Source: https://law.justia.com/cases/federal/appellate-courts/F2/417/1277/190209/
Timestamp: 2019-07-22 14:28:21
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Matched Legal Cases: ['§ 96', '§ 428', '§ 70', '§ 110', '§ 427', '§ 79', '§ 9', '§ 79', '§ 9', '§ 79', '§ 9', '§ 79', '§ 9', '§ 96', '§ 9', '§ 9', '§ 79', '§ 9', '§ 9', '§ 60', '§ 96', '§ 60', '§ 60', '§ 9', '§ 79', '§ 60']

R. Anthony Dubay, Appellant, v. Everette H. Williams, Appellee.everette H. Williams, Appellant, v. Rose City Development Co., Inc., Appellee.robert J. Davis, Appellant, v. Everette H. Williams, Appellee, 417 F.2d 1277 (9th Cir. 1969) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Ninth Circuit › 1969 › R. Anthony Dubay, Appellant, v. Everette H. Williams, Appellee.everette H. Williams, Appellant, v. R...
R. Anthony Dubay, Appellant, v. Everette H. Williams, Appellee.everette H. Williams, Appellant, v. Rose City Development Co., Inc., Appellee.robert J. Davis, Appellant, v. Everette H. Williams, Appellee, 417 F.2d 1277 (9th Cir. 1969)
US Court of Appeals for the Ninth Circuit - 417 F.2d 1277 (9th Cir. 1969)
COPYRIGHT MATERIAL OMITTED Don S. Willner (argued) of Willner, Bennett & Leonard, Portland, Or., for appellant DuBay.
Before us are three appeals from orders of the United States District Court for the District of Oregon adjudicating the claims of three creditors asserting security interests in the net proceeds of accounts receivable of the Portland Newspaper Publishing Co., Inc. (the "Bankrupt"). The three creditors are Rose City Development Company, Inc. ("Rose City"), Robert J. Davis, and R. Anthony DuBay. The Referee disallowed all three claims as preferences under section 60 of the Bankruptcy Act, 11 U.S.C. § 96. Petitions for review resulted in orders of the District Court affirming disallowance of the claims of Davis and DuBay reversing disallowance of Rose City's claims,1 from which orders the parties adversely affected appeal.
The three creditors were closely involved in the short and turbulent life of the Portland Reporter, a newspaper, and in the operation of its publisher, the Bankrupt, and the Bankrupt's predecessor, the Portland Reporter Publishing Company, Inc. (the "Reporter"). In November 1959 the Portland Stereotypers Union struck Portland's two dailies, the Oregonian and the Oregon Journal. Members of other local unions refused to cross the Stereotypers' picket lines. The two dailies joined forces and continued publication of their respective papers despite the strike. The affected local unions organized Reporter to employ their idled workers and to compete with the struck dailies. The Reporter was organized early in 1960 to publish the paper, and, concurrently, the unions incorporated Rose City to acquire the physical plant for Reporter. Rose City acquired and converted a warehouse and leased it to Reporter for its publication base. The financial condition of Reporter, precarious from the outset, steadily deteriorated until, in February 1964, the Reporter announced that it would suspend publication. The announcement touched the pocketbooks as well as the sentiments of the public, producing contributions of $50,000 and temporary loans of another $50,000, which was enough money to keep the newspaper afloat a few months longer. Robert J. Davis, who had recently become a member of Reporter's board, was so heartened by the public response that he agreed to continue his guaranteed bank loan of $25,000 in Reporter's favor and agreed to finance the paper up to $225,000 by buying stock of a corporation (the Bankrupt) into which Reporter could be merged. Reporter thereafter merged into the Bankrupt. Davis bought $156,000 of the Bankrupt's stock between April and September 1964. The paper's financial rally was fleeting. Infusions of capital were inadequate to withstand the mounting drain of operating losses. On September 27, 1964, the board announced the impending cessation of publication and relieved Davis of further obligation to buy stock. The paper died on September 30, 1964.
