Maxl Sales Co. v. Critiques, Inc.

• Decision Date: 16 July 1986
• Docket Number: No. 84-1526,84-1526
• Parties: 1 UCC Rep.Serv.2d 1338 MAXL SALES COMPANY, Plaintiff-Appellant, v. CRITIQUES, INC., d/b/a Decorators Warehouse, and Eric C. Rajala, Trustee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1293

796 F.2d 1293

1 UCC Rep.Serv.2d 1338

MAXL SALES COMPANY, Plaintiff-Appellant, v. CRITIQUES, INC., d/b/a Decorators Warehouse, and Eric C.

Rajala, Trustee, Defendants-Appellees.

No. 84-1526.

United States Court of Appeals, Tenth Circuit.

July 16, 1986.

Leonard J. Schapker, Overland, Kan. (Mark W. McKinzie and Kip A. Kubin, of Wallace, Saunders, Austin, Brown and Enochs, Overland Park, Kan., were also on brief), for plaintiff-appellant.

Eric C. Rajala, Overland Park, Kan., for defendants-appellees.

Before HOLLOWAY, Chief Judge, and LOGAN and BALDOCK, Circuit Judges.

HOLLOWAY, Chief Judge.

Appellant, Maxl Sales Company ("Maxl"), a creditor of the debtor in bankruptcy, appeals the judgment of the United States District Court for the District of Kansas (unpublished) affirming the bankruptcy judge's denial of Maxl's reclamation claim. Maxl Sales Co. v. Critiques, Inc. (In re Critiques, Inc.), 29 B.R. 941 (Bankr.D.Kan.1983). Maxl claims the court erred in its application of the Kansas Uniform Commercial Code (the "Code"), ¹ by applying the proceeds provisions of Sec. 84-9-306 to the facts of this case. Maxl argues the default provisions of Secs. 84-9-501 through 84-9-508 should have been applied.

I

The facts relevant to this dispute must be set forth in considerable detail. Appellee Critiques, Inc. ("the debtor") and Maxl entered into two separate transactions. On October 15, 1980, the parties entered into a consignment agreement and executed a security agreement with respect to this agreement on September 18, 1981. The security agreement named as its collateral "proceeds, accounts receivables, and intangibles of the debtor ... arising under a certain Consignment Agreement executed by and between the parties hereto and attached hereto as Exhibit 'A'." R. II 327. The security agreement further provided that "the secured party shall be entitled to immediate possession of all collateral secured hereunder with all property to be transferred to the possession of the secured party immediately upon the default of the debtor...." Id. The consignment agreement defined the consigned goods as "certain items of furniture, household goods, etc ... hereinafter referred to as 'products'." R. II 324. A corresponding financing statement filed September 22, 1981, listed "proceeds, accounts receivable and intangibles arising from a certain consignment agreement executed by Debtor and Secured Party." R. II 329.

In the second transaction on August 31, 1981, the debtor executed a promissory note in the amount of $12,000 to Maxl. On the same day the parties entered into a security agreement concerning the note which listed as its collateral "inventory, furniture, fixtures, equipment, accounts receivables, and intangibles of the debtor ... together with any proceeds of such property." R. II 233. A corresponding financing statement was filed on September 2, 1981, listing the same types of property but omitting the proceeds language contained in the security agreement.

The debtor defaulted on both security agreements. Subsequently, Maxl commenced proceedings to foreclose the security interests on November 23, 1981. On the same day, the State of Kansas filed a consumer protection complaint against the debtor. Thereafter, the state court issued a writ of attachment against the debtor's property. On December 14, 1981, a receiver was appointed, pursuant to state law, to operate the debtor's business for the purpose of generating sufficient revenues to satisfy all debts and claims that might exist. R. II 271. Maxl consented to the appointment of the receiver. The receiver was to hold in trust any net revenue. R. I 214.

When the receiver took possession of the debtor's premises he did not discover, collect, nor liquidate any accounts receivable or intangible assets of the debtor. The debtor's existing inventory, plus inventory purchased by the receiver, was liquidated at a public sale. It is undisputed that Maxl did not have a security interest in the inventory purchased by the receiver for the sale. It is also undisputed that the proceeds from the sale can be traced as to pre-existing inventory, pre-existing consignment inventory, and the inventory purchased by the receiver for the liquidation sale.

Prior to establishing priorities and the distribution of the proceeds in the state court receivership, the debtor filed for bankruptcy under Chapter VII of the Bankruptcy Code and the state court proceedings were stayed. See 11 U.S.C. Sec. 362(a). The funds from the liquidation sale were transferred to the trustee in bankruptcy and Maxl filed a complaint for reclamation in the bankruptcy court.

