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Fitzpatrick v. Philco Finance Corp.

decided: February 21, 1974.

JAMES R. FITZPATRICK, AS TRUSTEE OF A. W. SIKKING CO., BANKRUPT, PLAINTIFF-APPELLEE,
v.
PHILCO FINANCE CORP., DEFENDANT-APPELLANT



Appeal from the United States District Court for the Southern District of Illinois.

Swygert, Chief Judge, Kiley, Senior Circuit Judge, and Sprecher, Circuit Judge.

Author: Sprecher

SPRECHER, Circuit Judge.

This appeal concerns the right to proceeds from secured collateral following the debtor's bankruptcy.

Prior to 1969, A. W. Sikking Co. was a large and established appliance store in Springfield, Illinois. For some years Sikking had financed its purchase of Philco appliances through an agreement with Philco Finance Corp. Pursuant to that agreement, Philco had properly filed financing statements showing its secured interest in the appliances and in the proceeds of the collateral. As soon as Sikking sold an appliance, it was obligated under the agreement to pay the amount due on that item to Philco.

Philco products were distributed in the Illinois-Iowa area by Hardware Products Co. in Sterling, Illinois. Philco Finance had extended a credit line of $275,000 to Sikking as Hardware Products' largest retail dealer.

Sikking's practice in handling Philco sales was to write up a sales receipt on each appliance sold. The receipt noted the brand and kind of appliance, its model number, total price, cash down payment and financing arrangement. All cash payments were deposited in Sikking's general account at Springfield Marine Bank.*fn1 Much of the Philco merchandise was financed on retail installment contracts, which were sold to a finance company not affiliated with Philco. Proceeds from these contracts were deposited in the same account.

Sikking then drew checks on its account to pay Philco Finance under the security agreement. It appears that the checks usually noted separate Philco invoice numbers and amounts due for each transaction.

In 1969 several officers and directors of Sikking apparently became aware of mismanagement of the business by its president and general manager, Edward Curry. On July 15 they asked Curry to resign. At the urging of another secured creditor, two vice-presidents, Smith and Reilly, hired an accountant to determine the financial condition of the business.

The accountant, Harold Cox, began work on August 11. Although the books were in bad shape and he could not ascertain or verify the value of certain items, Cox prepared a "tentative" balance sheet which he reviewed with Smith and Reilly on September 3. It showed Sikking's liabilities exceeded its assets by more than $160,000.

Smith arranged for a meeting the next day, September 4. Those attending included Smith, Reilly and Cox; H. R. Bertolet, manager of the Philco Finance office in Rock Falls, Illinois; Peter Wheeler, an officer of Hardware Products Co.; several men from General Electric Credit Corp.; and Robert Saner, an officer of Springfield Marine Bank. Cox distributed copies of the balance sheet and led a discussion of Sikking's financial status. No decision about the future of the business was reached at the meeting.

Less than two weeks later, on September 16, Sikking's officers filed a petition in bankruptcy.

The trustee in bankruptcy filed this action against Philco Finance to recover most of the funds Sikking paid to Philco during the ten-day period before bankruptcy was instituted. The trustee's theory was that Philco's security interest in proceeds was limited by Ill.Rev.Stat. ch. 26, ยง 9-306(4):

In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in ...


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