Opinion ID: 760170
Heading Depth: 2
Heading Rank: 3

Heading: summary judgment ruling on paulman's security interest

Text: 37 A bankruptcy court's grant of summary judgment is reviewed de novo. See Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 546 (9th Cir.1991). 38 Paulman challenges the summary judgment ruling that he did not acquire a security interest in after-acquired property, and is therefore an unsecured creditor of Filtercorp. On this appeal, we must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the [bankruptcy] court correctly applied the relevant substantive law. Grimmett v. Brown, 75 F.3d 506, 510 (9th Cir.1996). 39
Accounts Receivable 40 Whether a security agreement creates a lien on particular assets is a question of state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Because no reported decisions of Washington courts or federal courts interpreting Washington law have answered the question whether a security agreement that grants an interest in inventory or accounts receivable, without more, extends to after-acquired property, we must determine how Washington's highest court would resolve the issue. See Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir.1986) (Where the state's highest court has not decided an issue, the task of the federal courts is to predict how the state high court would resolve it.), modified on denial of reh'g, 810 F.2d 1517 (9th Cir.1987). 41 Whether security interests in inventory presumptively include after-acquired property under Washington law came before us in Stoumbos v. Kilimnik, 988 F.2d 949, 954-56 (9th Cir.1993). We acknowledged the existence of a split of authority on whether a security interest in inventory or receivables automatically extended to after-acquired inventory or receivables despite the absence of an after-acquired property clause, but, on the facts of the case, did not have to decide the issue. See id. at 955-56. We now hold that if the issue came before the Washington Supreme Court, it would hold that security interests in inventory and accounts receivable presumptively include after-acquired inventory and receivables, subject to rebuttal by evidence that the parties intended otherwise. 42 Courts disagree over what terms are required in a security agreement to cover after-acquired inventory and accounts receivable. 2 A minority of jurisdictions require express language evidencing the parties' intent to cover after-acquired inventory or accounts receivable. See, e.g., In re Middle Atl. Stud Welding Co., 503 F.2d 1133, 1135-36 (3d Cir.1974) (applying Delaware law); Covey v. First Nat'l Bank (In re Balcain Equip. Co.), 80 B.R. 461, 462 (Bankr.C.D.Ill.1987) (applying Illinois law); In re Taylored Prods., Inc., 5 U.C.C. Rep. Serv. 286, 289-91 (Bankr.W.D.Mich.1968) (applying Michigan law). These courts view the Uniform Commercial Code provision concerning after-acquired property, U.C.C. § 9-204 (codified at Revised Code of Washington section 62A.9204), 3 as contemplating express after-acquired property clauses. See Middle Atlantic, 503 F.2d at 1135-36; Balcain Equip., 80 B.R. at 462. They reason that it is neither onerous nor unreasonable to require a security agreement to make clear its intended collateral. Middle Atlantic, 503 F.2d at 1136. To do so simplifies the interpretation of security agreements and provides more precise notice to third parties of the extent of a perfected security interest in the debtor's property. See id. (noting that a subsequent lender might expect the parties to make explicit an intention to include this kind of property, both for precision and because of the [pre-U.C.C.] law's historic hostility to floating liens). In these jurisdictions, a grant of a security interest in inventory or accounts receivable, without more, is insufficient to include after-acquired property. 43 However, we find more persuasive the contrary position, adopted by the majority of jurisdictions, that a security interest in inventory or accounts receivables presumptively includes an interest in after-acquired inventory or accounts receivables, respectively. See, e.g., National Bank v. West Tex. Wholesale Supply Co. (In re McBee), 714 F.2d 1316, 1330-31 (5th Cir.1983) (applying Texas law); Claytor v. Shenandoah Warehouse Co. (In re Shenandoah Warehouse Co.), 202 B.R. 871, 875 (Bankr.W.D.Va.1996) (applying Virginia law); In re American Family Marketing Corp., 92 B.R. 952, 954 (Bankr.M.D.Fla.1988) (applying Florida law); Provident Hosp. & Training Ass'n v. GMAC Mortgage Co. (In re Provident Hosp. & Training Ass'n), 79 B.R. 374, 380 (Bankr.N.D.Ill.1987) (applying Illinois law); 4 In re Nickerson & Nickerson, Inc., 329 F.Supp. 93, 96 (D.Neb.) (applying Missouri law), aff'd, 452 F.2d 56 (8th Cir.1971); Frankel v. Associates Fin. Servs. Co., 281 Md. 172, 377 A.2d 1166, 1168 (Md.Ct.App.1977) (applying Maryland law); Kuemmerle v. United N.M. Bank at Roswell, N.A., 113 N.M. 677, 831 P.2d 976, 979-80 (N.M.1992) (applying New Mexico law); see also Sims Office Supply, Inc. v. Ka-D-Ka, Inc. (In