Interbusiness Bank v. First Nat. Bank of Mifflin., Civil Action No. 1:03-CV-2272.

• Decision Date: 21 April 2004
• Docket Number: Civil Action No. 1:03-CV-2272.
• Parties: INTERBUSINESS BANK, N.A., Plaintiff v. FIRST NATIONAL BANK OF MIFFLINTOWN, Defendant, v. Allied Capital Corporation, et al., Third-Party Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

318 F.Supp.2d 230

INTERBUSINESS BANK, N.A., Plaintiff v. FIRST NATIONAL BANK OF MIFFLINTOWN, Defendant, v. Allied Capital Corporation, et al., Third-Party Defendants.

Civil Action No. 1:03-CV-2272.

United States District Court, M.D. Pennsylvania.

April 21, 2004.

COPYRIGHT MATERIAL OMITTED

Nedric L. Nissly, Debra P. Fourlas, McNees, Wallace & Nurick LLC, Harrisburg, PA, for Plaintiff.

Heather Z. Kelly, Thomas A. French, Rhoads & Simon, LLP, Harrisburg, PA, for Defendant.

Joseph P. Connor, III, Connor, Weber & Oberlies, P.C., Paoli, PA, Brian William Bisignani, Jennifer L. Murphy, Duane Morris LLP, Harrisburg, PA, for Third Party Defendant.

MEMORANDUM

CONNER, District Judge.

Presently before the court in this Uniform Commercial Code ("U.C.C.") case are several dispositive motions in which the parties seek recognition of their respective security interests in certain collateral of a common debtor as superior to others. Plaintiff, InterBusiness Bank, N.A. ("InterBusiness"), contends that defendant, First National Bank of Mifflintown ("First National"), lacked a valid interest in the "inventory" and "accounts receivable" of the debtor and yet collected and liquidated those assets in derogation of plaintiff's superior interest. Defendant disagrees, asserting that assignments from third-party defendants, Allied Capital Corporation and its subsidiary and successor corporations (collectively "Allied Capital"), were effective to give it a priority interest in the collateral. Defendant further argues that plaintiff does not possess a security interest in the collateral because (1) the documents defining plaintiff's interest refer only to "goods" and "accounts," not "inventory" and "accounts receivable," and (2) any interest that plaintiff had in the collateral was extinguished when plaintiff obtained satisfaction of the underlying debt in state court execution proceedings relating to a separate mortgage agreement between plaintiff and the debtor.

The questions presented in the motions are (1) whether parties may obtain priority security interests through assignment, (2) whether generic references in a financing statement to "goods" and "accounts" are effective to cover an interest in "inventory" and "accounts receivable" of the debtor, and (3) whether a security interest in collateral is deemed extinguished by operation of Pennsylvania law when the secured party purchases the real property of the debtor during execution proceedings on the underlying debt. For the reasons that follow, these questions must all be answered in the affirmative. Finding that the complaint states a valid claim for relief and that material questions of fact remain, the court will deny the cross-motions for summary judgment (Docs. 13, 20) and the motion to dismiss (Doc. 10).

I. Statement of Facts¹

At the heart of this controversy are two loans made by Allied Capital, a financing corporation, to Annlick Farm Supply, Inc. ("Annlick Farm Supply"), a business in central Pennsylvania. The first of these loans, in the amount of one million dollars ($1,000,000), was made in December 2000 pursuant to a loan agreement between the parties. (Doc. 1 ¶¶ 4-8; Doc. 1, Ex. A; Doc. 15 ¶¶ 1-10; Doc. 21 ¶¶ 1-2; Doc. 22 ¶¶ 1-10; Doc. 32 ¶¶ 1-2). As collateral, Allied Capital accepted a mortgage on real property owned by Annlick Farm Supply and an interest in its accounts, inventory, equipment, and other property. This interest was memorialized by a mortgage agreement and a security agreement, both of which were executed by the parties on December 22, 2000. (Doc. 1 ¶ 5; Doc. 1, Ex. B; Doc. 15 ¶¶ 1-10; Doc. 21 ¶ 3; Doc. 22 ¶¶ 1-10; Doc. 32 ¶ 3; Doc. 34, Ex. A ¶¶ 4-6). Allied Capital also filed a financing statement, identifying the collateral in which it claimed a security interest:

1. The collateral includes (but is not limited to) all property, tangible and intangible, now owned or hereafter acquired by Debtor including, without limitation, machinery, equipment, tools, furniture, fixtures and rents:

. . . . .

4. All goods, furniture, fixtures, building and other materials, tools, supplies, and other tangible personal property of every nature now owned or hereafter acquired by Debtor and used, intended for use, or usable in the construction, development, or operation of the Property, whether located on the Property or elsewhere, together with all accessions thereto, replacements and substitutions therefor and proceeds thereof 5. The right to use the trademark or trade name of Debtor and symbols or logos used in connection therewith, or any modifications or variations thereof, in connection with the operation of the improvements existing or to be constructed on the Property, together with all accounts, all contracts and contract rights and all plans, specifications, licenses, permits and other general intangibles (whether now owned or hereafter acquired, and including proceeds thereof) relating to or arising from Debtor's ownership, construction, use, operation, leasing or sale of all or any part of the Property....