"WHEREAS, Assignor desires to assign to Assignee accounts receivable which are unpaid but which are due and owing or which will become due for advertising services rendered by Assignor. * * *
"1. The Assignee will from time to time, during the continuance of this agreement, select such accounts receivable as shall total not more than $40,000 at any one time. * * *
"7. Any such assignment is for the sole purpose of providing security to Assignee upon his obligation under the agreement heretofore referred to and it is agreed that so long as Assignor is not in default Assignee shall not be entitled to the proceeds from any account periodically collected but the same shall remain the sole property of the Assignor."
The Uniform Commercial Code took effect in Oregon on September 1, 1963. (Ore.Laws 1961, c. 726, § 428.) DuBay and Reporter filed a financing statement on September 30, 1963, showing an assignment of accounts receivable and proceeds to DuBay.
If the memorandum were an assignment within the meaning of the 1962 agreement, it relates back to the contract from which it derived its vitality. The assignment stands or falls on the validity of the 1962 agreement of which it is an integral part. The 1962 agreement is felled by the pre-Code rule of Benedict v. Ratner (1925) 268 U.S. 353, 45 S. Ct. 566, 69 L. Ed. 991, holding that a transfer of property as security which reserves to the transferor the right to dispose of it, or to apply its proceeds to his own uses, is fraudulent as to creditors and void. Paragraph 7 of the 1962 contract gave Reporter unfettered control over the security and thereby invalidated the contract under the pre-Code Oregon rule following Benedict. (E. g., Harris v. Schnitzer, 146 Or. 391, 27 P.2d 1010 (1934); Scandinavian-American Bank v. Sabin (9th Cir. 1915) 227 F. 579; 4A Collier, Bankruptcy § 70.77, at 840-79 (14th ed. 1967).)
Section 70e of the Bankruptcy Act (11 U.S.C. § 110e) provides that a security agreement which is fraudulent as to any creditor having a provable claim is void as to the trustee. The Referee found that there were two such creditors of Reporter and accordingly held the assignment to DuBay void as to the trustee.
The invalid security agreement was not validated by the filing of financing statements by Reporter and DuBay after the Code became effective. In adopting the Uniform Commercial Code, the Oregon Legislature provided that the Code "applies to transactions entered into and events occurring on and after that date [September 1, 1963]" and that "Transactions validly entered into before the effective date * * * remain valid thereafter and may be terminated, completed, consummated or enforced as required or permitted by any statute or other law amended or repealed by this Act as though such repeal or amendment had not occurred." (Ore.Laws 1961, c. 726, §§ 427-28.)
Robert J. Davis, at Reporter's request, executed a guarantee of a $25,000 loan made by the First National Bank of Oregon to Reporter and gave the Bank collateral in the form of an assigned savings account on December 13, 1963. On the same date Reporter and Davis executed a security agreement the terms of which were virtually identical to that executed by DuBay and Reporter. Attached to the security agreement is an express assignment of designated accounts then existing together with their balances. A financing statement covering "accounts receivable and proceeds" was promptly filed by Davis. Thereafter no formal assignment of accounts was ever made. Reporter and Davis followed the same procedure as did DuBay. A series of memoranda was prepared by Reporter's controller and sent to the board, to Davis, and to Davis' lawyer, and Davis' initials were placed next to the named display accounts on the ledger sheets. The last memorandum, dated April 21, 1964, named certain display accounts with their respective amounts totaling $16,247.42, and unspecified circulation accounts totaling $18,752.58. The memorandum was typed and was not formally executed. The controller's name was also typed. No longhand signatures were affixed. No words of assignment or agreement appear on the memorandum of April 21 or its predecessor memoranda. Nothing at all is stated on the memoranda about future charges to the listed accounts or to future accounts.3
For the purpose of discussing his primary contentions we assume that the security agreement of December 13, 1963, together with the formal assignment of the accounts of the same date gave Davis a security interest in the balances of the accounts designated, which interest was perfected upon filing. But the security agreement without the formal assignment did not give Davis a security interest in accounts receivable, present or future, because the accounts receivable subject to the agreement cannot be defined by that instrument standing alone. The agreement expresses the parties' intent that affirmative action beyond the signing of the agreement was required to designate the accounts: Davis was to select the accounts and concurrently the Bankrupt was to execute an unconditional assignment of the selected accounts "by proper instrument in writing, a form of which is attached hereto." Under these circumstances the agreement does not itself contain "a description of the collateral" within the meaning of Ore. Rev.Stat. § 79.2030(1) (b) [U.C.C. § 9-203(1) (b)].4
The memorandum alone is not a security agreement. A "security agreement" is defined as "an agreement which creates or provides for a security interest." (Ore.Rev.Stat. § 79.1050(1) (h) [U.C.C. § 9-105(1) (h)].) The memorandum contains no words of creation or grant. (American Card Co. v. H.M.H. Co. (1963) 97 R.I. 59, 196 A.2d 150; Scott v. Stocker, supra, 380 F.2d 123.
