Opinion ID: 1220117
Heading Depth: 3
Heading Rank: 2

Heading: The bankruptcy proceeding and the Bank's state law claims.(1)

Text: The California Commercial Code is applicable to determine the rights and duties of the parties in this case. Division 9 (Secured Transactions) applies, inter alia, to [a] transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract; and [a] sale of accounts, chattel paper, payment intangibles, or promissory notes. Cal. Com.Code § 9109(a)(1), (3). Except as otherwise provided ..., while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral. Cal. Com.Code § 9301(1). CyberHome was located in California at all relevant times. In order to perfect its interest in the CyberHome accounts assigned to the Bank, the Bank was required to file a financing statement. Cal. Com.Code § 9310(a). The Bank contends that, after receiving notice, Hitachi was required to pay the invoices directly to CIT, on the Bank's behalf. Section 9406(a) provides: Subject to subdivisions (b) to (i), inclusive, an account debtor on an account, chattel paper, or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor. Cal. Com.Code § 9406(a) (emphasis added). Hitachi elected to ignore the notices and its duties under § 9406 and paid CyberHome instead. The Bank asserts that Hitachi is therefore directly liable for the full amount of the payment that Hitachi made in satisfaction thereof to CyberHome. The Bank argues that this liability is independent of the accounts receivable. The Bank claims that CyberHome's bankruptcy estate has no property interest in the Bank's claims against Hitachi. A debtor's bankruptcy estate consists of all legal or equitable interests of the debtor in property at the time the case is commenced. See 11 U.S.C. § 541(a)(1). The Bank argues that, as of the date of its bankruptcy petition, CyberHome had no conceivable property interest in either the invoices or the Bank's claims against Hitachi. CyberHome had received payment in full on the invoices from Hitachi prior to the filing of its bankruptcy petition and was the beneficiary of this improper payment. The Bank argues, as a consequence, that the trustee's preference action against the Bank is irrelevant to its claims against Hitachi. Under the California Commercial Code, the Bank was required to perfect its security interest in the CyberHome accounts receivable in order to establish the priority of its interest as against competing secured creditors that were perfected and any future bankruptcy trustee. The Bank filed its financing statement within 90 days of CyberHome's bankruptcy filing. The trustee filed a preference avoidance action against the Bank under 11 U.S.C. § 547(b) [1] and obtained an unopposed order granting a motion for summary adjudication on August 10, 2007. The Bank acknowledges that the effect of the bankruptcy court order was to avoid the financing statement filed by the Bank as a preference under § 547(b) and to thereafter avoid the Bank's security interest against the accounts receivable. See 11 U.S.C. § 544(a). [2] This made the Bank an unsecured creditor against the bankruptcy estate and permitted the trustee to collect all accounts receivable. The Bank contends, however, that the bankruptcy court order does not extend to or have any effect on the obligation at issue in this case, arguing that it arose pre-bankruptcy independently of the accounts receivable. The bankruptcy court order does nothing to limit or alter the Bank's rights with respect to the millions of dollars of transactions that occurred in the years prior to bankruptcy under the factoring agreements. Consequently, the order does not give the bankruptcy estate a property interest in either the subject invoices or the Bank's claims herein against Hitachi. CyberHome had no interest when its petition was filed because it had received payment in full. The trustee has no interest for the same reason. Following the same line of logic, the Bank further asserts that a preference/lien action under 11 U.S.C. §§ 547(b) and 544(a) does not retroactively avoid a security interest as to past events and/or non-estate property. Instead, it is limited in its effect to property of the debtor that can be recovered by the avoidance statutes and property of the bankruptcy estate. The Bank contends that § 544(a) has no applicability to property in which the debtor has no interest, such as its claims against Hitachi. The Bank claims that the bankruptcy court order expressly adheres to these limitations on the bankruptcy avoidance powers in limiting the scope of the order to cover only receivables, inventory and proceeds that are property of the bankruptcy estate. The effect of the court's order is to preclude the Bank from seeking to collect CyberHome's remaining receivables in competition with the trustee. The Bank maintains, however, that the order has no applicability to Hitachi's payment of $1.2 million directly to CyberHome, instead of to the Bank as was required, nearly eight months prior to CyberHome's bankruptcy filing.