re Sims Office Supply, Inc.), 83 B.R. 69, 72-73 (Bankr.M.D.Fla.1988) (applying Florida law); In re Fibre Glass Boat Corp., 324 F.Supp. 1054, 1056 (S.D.Fla.) (applying Florida law), aff'd, 448 F.2d 781 (5th Cir.1971). The rationale for this position rests on the unique nature of inventory and accounts receivable as cyclically depleted and replenished assets. Stoumbos, 988 F.2d at 956; see also Shenandoah Warehouse, 202 B.R. at 875 (noting revolving nature of receivables in most businesses); Nickerson & Nickerson, 329 F.Supp. at 96 (Inventory is like a river, the water in which continually flows, rises and falls, but which always constitutes a river.) (citing Ray D. Henson, Proceeds Under the Uniform Commercial Code, 65 Colum. L.Rev. 232 (1965)). Because inventory and accounts receivable are constantly turning over, no creditor could reasonably agree to be secured by an asset that would vanish in a short time in the normal course of business. Stoumbos, 988 F.2d at 955 (citing American Employers Ins. Co. v. American Sec. Bank, 747 F.2d 1493, 1501 (D.C.Cir.1984)); see also Fibre Glass Boat, 324 F.Supp. at 1056 (Surely the creditor would not enter into a financing arrangement secured by collateral fixed on a particular date, when the collateral by its nature would be constantly changing.). Essentially, a floating lien on inventory and accounts receivable is presumed because the collateral is viewed in aggregate as a shifting body of assets. See Nickerson & Nickerson, 329 F.Supp. at 96 ([I]nventory subject to a security agreement should be looked upon as a single entity and not as [a] collection of individual items.). 44 Commentators support the majority position. See, e.g., 8A Ronald A. Anderson, Anderson on the Uniform Commercial Code § 9-204:11 at 896 (3d ed. 1996) (When the collateral is of such nature that it is continually changing, a security interest in the collateral covers after-acquired property even though there is no express after-acquired property clause.); Barkley Clark, The Law Of Secured Transactions Under The Uniform Commercial Code p 2.09 [b] at 2-98 n. 338 (1993) (The best rule for the courts is to excuse any reference to after-acquired property in the financing statement, but to draw the line in the security agreement according to real expectations in the commercial world; inventory, accounts, and farm products should not require inclusion of after-acquired property clauses in the security agreement, while equipment or general intangibles should.); Ray D. Henson, Secured Transactions Under the Uniform Commercial Code 281 n. 57 (2d ed. 1979) (Where collateral, such as inventory or accounts, is constantly changing, the collateral can be analogized to [a][r]iver.... When the collateral changes, we trace the original security interest into the proceeds back into the substituted collateral, and so on, so that the security interest is continuous and continuously perfected.) (citations omitted). 45 The Uniform Commercial Code also provides support. The Official Comment to U.C.C. section 9-204 explains that the code accepts the validity of floating liens. 5 Nothing in the comments mandates a specific statement to secure after-acquired property. Moreover, U.C.C. section 9-110 provides that a security agreement need not make a specific description of the covered collateral so long as it reasonably identifies what is described. Wash. Rev.Code § 62A.9-110 (1995). Finally, the presumption of a floating lien on inventory and accounts receivable is consistent with the mandate that the U.C.C. be liberally construed and applied to promote its underlying purposes and policies. Wash. Rev.Code § 62A.1-102(1) (1995); see also 8 William D. Hawkland et al., Uniform Commercial Code Series § 9-204:1, at Art. 9-1118 (1997) (The intent of the drafters was to recognize and liberalize the rules surrounding after-acquired property clauses....). 46 The BAP rejected the presumption that security interests in inventory and accounts receivable automatically include after-acquired property, in part on the ground that the cases adopting this position involved language in the security agreement demonstrating that the parties intended to cover a broad class of collateral, such as all inventory or all accounts. While parties have often signaled their intent through use of the word all in the security agreement, this is not true of every case endorsing the presumption. Compare Sims Office Supply, 83 B.R. at 70 (security agreement granting security interest in all inventory), and Fibre Glass Boat, 324 F.Supp. at 1055 (security agreement granting security interest in all inventory used in the production of boats), with Shenandoah Warehouse, 202 B.R. at 872, 875 (security agreement granting security interest in accounts receivable included after-acquired receivables despite fact that it did not say all), and American Family Mktg., 92 B.R. at 953-54 (security agreement granting security interest in 65% of the value of the inventory included after-acquired inventory). 