There remains Davis' contention that the December 13 agreement together with the formal assignment of the same date created a security interest in the designated accounts not only in respect of their then stated balances, but also of the future balances of those accounts which were not deleted by the later memoranda. The contention fails because those instruments do not contain any words which import an intention to give a security interest in after-acquired property and the language used is not consistent with such an intent. The only words available to Davis are references to "accounts receivable." The word "account" is defined in the Oregon Commercial Code, unless the context otherwise requires, as "any right to payment for * * * services rendered which is not evidenced by an instrument or chattel paper." (Ore.Rev.Stat. § 79.1060(1) [U.C.C. § 9-106(1)].) The implication is that a future charge is not an "account," because the services have not yet been rendered. But apart from any technical definition of terms, the agreement simply cannot be squared with an intent to make a present transfer of the future balances or charges to the listed accounts. The agreement says that Davis "will from time to time, during the continuance of this agreement select such accounts receivable as shall total * * * $35,000 * * *" and that Davis could reassign an account and select another "to be assigned." The Referee, the District Court, and we read these words the same way: The parties intended any future accounts and balances to be added by later assignments; there was no intent presently to assign future balances in those accounts. It is obvious that the parties did not draft the agreement and the assignment with the provisions of the Commercial Code in mind. They could have done so, but they did not, and we cannot draw for them an agreement they did not draw for themselves.
Rose City lent Reporter $45,000 on November 16, 1963, and $10,300 on November 22, 1963, for which Reporter executed two promissory notes in Rose City's favor. To secure the loans the parties entered into a security agreement dated November 22, 1963, by which Reporter assigned to Rose City a security interest in all of its accounts receivable "now existing or hereafter arising," other than those accounts assigned to DuBay and Davis. A financing statement was filed on November 26, 1963. The security agreement did not contain any provision for Rose City's policing the accounts.5
Can the trustee set aside as preferential Rose City's security interest in these accounts receivable which arose within four months of bankruptcy? Is there an unavoidable collision between section 60 of the Bankruptcy Act and the floating lien created and protected by article 9 of the Commercial Code (Ore.Rev.Stat. §§ 79.2040, 79.3020, 79.4020 [U.C.C. §§ 9-204, 9-302, 9-402])?
Section 60a(1) of the Bankruptcy Act (11 U.S.C. § 96a(1)) defines a "preference" as (1) a transfer of any property of the debtor, (2) to or for the benefit of a creditor, (3) for or on account of an antecedent debt, (4) while the debtor is insolvent, (5) within four months of bankruptcy, (6) which enables the creditor to obtain a greater percentage of his debt than some other creditor of the same class. Section 60b permits the trustee to avoid a preference if the creditor had reasonable cause to believe that the debtor was insolvent at the time of the transfer. The trustee has succeeded in having resolved in his favor all section 60 issues save two: (1) Did the Bankrupt's transfer of a security interest to Rose City occur during the four months preceding bankruptcy? (2) Was the transfer for or on account of an antecedent debt?
