In re Thompson Boat Co.
| Decision Date | 11 July 1995 |
| Docket Number | Bankruptcy No. 93-20546,Adversary No. 94-2072. |
| Citation | 230 BR 815 |
| Parties | In re THOMPSON BOAT CO., Debtor. Randall L. Frank, Trustee, Plaintiff, v. ITT Commercial Finance Corp., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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Susan M. Cook, Bay City, MI, for Plaintiff.
Charles M. Tatelbaum, Robert J. Diehl, Jr. and Marc M. Bakst, Detroit, MI, for Defendant.
On October 13, 1989, Thompson Boat Co. and ITT Commercial Finance Corp. entered into an agreement entitled "Floor Plan Repurchase Agreement." This agreement specified terms under which ITT would provide financing for dealerships that purchased boats from Thompson. One such term was Thompson's agreement to repurchase from ITT those boats which came into the latter's possession as a result of a dealership's failure to repay the loan from ITT.
On December 5, 1991, Thompson and ITT signed a "Recourse Addendum to Floor Plan Agreement." In this addendum, Thompson agreed to hold ITT harmless from any loss that ITT incurred in connection with the extension of financing to a dealership pursuant to the Floor Plan Repurchase Agreement. As security for the performance of this and Thompson's other obligations under the terms of the Floor Plan Repurchase Agreement and the Recourse Addendum, the latter document provides that ITT may deduct a certain percentage from amounts payable to Thompson for boats sold by Thompson and financed by ITT, and that the amounts so withheld by ITT "shall be deemed to be held and accounted for in a separate reserve account maintained in the books and records of ITT (`Reserve Account')." Recourse Addendum at ¶ B. The addendum states in part as follows:
As security for all of Thompson\'s obligations to ITT under this Agreement, Thompson hereby pledges and grants to ITT a security interest in, all amounts held from time to time in the Reserve Account . . . and agrees that upon any default . . . of such obligations ITT may setoff and apply against those obligations any and all amounts so held in the Reserve Account. . . .
Id. at ¶ F.
Michigan National Bank apparently held a perfected security interest in Thompson assets which predated execution of the foregoing addendum. On February 26, 1993, ITT entered into an agreement with MNB wherein the latter subordinated to ITT its rights in, among other things, "all reserves and reserve accounts, which are now or hereafter held by or on behalf of Thompson Boat or ITT." Subordination Agreement at ¶ 1. On March 5, 1993, ITT filed a financing statement relating to the reserve account. Thompson filed for relief under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., on May 19, 1993.
On August 5, 1994, the trustee filed his second amended complaint against ITT. Count I alleges that ITT's security interest in the reserve account and certain other assets of Thompson is subject to avoidance under 11 U.S.C. § 547(b). Count II seeks a determination that the trustee's rights in the reserve account prime those of ITT under 11 U.S.C. § 544(a)(1) and (2).1
On August 16, 1994, ITT filed a motion to dismiss the second amended complaint. Both parties filed a motion for partial summary judgment on the question of whether ITT's interest in the reserve account is vulnerable to attack under § 547(b) and/or § 544(a). A hearing on the motions was held, at which the Court reserved decision on the issues raised. For the reasons which follow, ITT's motion for partial summary judgment will be granted, and the other motions will be denied.
Section 547(b) allows the trustee to "avoid any transfer of an interest of the debtor in property" if the requirements enumerated therein are satisfied and no defense is applicable. For present purposes, one condition is that the transfer occur "on or within 90 days before the date of the filing of the bankruptcy petition." 11 U.S.C. § 547(b)(4)(A). Citing F.R.Civ.P. 12(b)(6) (), ITT argued that Count I should be dismissed because this condition is not satisfied, and that Count II must also be dismissed because it is dependent upon avoidance of ITT's lien pursuant to Count I and § 547(b).
