In re Southern Equipment Sales Co., Inc., Bankruptcy No. 81-04477
| Decision Date | 23 November 1982 |
| Docket Number | Adv. No. 81-0466.,Bankruptcy No. 81-04477 |
| Citation | 24 BR 788 |
| Parties | In re SOUTHERN EQUIPMENT SALES CO., INC., Debtor. JOHN DEERE INDUSTRIAL EQUIPMENT CO., Plaintiff, v. SOUTHERN EQUIPMENT SALES CO., INC., and Joseph M. Weinberg, Trustee, Defendants. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
W.T. Windsor, Jr., Saul, Ewing, Remick & Saul, Philadelphia, Pa., for plaintiff.
DuBois, Sheehan, Hamilton & DuBois by Madison DuBois, Camden, N.J., local counsel for plaintiff.
Joseph Weinberg, P.A. by Joseph A. McCormick, Jr., Haddonfield, N.J., for trustee.
C. Peter Burro, Haddonfield, N.J., for debtor.
Plaintiff John Deere Industrial Equipment Company filed a Complaint against the debtor, Southern Equipment Sales Company, Inc., and its Trustee, seeking to lift the automatic stay of Section 362 of the Bankruptcy Code in order to reclaim certain personal property and to enforce its security interest in funds in plaintiff's possession. The Trustee filed an answer, in the form of a general denial, and a counterclaim, which sought the turnover of funds in plaintiff's possession, namely a reserve account and a contingent earnings account. During the pendency of this proceeding both parties agreed that the personal property sought to be reclaimed by plaintiff was returned to it. Therefore, the only issues to be resolved are the validity and extent of the plaintiff's alleged security interest or right to setoff in the funds constituting the reserve account and the contingent earnings account.
The relevant facts concerning the transactions between the parties are not disputed. At an unspecified date, the debtor became a dealer for the plaintiff, which encompassed selling, leasing and financing of industrial equipment manufactured by plaintiff. In order to specify their obligations in the dealer relationship, the parties entered into a Leasing Agreement, a Finance Agreement and a Security Agreement, but only the most recent versions of these agreements were presented to this court.
The dealer relationship between the debtor and John Deere was terminated on October 1, 1980, and no further purchases of chattel paper were made by John Deere after that date, although deals in progress were processed through December, 1980. After this time John Deere continued to collect payments due from the debtor's customers pursuant to a lease or sales contract. Deductions would be made from the dealer reserve and the contingent earnings account when John Deere suffered a loss as the result of a lease or sale initiated by the debtor.
Under the security agreement, executed as of May 2, 1978, the debtor granted a security interest to John Deere in all inventory, including additions, replacements, proceeds and "proceeds of proceeds". The inventory was comprised of industrial and agricultural machines and equipment and parts, which the debtor would then lease or sell to its customers. Under the security agreement, the debtor agreed to pay all present and future indebtedness owed to John Deere "for or incident to the purchase of goods" regardless of the form of the indebtedness.
Pursuant to the security interests created by the security agreement, the debtor signed several financing statements, which were filed in the Gloucester County Clerk's Office and the office of the New Jersey Secretary of State in November and December 1978. All financing statements have a "check" in the box indicating that proceeds of collateral are covered and contain the following description of collateral:
The Trustee does not appear to challenge these financing statements as properly perfected, but argues that the reserve account and contingency earnings account are not within the terms of the security agreement or financing statement as collateral.
The leasing agreement, executed in April 1980 and the financing agreement, executed in June 1980, had similar terms for the establishment of the reserve accounts and contingency earnings account. After execution of a lease or sales contract between a customer and the debtor, the debtor assigned its right to payments to John Deere, and the customer was instructed to make all payments to John Deere. Then, the invoice price of the equipment would be credited to the debtor's account by allocation of 99% of the wholesale price to the debtor's on-going account with John Deere, and one percent of the total price to the "dealer reserve account".
John Deere was entitled to make deductions from the dealer reserve account resulting from any customer defaults on the leases or sales contracts negotiated by the debtor. Expenses in repossession and collection of the payments due from customers were also authorized as deductions from the dealer reserve account. The reserve account was credited with annual interest of 8% on the average monthly balance, and the debtor received monthly reports regarding all activity on the account.
Any amount exceeding 3% of the outstanding obligations of any type at the end of each year was to be paid over to the debtor. However, no sums were ever paid to the debtor from the dealer reserve account, because of the large obligations owed by the debtor to John Deere.
John Deere did not maintain separate reserve accounts for each type of transaction or for each of its dealers; instead, it kept all money in one account and merely maintained separate records of what each dealer was owed. This is consistent with John Deere's right, under its contracts, to apply any excess resulting from one type of transaction to any outstanding obligations due from a debtor resulting from a different transaction.
The John Deere Dealer Finance Agreement also provided for the establishment of a contingent earnings account for sales contracts in which John Deere decided to extend only a partial credit or financing to the debtor's customers, which Deere did not deem fully creditworthy. John Deere would credit the contingent earnings account with the difference between the total sales price and the amount of credit which John Deere decided to extend to the debtor's customer. This sum was not immediately credited to the debtor's account with John Deere, because it was contingent upon the customer completing its obligations under the sales contract. The sums held in the contingent earnings account would be paid to a dealer when the net credit value of the sales contract was received by John Deere. If a loss occurred from a customer's failure to pay all installments due under the sales contract or from a deficiency resulting after repossession, John Deere was entitled to use the sums in the contingent earnings account to reduce its loss, instead of paying this amount to a dealer.
John Deere continued to suffer losses after the termination of the parties' relationship in October 1980, and they entered into an agreement dated July 23, 1981 in order to fix the debtor's liability to John Deere. Both parties recognized that the debtor owed John Deere the sum of $593,879.76 arising from the dealer relationship. However, they agreed to reduce this liability to $317,554.76 and allow John Deere to take a deductible loss for the remainder. The debtor executed a promissory note in the amount of $317,554.76 to ensure it would perform its obligations under the agreement. The debtor was to return certain equipment obtained for sale or lease and would be credited with the sum of $192,425.00. This left a remaining debt of $125,129.76 owed by the debtor to John Deere for past-due indebtedness.
The agreement also granted a security interest to John Deere in the debtor's accounts receivable in order to secure the debtor's liability. There is nothing in the agreement dated July 23, 1981 rescinding the debtor's prior obligations under the leasing and finance agreements, and no action was taken to void the prior perfected financing statements filed by John Deere.
On July 30, 1981, the debtor filed a Petition under the Bankruptcy Code. At that time the chattel paper outstanding had been reduced almost one million dollars from that held by John Deere 90 days before the filing of the Petition. The dealer's reserve account for the debtor had been reduced by several thousand dollars. After the debtor filed its Petition, there was additional activity in all these accounts. Customers paid some of their debts. John Deere did not observe the automatic stay of Section 362 of the Code, and reduced the contingent earnings account to zero and the dealer's reserve account to a negative balance. John Deere argues that these actions did not violate the automatic stay because these accounts were not property of the estate.
Under Section 541(a)(1) of the Bankruptcy Code, "all legal or equitable interests of the debtor in property as of the commencement of the case" becomes "property of the estate". The Legislative History contains the following analysis of the extent of this property:
. . . the estate is comprised of all legal or equitable interest of the debtor in property,...
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