The validity of Rose City's floating lien on after-acquired accounts receivable arising prior to the four-month period preceding bankruptcy is unchallenged. Rose City's security agreement complied with the provisions of Oregon Commercial Code section 79.2040(3) (U.C.C. § 9-204(3))7 and its lien was perfected by filing its financing statement in accordance with section 79.4020 of the Code (U.C.C. § 9-402).
The trustee contends that any interest Rose City claims in accounts receivable which came into existence within four months before bankruptcy is voidable as a preference because the transfer of such an interest could not have occurred earlier than the date upon which the account arose. The Commercial Code says that the debtor has no rights " [i]n an account until it comes into existence." (Ore.Rev.Stat. § 79.2040(2) (d), U.S.C. § 9.204(2) (d).) To obtain a right, there must be a transfer to the creditor, and that transfer cannot occur, he says, until the right arose. A transfer occurring during the four months preceding bankruptcy cannot be related back to the filing of a financing statement and thus perfected before the preference period because to do so would violate the federal policy expressed in section 60.
Some ingenious theories have been spun to avoid the result to which the trustee's logic leads.8 It is unnecessary for us to resort to any of them to reject the trustee's argument. The unarticulated premise is that Congress left to state law the definition of "transfer" and of "perfection," thereby permitting state law to control the impact of preferences. The premise is flawed. Congress itself defined these concepts leaving only some details to be brushed in by state law.
Section 60a(2) of the Bankruptcy Act provides that "a transfer of property * * * shall be deemed to have been made or suffered at the time when it became so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee."
Congress did not state that a "transfer" occurs when a security interest attaches or when state law says a conveyance has been made. Congress provided that a transfer is "deemed" to have been made when it became "so far perfected" that no subsequent lien creditor could achieve priority. "Transfer" for the purpose of section 60a(2) is thus equated with the act by which priority over later creditors is achieved and not with the event which attaches the security interest to a specific account.
The 1898 edition of the statute contained no definition of the time at which a transfer was deemed made for preference purposes. It was completely inadequate to deal with transfers by security instruments, particularly by chattel mortgages with after-acquired property clauses, in which the creditor's interest did not publicly appear until bankruptcy was imminent. Typically the debtor was given all the appearance of unencumbered ownership of his personalty upon the strength of which general creditors unaware of the secured creditor's lien continued to advance credit. Shortly before the insolvent's collapse, the secured creditor would take possession of the liened assets, or otherwise perfect his lien, leaving the other creditors the pickings from a nearly barren estate. Federal courts, applying the "Massachusetts rule" on perfection of liens on after-acquired property, upheld such transfers against the trustee's attacks. (Humphrey v. Tatman (1905) 198 U.S. 91, 25 S. Ct. 567, 49 L. Ed. 956; Thompson v. Fairbanks (1905) 196 U.S. 516, 25 S. Ct. 306, 49 L. Ed. 577; Petition of Post (In re Robert Jenkins Corp.) (1st Cir. 1927) 17 F.2d 555, cert. denied, Levy v. Post (1927) 275 U.S. 527, 48 S. Ct. 20, 72 L. Ed. 407.)11
If we read section 60a(2) the way the trustee asks us to do, we would defeat, not implement, Congress' intent, and we would impair, not promote, the intent of the draftsmen of the Uniform Commercial Code to make security transactions conform to the legitimate needs of commerce, rather than to the common-law lawyer's wish for conceptual nicety.15
The validation of Rose City's security interest and the invalidation of the claimed security interests of DuBay and Davis to which Rose City's security interest had been expressly subordinated raises the questions: (1) Did Rose City and the Bankrupt intend that accounts theretofore assigned to DuBay and Davis would become part of Rose City's security if either or both of the DuBay and Davis security interests were invalid? (2) To what extent, if at all, may the trustee preserve the senior DuBay and Davis claims for the benefit of the estate? Neither of these questions was decided below. The questions were raised before the Referee, but they were not resolved, because the Referee's invalidation of all three claims made the decision of the questions moot. The questions are to be resolved upon ultimate remand to the Referee.