ITT is correct in suggesting that dismissal of Count I would doom Count II. Briefly stated, § 544(a) gives the trustee "the rights and powers of . . . —(1) a creditor of the debtor . . . that obtains . . . a pre-petition judicial lien on the debtor's property . . . and (2) a creditor of the debtor that . . . obtains . . . a prepetition execution against the debtor that is returned unsatisfied." If ITT's perfected security interest cannot be avoided pursuant to § 547(b), then the lien/execution creditor rights conferred on the trustee by virtue of § 544(a) would be useless. See, e.g., In re Bridge, 18 F.3d 195, 200 (3d Cir.1994) (); Mich. Comp. Laws § 440.9301(1)(b) ; In re Murray, 109 B.R. 245, 249 (Bankr. E.D.Mich.1989) ().
But ITT's attack on Count I falters because it completely disregards the trustee's theory. According to ITT, the date of the transfer which the trustee seeks to avoid under § 547(b) is December 5, 1991, the date the Recourse Addendum was executed. For purposes of § 547(b), however, a transfer is generally deemed to take place on the date it is perfected, if perfection occurs more than 10 days after the actual transfer date. § 547(e)(2)(B). The complaint alleges in paragraphs 24 and 25 that ITT's financing statement was filed within 90 days pre-petition and more than 10 days post-transfer.2 Indeed, the complaint specifically cites § 547(e)(2)(B) for the conclusion that the transfer is subject to avoidance. See Second Amended Complaint at ¶ 24. The contention in ITT's brief that the complaint fails to identify a transfer occurring within the preference period is therefore without merit.
It appears that ITT eventually recognized the folly of this assertion, as it took an entirely different tack at the hearing. Rather than claiming the transfer occurred outside the preference period, ITT argued that dismissal was in order because one could determine from the exhibits attached to the complaint that the reserve account was subject to ITT's right of recoupment.
The recoupment argument—which is relevant only to the reserve account—is also raised by ITT in connection with its motion for partial summary judgment, and will be discussed in detail in that context. See infra pp. 823-29. For purposes of the motion to dismiss, it suffices to note that recoupment cannot under any circumstances defeat the trustee's claim to the extent that the balance in the reserve account exceeds ITT's recoupment claims against Thompson. See, e.g., In re Holford, 896 F.2d 176, 179 (5th Cir.1990).
The complaint and attached exhibits do not demonstrate that ITT even has a claim against Thompson, much less that such claims are for an amount equal to or greater than that in the reserve account. See generally, e.g., Bonilla v. Oakland Scavenger Co., 697 F.2d 1297, 1301 (9th Cir.1982), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 838 (1984) (). Indeed, ITT conceded that neither party has yet quantified the other's alleged liability. See ITT's Motion for Partial Summary Judgment at p. 2 ().3 Since the complaint may state a cause of action regardless of whether ITT has a recoupment right, the motion to dismiss will be denied. See, e.g., Mann v. Conlin, 22 F.3d 100, 103 (6th Cir.), cert. denied, 513 U.S. 870, 115 S.Ct. 193, 130 L.Ed.2d 126 (1994) .
As indicated above, both counts of the complaint hinge on the trustee's ability to avoid ITT's security interest pursuant to § 547(b). According to ITT, its security interest in the reserve account is not subject to such avoidance because it perfected that interest by possession, rather than by filing the financing statement as alleged by the trustee. The basis for this assertion is ITT's contention that the reserve account constitutes "money," as that term is defined by Michigan's version of the Uniform Commercial Code, Mich. Comp. Laws § 440.1101 et seq.
As a general proposition, it is true that a security interest in money is perfected by possession. See Mich. Comp. Laws § 440.9304(1). But ITT's contention that the reserve account is money does not withstand scrutiny.
The UCC defines "money" as "a medium of exchange authorized or adopted by a domestic or foreign government, . . . including a monetary unit of account established by an intergovernmental organization or by agreement between 2 or more nations." Mich. Comp. Laws § 440.1201(24). ITT...
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Glenn S. Morris & Glenn S. Morris Trust v. R. Judd Schnoor & Madcap Enters., L.L.C.
...This is consistent with "[t]he central purpose of Article 9 of the UCC . . . to regulate secured transactions." In re Thompson Boat Co, 230 BR 815, 825 (ED Mich, 1995) (emphasis added), citing MCL 440.9101 and MCL 440.9102. It is well-recognized that "[t]he UCC is to be liberally construed ......
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