Mid-Atlantic Supply, Inc. of Virginia v. Three Rivers Aluminum Co.

• Citation: 790 F.2d 1121
• Decision Date: 21 May 1986
• Docket Number: MID-ATLANTIC,No. 85-1795,85-1795
• Parties: 1 UCC Rep.Serv.2d 898 SUPPLY, INC. OF VIRGINIA and Jack D. Maness, Trustee, Plaintiffs, and United Virginia Bank, Appellant, v. THREE RIVERS ALUMINUM COMPANY, Appellee. In re MID ATLANTIC SUPPLY COMPANY, Debtor.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 1121

790 F.2d 1121

1 UCC Rep.Serv.2d 898

MID-ATLANTIC SUPPLY, INC. OF VIRGINIA and Jack D. Maness, Trustee, Plaintiffs, and United Virginia Bank, Appellant, v. THREE RIVERS ALUMINUM COMPANY, Appellee.

In re MID ATLANTIC SUPPLY COMPANY, Debtor.

No. 85-1795.

United States Court of Appeals, Fourth Circuit.

Argued Jan. 8, 1986.

Decided May 21, 1986.

Richard T. Robol (Seawell, Dalton, Hughes & Timms, Norfolk, Va., on brief), for appellant.

Charles M. Lollar (Willcox, Savage, Dickson, Hollis & Eley, P.C., Norfolk, Va., on brief), for appellee.

Before RUSSELL and WIDENER, Circuit Judges, and HAYNSWORTH, Senior Circuit Judge.

DONALD RUSSELL, Circuit Judge:

The appellee herein, Three Rivers Aluminum Company (TRACO), moved the bankruptcy court having jurisdiction of the Chapter 11 proceeding of the debtor Mid-Atlantic Supply, Inc. of Virginia (Mid-Atlantic) for the entry of an order modifying the automatic stay provided by Sec. 362(a) of the Bankruptcy Code to permit delivery to TRACO by the debtor in possession of a check drawn by the R.A. Lawson Corporation (Lawson) and payable jointly to TRACO and Mid-Atlantic in the amount of $109,000. The bankruptcy judge granted the motion, finding that "the Debtor and TRACO entered into a three-way agreement whereby the Check was drawn by Lawson, payable jointly to the Debtor and TRACO, and delivered to the Debtor, in trust for the benefit of TRACO and that TRACO was entitled to receive and retain the Check pursuant to such arrangement...." The trustee appealed that decision to the district court. In the meantime Mid-Atlantic's original Chapter 11 proceeding had been converted into a Chapter 7 proceeding. The trustee in the Chapter 7 proceeding abandoned any claim to the check and TRACO filed anew a motion under Rule 70, Fed.R.Civ.P., for possession of the check. At this point, the United Virginia Bank (Bank), which claimed a prior perfected security interest in all accounts receivable of Mid-Atlantic, moved to intervene in order both to protect its security interest and to contest on behalf of the estate the propriety of the bankruptcy judge's turn-over order. The district court granted the Bank's motion to intervene but, after a hearing, it granted TRACO's Rule 70 motion, holding "that the Trustee and the bankruptcy estate of Mid-Atlantic are divested of title and possession of the check in the amount of $109,000.00, payable jointly to Mid-Atlantic and TRACO, and said title and possession is vested in TRACO." It refused to disturb the trustee's abandonment of a claim to the check. It did not discuss the Bank's argument of the applicability of the Virginia Commercial Code, though it is to be assumed the court found the contention without merit. The Bank has appealed that order of the district court. We affirm in part and reverse in part.

The controversy involved in this appeal arose out of an agreement between Lawson, the primary contractor, and Mid-Atlantic, whereby the latter was to install customized aluminum windows at what was known as the Freemason Condominium Project in Norfolk, Virginia. The agreement appears to have contemplated two distinct performances: one involved the supplying of the customized windows, the approved model for which was to follow a design to be developed by TRACO; the other involved the actual installation of the windows fabricated by TRACO. Moreover, the two parts, according to the undisputed testimony, were to be "handled" differently: the acquisition of the windows "was [to be] handled on a purchase order"; the installation work "was [to be] handled on a subcontract." Immediately after Lawson and Mid-Atlantic had gotten together on this arrangement, however, a problem arose. Because of its credit investigation of Mid-Atlantic, TRACO would accept an order from Mid-Atlantic for the windows only on a cash basis. Until TRACO accepted the order and began the manufacture of the windows, no progress could be made. Finally, TRACO said it would accept the order and begin work on the windows but only on one of three arrangements: one would require a cash deposit of 50 per cent of the price for the windows to be made at the time of the acceptance of the order with the remainder of the purchase price to be paid on delivery or COD; a second would be "a standby irrevocable letter of credit in the amount of the contract" from an acceptable bank; and the third would be "to arrange for a joint check arrangement through a suitable creditor on the project [obviously, the primary contractor, Lawson]," an arrangement which would assure that "the monies would come through a joint check arrangement and would be within the control of TRACO." Mid-Atlantic expressed the desire to proceed under the last plan. However, TRACO was still unwilling to go forward until Lawson itself had agreed to be bound by the arrangement in writing. TRACO had, in the meantime, obtained a credit report on Lawson and had concluded, according to its credit officer, that Lawson, unlike Mid-Atlantic, was "well acceptable within our normal [credit] confines and we would accept [credit] on Lawson Company." Lawson signed the required letter and TRACO then commenced work on the order.