In re Portland Newspaper Publishing Co. (D.Ore.1967) 271 F. Supp. 395
The questions presented are of such novelty and importance that they have received widespread attention and discussion in the law reviews E. g., Hogan, "Games Lawyers Play With the Bankruptcy Preference Challenge to Accounts and Inventory Financing," 53 Cornell L. Rev. 553 (1968); Krause, Kripke and Seligson, "The Code and the Bankruptcy Act: Three Views on Preferences and After-Acquired Property," 42 N.Y.U. L. Rev. 278 (1967); Henson, "The Interpretation of the Uniform Commercial Code: Article 9 in the Bankruptcy Courts," 22 U.Miami L.Rev. 101 (1967); Henson, "The Portland Case," 1 Ga.L. Rev. 257 (1967); Henson, "`Proceeds' Under the Uniform Commercial Code," 65 Colum. L. Rev. 232 (1965); Gordon, "The Security Interest in Inventory Under Article 9 of the Uniform Commercial Code and the Preference Problem," 62 Colum. L. Rev. 49 (1962); Friedman, "The Bankruptcy Preference Challenge to After-Acquired Property Clauses Under the Code," 108 U. Pa. L. Rev. 194 (1959); King, "Section 9-108 of the Uniform Commercial Code: Does It Insulate the Security Interest From Attack by a Trustee in Bankruptcy?", 114 U. Pa. L. Rev. 1117 (1966); Kennedy, "The Trustee in Bankruptcy Under the Uniform Commercial Code: Some Problems Suggested by Articles 2 and 9," 14 Rut. L.Rev. 518 (1960); Hogan, "Future Goods, Floating Liens and Foolish Creditors," 17 Stan. L. Rev. 822 (1965); Viles, "The Uniform Commercial Code v. The Bankruptcy Act," 55 Ky.L.J. 636 (1967); Riemer, "Bankruptcy — Preference — Conflict Between Section 9-108 of the Uniform Commercial Code and Section 60(a) of Bankruptcy Act," 70 Comm'l L.J. 63 (1965); Riemer, "The After-Acquired Property Clause Revisited," 70 Comm'l L.J. 334 (1965); Kennedy, "The Impact of the Uniform Commercial Code on Insolvency: Article 9," 67 Comm'l L.J. 113 (1962); Comment, "Toward Commercial Reasonableness: An Examination of Some of the Conflicts Between Article 9 of the Uniform Commercial Code and the Bankruptcy Act," 19 Syr.L.Rev. 939 (1968); Recent Developments. "Bankruptcy Preferences — Secured Transactions," 65 Mich. L. Rev. 1004 (1967); Comment, "After-Acquired Property Security Interests in Bankruptcy: A Substitution of Collateral Defense of the U.C.C.," 77 Yale L.J. 139 (1967); Note, "Rosenberg v. Rudnick: An Examination of the Potential Conflict Between the After-Acquired Property Provisions of Article 9 of the U.C.C. and Section 60(a) of the Bankruptcy Act," 15 U.C.L.A.L.Rev. 678 (1968).