47 More importantly, the majority of courts and commentators reason that the presumption of a floating lien on inventory and accounts receivable is not created by particular language but rather springs from an appreciation of the cyclical nature of the collateral itself. This is confirmed by the decision on which the BAP placed its principal reliance, American Employers Ins. Co. v. American Sec. Bank, 747 F.2d 1493 (D.C.Cir.1984) (applying Maryland law). The American Employers court acknowledged that inventory and accounts receivable are unique types of collateral, describing them as constantly turning over, and ... usually conceived of as a single entity. Id. at 1500. Drawing on cases considering financing statements lacking explicit after-acquired property clauses, the court noted that the description of the collateral as 'accounts receivable' sufficiently identifie[s] the collateral as to put a prospective creditor on notice of the probability that the security agreement did embrace present and future accounts receivable. Any other view would ignore the realities of the world of financing. Id. (quoting South County Sand & Gravel Co. v. Bituminous Pavers Co., 106 R.I. 178, 256 A.2d 514, 517 (R.I.1969) (internal quotation marks omitted)). Further, the American Employers court reasoned that [t]he addition of the word 'future' to 'accounts receivable and inventory' would not seem to help an interested party in determining the status of the debtor. Id. (quoting In re Platt, 257 F.Supp. 478, 481 (E.D.Pa.1966) (internal quotation marks omitted)). Turning to the security agreement at issue, the American Employers court held that [i]t is reasonable to read a security agreement granting an interest in all inventory or receivables to include after-acquired inventory or receivables. Id. at 1501. And although the court also looked to evidence of the parties' subjective intent to include after-acquired collateral, the rationale of the decision is consistent with a presumption favoring inclusion of after-acquired collateral. Indeed, some jurisdictions have interpreted American Employers as endorsing the presumption. See Sims Office Supply, 83 B.R. at 72 (citing American Employers for the proposition that [t]he modern trend suggests that a security interest in after-acquired property is to be automatically presumed when the collateral is described in such generic terms as 'accounts receivable,' ... or 'inventory' ); Kuemmerle, 831 P.2d at 979-80 (citing American Employers for the proposition that [a] majority of the courts addressing this issue have concluded that a security interest in inventory also includes after-acquired inventory unless the security agreement clearly indicates the contrary result is intended). 48 Some courts have approached the issue of after-acquired property by asking whether a reasonable person viewing the security agreement would recognize that the parties intended to secure after acquired inventory or accounts receivable. In re Gary & Connie Jones Drugs, Inc., 35 B.R. 608, 611 (Bankr.D.Kan.1983) (applying Kansas law); see also Kubota Tractor Corp. v. Citizens & S. Nat'l Bank, 198 Ga.App. 830, 403 S.E.2d 218, 224 (Ga.Ct.App.1991) (applying Georgia law). Yet courts applying the reasonable person test invariably find that the parties intended to secure after acquired inventory [or accounts receivable] despite the absence of an after acquired clause because the assets are constantly flowing in and out of the debtor's possession. Gary & Connie Jones Drugs, 35 B.R. at 611. Thus, this approach essentially collapses into the presumption that after-acquired inventory and accounts receivable are covered. 49 The presumption that a grant of a security interest in inventory or accounts receivable includes after-acquired property is of course rebuttable. For example, the presumption would be overcome where the security agreement language itself manifests an intent to limit the collateral to specific identified property, where a party presents clear evidence of contemporaneous intent to limit the collateral, or where the debtor can demonstrate that it was engaged in a type of business where the named collateral, whether inventory or receivables, does not regularly turn over so that the rationale for the presumption does not apply. See, e.g., Stoumbos, 988 F.2d at 955-56 (no need to decide if inventory automatically includes after-acquired inventory because security agreement at issue granted an interest in inventory ... on hand at May 1, 1982); Sims Office Supply, 83 B.R. at 73-74 (security agreement with provisions relating to debtor's sale of collateral, creditor's inspection of collateral, and substitution of collateral was sufficiently ambiguous to preclude summary judgment despite presumption that inventory and accounts receivable include after-acquired property); see also Chrysler Credit Corp. v. Knebel Chevrolet-Buick, Inc., 976 F.2d 1012, 1015 (7th Cir.1992) (in a financing statement, the description of collateral as used car inventory would presumptively include after-acquired cars, but when used in conjunction with a list of specific cars, the statement could not reasonably be said to cover after-acquired inventory). 