for vehicles on the debtor's floor plan sold to consumers; (d) $1,179.17 is insurance claim funds for...