The bankruptcy court stated that Maxl's argument for application of K.S.A. Sec. 84-9-504 was without merit; that such section governs a secured party's right to dispose of collateral after default; that the case was governed instead by K.S.A. Sec. 84-9-306 dealing with a secured party's interest in proceeds; and that the section virtually eliminated Maxl's perfected security interest in proceeds of the collateral securing the $12,000 note because, under Sec. 84-9-306(4), the cash must be viewed as commingled with other cash proceeds and there was no evidence that any cash proceeds were received by the debtor within the ten-day period before the bankruptcy petition was filed. The bankruptcy court also found that Sec. 84-9-306(3) subordinated the interest of Maxl to the trustee with regard to the proceeds of the consignment inventory securing the consignment agreement. The court reasoned that Maxl's security agreement and financing statement described only three types of collateral--accounts receivable, intangibles, and proceeds; that inventory was not included in either the security agreement or financing statement; and that Maxl, therefore, had no perfected security interest in the consignment inventory and could not have a perfected security interest in the proceeds of that inventory.

The district court affirmed the rulings of the bankruptcy court. It rejected the argument that the appointment of the receiver in the state trial court was a "disposition of collateral" under Sec. 84-9-504, entitling Maxl to reduce its claim to judgment or to foreclose its interest by any available procedure under state law, Maxl contending that an available procedure provided by K.S.A. Sec. 60-1301 was the appointment of a receiver for business. The court held that the bankruptcy court's ruling subordinated the interest of Maxl to that of the bankruptcy trustee in accordance with law; and that the court could not resurrect an unperfected security interest when the holder of that interest had failed to perfect under the provisions of the Code. Thus, the denial of the complaint for reclamation was affirmed, and this appeal followed.

II

Do the "proceeds" provisions of K.S.A. Sec. 84-9-306 or the

provisions of K.S.A. Secs. 84-9-501 and 84-9-504 apply?

We first address Maxl's contention that the bankruptcy court erred in applying the "proceeds" provisions of Sec. 84-9-306 in the circumstances of this case. Maxl contends that its institution of foreclosure proceedings and the state court's order in the consumer protection case of a receivership triggers the "default" provisions of Secs. 84-9-501 through 84-9-508. Maxl argues that by consenting to the receivership, rather than foreclosing, the appointment was a "disposition of collateral," entitling Maxl to reduce its claim to judgment or to foreclose by any available procedure under state law, and to reclaim the "dispositional proceeds." State law authorizes the appointment of a receiver for a business. K.S.A. Secs. 60-1301 through 60-1305 (1983). On the basis of this argument, Maxl would prevail, if it is correct, both as to the consignment security interest and the security interest in the promissory note.

To place our analysis in perspective, it must be recognized that the basic purpose of Article Nine of the Uniform Commercial Code is to "provide a simple and unified structure within which the immense variety of present-day secured financing transactions can go forward with less cost and with greater certainty." Section 84-9-101 Official UCC Comment at 385 (1983). We must construe the provisions of the Code in a manner that will promote this underlying purpose. In determining legislative intent, the courts are not bound to an examination of the language alone, but may properly look into the causes which impel a statute's adoption, inter alia. See Petition of City of Moran, 238 Kan. 513, 713 P.2d 451, 456 (1986). But where statutes are plain and unambiguous, courts must give effect to the intention of the legislature as expressed rather than determine what the law should or should not be. Johnston v. Tony's Pizza Service, 232 Kan. 848, 658 P.2d 1047, 1049 (1983).

The default provisions allow a secured creditor to "reduce his claim to judgment, foreclose or otherwise enforce the security interest by any available judicial procedure." Section 84-9-501(1). Section 84-9-504 provides for the secured party's rights to dispose of collateral after default. The secured party "may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing." Section 84-9-504(1). There is no definition of proceeds in the default provisions. In the Definitional Cross References under Sec. 84-9-504, we are referred to "Proceeds" in Sec. 9-306, which defines proceeds as follows:

"84-9-306. 'Proceeds': secured party's rights on disposition of collateral. (1) 'Proceeds' includes whatever is received upon the sale, exchange, collection or other disposition of collateral....

We think the language of the statute is clear and hold that the bankruptcy court was correct in applying the "proceeds" provisions to the facts of this case. There is no dispute that state court enforcement procedures had been instituted, but these procedures were not...