"April 21, 1964 Memo to: The Board of Directors of the Portland Newspaper Publishing Co., Inc.... and Robert J. Davis From: Keith W. Platner, Controller Re: Accounts Receivable Assignment to Robert J. Davis The following list of accounts receivable taken as of April 21, 1964, is to show the current standing of the original assignment of these accounts November 30, 1963, and February 24, 1964, RJD. Account Name Amount as of April 21, 1964 [Here appear names of accounts and balances as of April 21, 1964] Circulation A/R $18,752.56 __________ $35,183.75"
The Davis agreement encompasses less than all of the Bankrupt's accounts receivable; therefore, National Cash Register Co. v. Firestone & Co., Inc. (1963) 346 Mass. 255, 191 N.E.2d 471, 1 UCC Rep. 460, does not aid him. In the cited case the security agreement covered the business at a stated address "together with all its good-will, fixtures, equipment and merchandise." The court held that the creditor had a security interest in the cash register because "all" meant "all" fixtures and equipment
The parties used printed form No. 1208 UCC Series entitled "Accounts Receivable Loan and Security Agreement" with some modifications. Section 2.5 of the form relating to terms of payment and to the deposit of proceeds in a cash collateral account in the name of the secured party was stricken and in its place was inserted payment of $653.36 per month
The Code states that "a security agreement may provide that collateral, whenever acquired, shall secure all obligations covered by the security agreement." The draftsmen's intent was to validate security interests in after-acquired property, including inventory and accounts receivable, and to place such security interests on a par with security interests in property in which the debtor has present rights. Draftsmen's Comments to U.C.C. § 9-204
One theory, variously called the "res," "entity," or "Mississippi River" theory, conceives of accounts receivable as a single entity with an identity apart from the individual account components which make up the mass. The reified mass is the thing to which the creditor's lien adheres and which gives the creditor a present interest in all future accounts perfected upon filing a financing statement. Therefore, so long as the financing statement is filed before the four-month period antedating bankruptcy, the transfer is not voidable by the trustee. (E. g., Manchester National Bank v. Roche (1st Cir. 1951) 186 F.2d 827; Rosenberg v. Rudnick (D. Mass. 1967) 262 F. Supp. 635.)
Another theory is labeled the "sophisticated res" theory, which treats the secured creditor as having a continuously perfected security interest in after-acquired accounts as the proceeds of a previous interest in contract rights or general intangibles. The perfected interest adheres to the contract right, and not to the later performance of the right by the transfer of the after-arising account. (Coogan & Bok, "The Impact of Article 9 of the Uniform Commercial Code on the Corporate Indenture," 69 Yale L.J. 203 (1959))
Act of July 1, 1898, c. 541, § 60, 30 Stat. 562
64 Stat. 24, 11 U.S.C. § 96(a)
A helpful discussion of these cases and their relationship to the history of § 60 is found in Friedman, "The Bankruptcy Preference Challenge to After-Acquired Property Clauses Under the Code,"supra note 2, 108 U. Pa. L. Rev. 194 (1959).
See, e. g., Hearings Before the Committee on the Judiciary To Study Revision of the Bankruptcy Act (1937) 75th Cong., 1st Sess., ser. 9, at 121-22.
Ibid. See also the discussion by the House Committee considering the bill which became the 1950 version of § 60a (2). H.R.Rep.No. 1293 (1949) 81st Cong., 2d Sess.
Congress was also stirred specifically by critics of Corn Exchange Nat'l Bank & Trust Co. v. Klauder (1943) 318 U.S. 434, 63 S. Ct. 679, 87 L. Ed. 884, in which the Court invalidated a nonnotification assignment of accounts receivable deemed unperfected under Pennsylvania law.
The intent of the draftsmen to insulate Rose City's security interest from preference attack is evidenced by § 9-108 of the Uniform Commercial Code (Ore.Rev. Stat. § 79.1080). The insulation is in the form of a definition designed to defeat a trustee's claim that subjection of an after-arising account to an antecedent security agreement complying with the Code is a transfer in consideration of an antecedent debt within the meaning of § 60a(1). We do not reach the question, hotly contested by the parties, whether the Commercial Code draftsmen were successful in thus defeating a claim of preference. We cite the section simply to indicate the policy of the Commercial Code draftsmen to uphold security interests in after-acquired accounts receivable perfected upon filing a financing statement against a claim of preference by the trustee