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In re Chaseley's Foods Inc.

decided: December 9, 1983.

IN THE MATTER OF: CHASELEY'S FOODS, INC., D/B/A VIC'S SUPER FOODS, DEBTOR. APPEAL OF DANIEL L. FREELAND, TRUSTEE


Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 82 C 849 -- James T. Moody, Judge.

Cummings, Chief Judge, Wood, Circuit Judge, and Campbell, Senior District Judge.*fn*

Author: Per Curiam

This is an appeal by Daniel L. Freeland, trustee in bankruptcy for Chaseley's Foods, Inc., from an order of the United States District Court for the Northern District of Indiana reversing an order of Bankruptcy Judge Nehrig and remanding the case for further proceedings. District Judge Moody decided that under Ind. Code 26-1-9-403(2) (which was Section 9-403(2) of the Uniform Commercial Code effective in Indiana in 1964), the Small Business Administration which, as assignee of security agreements and financing statements, held a perfected security interest in Chaseley's collateral at the time its bankruptcy petition was filed in August, 1980, retained that perfected interest despite failing to file a continuation statement upon the December 23, 1980, expiration of the financing statement. United States v. Freeland, 30 Bankr. 452 (N.D. Ind. 1983).

The parties have stipulated to the facts in this case, and they appear in the district court's opinion, 30 B.R. 452, 453-454 (N.D. Ind. 1983), and need not be repeated here.

We affirm the district court's order as modified by this per curiam opinion and adopt as our own, with one amplification added at note 1a infra, Judge Moody's able and well-reasoned opinion which is reproduced as the appendix hereto.

Freeland raises several other arguments supporting affirmance of the Bankruptcy Court's decision upholding his claim to the proceeds even though Indiana law does not require the filing of a continuation statement under these circumstances. We have given serious attention to those arguments but need to discuss only two.

First, Freeland notes that Section 546(b) of the Bankruptcy Act, 11 U.S.C. at 546(b), allows a creditor to perfect a security interest after a bankruptcy petition has been filed and concludes that the Government was required under federal law to file a continuation statement. He cites no case law to support this position and we have found none. Indeed, the authorities on which he relies make clear that Section 546(b) was intended to make perfection possible after a bankruptcy petition was filed when Section 362's automatic stay provision (11 U.S.C. § 362) would otherwise prevent perfection, and not to impose new requirements beyond those required for perfection under state law. E.g., 4 Colliers on Bankruptcy para. 546.03 at 546-7 to 546-8. Since under Indiana law, the Government's pre-petition security interest in Chaseley's inventory remained perfected without the necessity for filing a continuation statement, Section 546(b) has no relevance to the continuation statement issue.

Freeland's second argument is more troublesome. He contends that whatever security interest the Government may have in Chaseley's inventory collateral, it has no perfected interest in the proceeds from the sale of that collateral. Since the Government's complaint seeks only to establish its priority rights to the proceeds, Freeland contends that we must reinstate the Bankruptcy Court's decision that Freeland's interest in the proceeds is superior to the Government's. The Bankruptcy Court did not reach this issue, because it found for the trustee on other grounds. The district court's opinion does not discuss the issue either.

The question of who has rights in proceeds which are acquired by a bankrupt's estate after a bankruptcy petition is filed requires interpretation of both state and federal law. Under the Bankruptcy Act, when a security interest in collateral is created before bankruptcy "such security interest extends to such proceeds * * * acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to the extent that the court, after notice and a hearing, and based on the equities of the case, orders otherwise." 11 U.S.C. § 552(b).

It is undisputed that the security agreement assigned to the Government covered Chaseley's inventory and any proceeds arising from that inventory (Stipulation Agreement and Attachment B thereto). Thus under Section 552 (b) the Government has a security interest in the proceeds from the inventory sale to the extent applicable nonbankruptcy laws provide. The applicable nonbankruptcy laws are Ind.Code 26-1-9-306(4)*fn2 which defines the rights of a party with a perfected security interest in proceeds of collateral of an insolvent debtor and Ind.Code 26-1-9-306(3) which defines a perfected security interest in proceeds.

Under 26-1-9-306(3) (which is Section 9-306 (3) of the 1962 version of the Uniform Commercial Code effective in Indiana in 1964):

(3) The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes unperfected ten (10) days after receipt of the proceeds by the debtor unless

(a) a filed financing statement covering the original collateral also covers proceeds; or

(b) the security interest in the proceeds is perfected before the expiration of the ten (10) day period.

Thus whether under 11 U.S.C. § 552(b) the Government has a security interest in the proceeds which will defeat the trustee's claim depends on whether under Ind.Code 26-1-9-306(3), the Government has a perfected security interest in these proceeds. This Court does not have sufficient facts before it to make that determination as a matter of law. It is clear that the financing statement assigned to the Government does not expressly cover proceeds (Stipulation of Facts, Attachment D) although, as already noted, the assigned security agreement does. Although Freeland asserts that the Government never filed a perfected security interest in proceeds after the sale, that is not a stipulated fact. Furthermore, the Government alleges and Chaseley's Foods admits that "plaintiff consented to the sale of the collateral, with its lien attached to the proceeds." (para. 4 Complaint; Legal Par. 1, Answer). Finally, the Bankruptcy Court has not made any finding as to whether the Government has a perfected security interest in the proceeds.

While it appears that the Government has no perfected security interest in the proceeds, the record does not conclusively establish this fact, so that the proceedings must be remanded to the Bankruptcy Court to find this fact. In Re Platt, 257 F. Supp. 478, 481-82 (E.D.Pa. 1966). Furthermore, even if the Bankruptcy Judge finds that under 26-1-9-306(3), the Government has no perfected security interest in the proceeds, the Government may nevertheless prevail against the trustee. Section 552(b) gives the court the right to modify the security interest resulting under state law where equity requires. In Re Trans-Texas Petroleum Corp., 33 B.R. 67 (Bkrtcy., N.D.Tex. 1983) and 11 U.S.C. § 552(b). We express no opinion as to whether equity would require any modification of the result ...


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