(Doc. 1, Ex. B). The statement was filed with state and local government offices in January and February 2001. (Doc. 1 ¶ 5; Doc. 15 ¶¶ 1-10; Doc. 21 ¶¶ 4-6; Doc. 22 ¶¶ 1-10; Doc. 32 ¶¶ 4-6).

Soon after making the first loan, Allied Capital made a second loan to Annlick Farm Supply in the amount of $1,250,000.² The parties executed another security agreement, giving Allied Capital an interest in the inventory and accounts of the business as collateral for the second loan. (Doc. 1 ¶¶ 9-10; Doc. 15 ¶¶ 11-12; Doc. 21 ¶¶ 9-12; Doc. 22 ¶¶ 11-12; Doc. 32 ¶¶ 9-12). Soon thereafter, Allied Capital filed a second financing statement identifying the collateral claimed under the second security agreement:

All tangible and intangible property of the Debtor, whether now owned or hereafter acquired, wherever located, including, but not limited to, the Debtor's interest now owned and hereafter acquired in the following types or items of property:

. . . . .

(ii) all inventory of every nature, kind and description....

(iii) all accounts, accounts receivable, [and] contract rights ... arising out of the sale, lease or consignment of goods, or the rendition of services by the Debtor....

(Doc. 1, Ex. E). This second financing statement was filed with state and local government offices in January and February 2001, after Allied Capital had filed the financing statement relating to the first loan agreement. (Doc. 1, Ex. E; Doc. 15 ¶¶ 5, 7, 9, 12-13; Doc. 22 ¶¶ 4, 11; Doc. 22 ¶¶ 5, 7, 9, 12-13; Doc. 32 ¶¶ 4, 11).

In a series of subsequent transfers, certain interests held by Allied Capital arising from the first and second loans were assigned to other corporations. All of the interests arising under the first loan, including the loan agreement, mortgage agreement, security agreement, and initial financing statement, were assigned to InterBusiness on July 30, 2001. (Doc. 1 ¶¶ 6-8; Doc. 15 ¶¶ 1-10, 17; Doc. 21 ¶¶ 7-8; Doc. 22 ¶¶ 1-10, 17; Doc. 32 ¶¶ 7-8). With respect to the second loan, Allied Capital retained its interests in the loan and security agreements, and transferred only its interest in the second financing statement. Through amendments filed with the appropriate government offices, Allied Capital's interest in this second financing statement was assigned to First National in April 2001.³ (Doc. 1 ¶ 13; Doc. 15 ¶ 17; Doc. 21 ¶ 11; Doc. 22 ¶ 17; Doc. 32 ¶ 11).

In May 2001, First National extended to Annlick Farm Supply a revolving line of credit in the amount of $500,000 (later increased by $200,000) pursuant to a loan agreement between the parties. They also executed a security agreement giving First National an interest in "all inventory and accounts" as collateral for the loan. (Doc. 1 ¶ 12; Doc. 15 ¶¶ 14-16; Doc. 21 ¶ 14; Doc. 22 ¶¶ 14-16; Doc. 32 ¶ 14).

In July 2002, Annlick Farm Supply defaulted on its obligations under the loan agreement between it and First National. Soon thereafter, First National collected the accounts receivable of Annlick Farm Supply and liquidated its inventory, garnering approximately $450,000. (Doc. 1 ¶¶ 22-23; Doc. 4 ¶¶ 22-23; Doc. 21 ¶¶ 19-20; Doc. 32 ¶¶ 19-20).

In October 2002, other creditors of Annlick Farm Supply commenced involuntary bankruptcy proceedings against the company. InterBusiness moved for relief from the automatic stay to allow it "to exercise its state law rights and remedies against the Collateral and Real Property" of the debtor. (Doc. 34, Ex. A at 4). The bankruptcy court granted the request, and InterBusiness obtained judgment by confession against Annlick Farm Supply in a Pennsylvania trial court for sums owing under the loan agreement between the parties. (Doc. 34, Ex. B; Doc. 40 ¶¶ 2-4). A writ of execution was issued, and the real property subject to the mortgage agreement was sold to InterBusiness on May 1, 2003. (Doc. 34, Exs. B, C; Doc. 40 ¶¶ 2-4). Following its purchase, InterBusiness did not file a petition to fix the fair market value of the property or take other action to determine the debt, if any, still owed by Annlick Farm Supply. (Doc. 34, Ex. D).

InterBusiness filed the complaint sub judice on December 12, 2003. (Doc. 1). The complaint asserts that InterBusiness's security interest in the inventory and accounts receivable of Annlick Farm Supply is superior to that of First National, and demands remittance of the proceeds of the liquidation of those assets. (Doc. 1 at 8). First National then filed a third-party complaint against Allied Capital, including claims of fraud and misrepresentation based on Allied Capital's alleged assurances that First National would obtain a first-priority position through assignment of the second loan financing statement. (Doc. 6).

Soon thereafter, Allied Capital filed a motion to dismiss, claiming that, under the allegations of the original complaint, InterBusiness did not have a perfected security interest in the inventory and accounts...