TRACO delivered to the site the windows purchased and Mid-Atlantic proceeded to install the windows per its subcontract. On November 12, 1984, Lawson issued its check which is the subject of this controversy. This check was in payment for the windows and was issued payable jointly to Mid-Atlantic and TRACO. At the same time, Lawson issued a separate check, payable solely to Mid-Atlantic, in payment of the agreed contract price under Mid-Atlantic's subcontract for installing the windows. When the joint check was received by Mid-Atlantic, the president of Mid-Atlantic stated it was his intention to "[s]ign it, send it to Three Rivers [i.e., TRACO], and that way ... have the account balance." In response to the inquiry whether he intended to do this because he considered "[t]he money [more accurately the check] was never yours, was it?", the president of Mid-Atlantic testified: "I didn't think it was then." On the same day it received the check Mid-Atlantic filed its Chapter 11 petition. Accordingly, the check was still in Mid-Atlantic's possession at the time the bankruptcy action was begun. It is the title and right of possession to that check which is the issue in this appeal.

It is the position of TRACO, accepted by both the bankruptcy judge and, on appeal, by the district judge, that Mid-Atlantic held the check "in trust" for TRACO, which as the beneficiary of the trust was entitled to possession and title thereto. The Bank, on the other hand, argues that the check and its proceeds were to be treated as an asset of the bankruptcy estate, title to which was vested in the debtor Mid-Atlantic. In support of its position, the Bank relies first on Sec. 541(a) of the Bankruptcy Reform Act of 1978, under which, under its construction of the Section, the check became "property" of the debtor subject to administration and disposition as property owned by the debtor. The Bank also argues that the transaction involving TRACO, Mid-Atlantic, and Lawson resulted in TRACO holding a security interest in the check which secured payment of Mid-Atlantic's indebtedness to TRACO. The Bank then urges that its prior perfected security interest in Mid-Atlantic's accounts receivable had priority under the Virginia Commercial Code and entitled it to ownership of the check. We begin with an inquiry into the scope of Sec. 541(a).

The Bank seems to agree that prior to The Bankruptcy Reform Act of 1978 with its addition of Section 541(a), the check, if held by the debtor in trust at the time of the bankruptcy filing would not have been treated as an asset of the bankruptcy estate but as the property of the beneficiary of the trust. Thus, in its brief in this court, it said that "[u]nder the bankruptcy acts which preceded the Bankruptcy Reform Act, property held by the bankrupt in trust thus belonged to the beneficiary and never became a part of the bankruptcy estate under former Sec. 70." But the Bank posits that this rule was changed by the revised Sec. 541(a) and argues that under the enlarged definition of "property" of the bankrupt contained in Sec. 541(a) Lawson's check in possession of the debtor at the filing of the bankruptcy proceedings is to be regarded properly as "property" of the debtor, subject to administration and distribution in such proceedings as a part of the assets of the bankruptcy estate. There is no dispute that, as the Bank argues, Sec. 541(a) broadened the definition of bankruptcy "property" beyond what it had been earlier under the Act. We recognized this change in our opinion in Tignor v. Parkinson, 729 F.2d 977, 980 (4th Cir.1984). But neither the language of Sec. 541, taken as a whole, nor its legislative history supports the Bank's construction of the Section as changing the prior rule as to property held by the debtor in trust or as destroying the rights of beneficiaries in property held in trust by the debtor at the commencement of the bankruptcy proceeding. The bankruptcy estate is said in 541(a)(1) to consist of "all legal or equitable interests of the debtor in property as of the commencement of the case." But subsequently in 541(d) the statute makes quite clear that this language of (a) does not include property that the debtor does not hold in his own right. To make this intention doubly certain, Sec. 541(d) provides that "[p]roperty in which the debtor holds ... only legal title and not an equitable interest ... becomes property of the estate ... only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." Further, the Senate Report, in explaining the scope of the Section, declared that under Sec. 541 the trustee "could take no greater rights than the debtor himself had." S.Rep. No. 989,...