50 We conclude that were the issue to come before the Washington Supreme Court, it would hold that after-acquired collateral is presumptively covered by a security agreement referencing inventory or accounts receivable. Because Washington has recognized that the Uniform Commercial Code was promulgated in order to develop uniformity in commercial transactions, Schroeder v. Fageol Motors, Inc., 86 Wash.2d 256, 544 P.2d 20, 24 (Wash.1975) (en banc), it can be expected to follow the rule adopted by a majority of the jurisdictions that have addressed the issue and that conforms to commercial practice and common sense. 51
52 Applying the foregoing analysis to the security agreement between Paulman and Filtercorp, we reach different results with respect to accounts receivable and inventory. The note (which serves as the security agreement) states that it was secured by the accounts receivable and inventory of Filter Corp. [sic] (see UCC-1 filing and attached inventory listing.). While the presumption that after-acquired property is included stands unrebutted as to accounts receivable, it is rebutted for inventory by the reference to the attached inventory listing. 53 Under the approach we adopt, the reference to accounts receivable presumptively includes after-acquired accounts receivable. The bankruptcy court found the opposing declarations of Paulman and Filtercorp, Inc.'s President as to their contemporaneous intent to be inconclusive. That finding of fact is not clearly erroneous. There is no other evidence of intent in the record. Therefore, we hold that Paulman has a security interest in after-acquired accounts receivable of Filtercorp. That security interest was perfected when Paulman filed a UCC-1 financing statement before other creditors and before Filtercorp filed for bankruptcy. 6 54 With respect to the security interest in inventory, the note referenced an attached inventory listing which, however, was never attached to either the note or the financing statement. Paulman claims that he did not attach the listing because he agreed with Filtercorp, Inc.'s President Bernard to create a security interest in inventory in general, including after-acquired inventory. Bernard, in contrast, claims that after-acquired inventory was never discussed by the parties prior to entering into the loan agreement and that he did not intend to attach after-acquired property given the short term nature of the loans. The bankruptcy court's finding that this conflicting evidence is inconclusive is not clearly erroneous. Thus, we are left with the language of the note itself. 55 When, as in this case, a security interest in inventory is described by reference to a list, it suggests an intent to limit the collateral rather than cover inventory as a floating mass including after-acquired inventory. See Chrysler Credit, 976 F.2d at 1014-15 (financing statement identifying collateral as Used Car Inventory; See Attachment 'A'  evidenced an intent to limit inventory rather than include after-acquired inventory). Yet, reference to an attached list does not preclude securing after-acquired collateral when the agreement or the listing demonstrate an intent to do so. See Coats State Bank v. Grey (In re Grey), 902 F.2d 1479, 1481 (10th Cir.1990) (security agreement granting interest in all debtor's livestock, hog equipment, farm machinery, and farm equipment as listed, to be updated monthly created an interest in after-acquired property because the requirement of monthly updating, in addition to other facts, evidenced an intent to attach after-acquired property); John Deere Co. v. Butler County Implement, Inc., 232 Kan. 273, 655 P.2d 124, 129-30 (Kan.1982) (security agreement covering inventory per ... Exhibit 'B'  did not create interest in after-acquired inventory, whereas security agreement in inventory and accounts receivable now owned and hereafter acquired by Borrower.... SEE ATTACHED EXHIBIT 'A'  did create interest in after-acquired property by the inclusion of an explicit after-acquired property clause). 56 Here, the Paulman-Filtercorp note referenced an inventory listing, which rebuts the presumption that after-acquired inventory is attached, and failed to demonstrate any particular intent to cover after-acquired inventory. The note's ambiguity regarding the security interest in inventory must be construed against Paulman, the drafter of the note. See McMahan & Baker, Inc. v. Continental Cas. Co., 68 Wash.App. 573, 843 P.2d 1133, 1136 (Wash.Ct.App.1993) (ambiguous contract language is construed against the drafter). We conclude that Paulman does not have a security interest in after-acquired inventory of Filtercorp. 7 57 Accordingly, we reverse the summary judgment with respect to Paulman's lien on accounts receivable, including after-acquired accounts receivable, of Filtercorp, and affirm with respect to his lien on inventory. 58