The opinion of the court was delivered by: Michael P. McCUSKEY Chief U.S. District Judge
This is an appeal from an Opinion entered by the United States Bankruptcy Court for the Central District of Illinois (Bankruptcy Case No. 08-91780) brought pursuant to 28 U.S.C. § 158(a), concerning whether a valid Purchase Money Security Interest (PMSI) existed with regard to certain property of a debtor. In Adversary Case No. 08-09049, the Bankruptcy Court found in favor of Plaintiff-Appellee, Midland States Bank (Strategic),*fn1 and against Defendant-Appellant Innerworkings, LLC/Innerworkings, Inc. (InnerWorkings). Following a thorough review of the record and relevant legal authorities, this court agrees with the decision of the Bankruptcy Court and affirms its judgment.
The following facts are taken from the briefs of both parties filed in this court: Debtor Sports Publishing LLC commenced the underlying bankruptcy case by filing a voluntary chapter 11 petition in the United States Bankruptcy Court for the Central District of Illinois on October 15, 2008. Strategic loaned money to Debtor, entered into a Commercial Security Agreement on July 10, 2001 with Debtor and filed Financing Statements on July 16, 2001 and February 7, 2006 (continuation filing) with the Illinois Secretary of State's Office to secure its notes and payment of the money owed by the Debtor. InnerWorkings loaned money and/or extended credit to Debtor, entered into a Commercial Security Agreement with Debtor on January 1, 2005, and filed a Financing Statement with the Illinois Secretary of State's Office on March 29, 2005, with respect to certain of Debtor's property. Subsequently, InnerWorkings entered into a series of agreements (PMSI Agreements) with Debtor and Strategic in which the parties agreed that InnerWorkings would finance certain inventory of Debtor.
On November 4, 2008, Strategic commenced the adversary proceeding from which this appeal is taken by filing its Complaint to Determine the Validity, Extent, and Priority of Lien Claims (Complaint) against InnerWorkings and other defendants. In the Complaint, Strategic requested a determination by the Bankruptcy Court as to the validity, extent, and relative priority of the lien claims of InnerWorkings and Strategic.
In its pleadings, InnerWorkings conceded that Strategic had a first priority lien on and security interest in the collateral (non-PMSI collateral) of Debtor other than the PMSI collateral and that InnerWorkings has a second priority lien on and security interest in the non-PMSI collateral. However, InnerWorkings asserted that it has a valid PMSI on certain inventory collateral (PMSI collateral), which therefore constitutes a first priority lien on and security interest in the PMSI collateral, senior to the lien and security interest of Strategic.
The PMSI Agreements in question relate to certain books InnerWorkings financed for Debtor. The language contained in the January 1, 2005, InnerWorkings Commercial Security Agreement and Uniform Commercial Code Financing Statement with Debtor stated: "Despite any other provision of this Agreement, Vendor is granted, and by virtue of the fact that it provided product to Grantor, has a purchase money security interest in the goods that were sold to Grantor." Then in 2007 InnerWorkings and Debtor entered into the agreements in question, which established a PMSI in property of the Debtor financed by InnerWorkings.
The sole issue presented for trial was whether InnerWorkings complied with the requirements under Illinois law for the creation and enforcement of a valid PMSI on the PMSI collateral in the PMSI Agreements. As InnerWorkings was the party asserting the PSMI, it bore the burden of proof in presenting evidence that established that it has complied with the Illinois PMSI laws relating to inventory.
During the Bankruptcy Court trial on May 5, 2009, Steven Wills, the former president of Strategic, was called as an adverse witness by InnerWorkings. He was the only witness called by InnerWorkings. Wills was familiar with the lending relationship between Debtor and Strategic. He was also familiar with the relationships between InnerWorkings and Strategic and InnerWorkings and Debtor. Wills denied that he had detailed conversations with InnerWorkings's management and Strategic's management concerning InnerWorkings's attempt to sell books to Debtor, secured by a PMSI. He did admit to having "five to ten" discussions with InnerWorkings concerning Debtor's owing money to InnerWorkings. Wills again denied knowing that InnerWorkings had a PMSI with regard to certain books sold by InnerWorkings to Debtor. Wills's understanding of the book deal was that it was just a normal "client/customer relationship." Wills was then shown the agreement between Debtor and InnerWorkings for the 2007 Fall listing of books that Debtor had planned to publish. When asked by InnerWorkings's counsel if those agreements identified the books that InnerWorkings would sell to Debtor on a PMSI basis, Wills said they did not. Wills again stated the agreements to sell the books, to his knowledge, were not based on a PMSI, but rather just the normal client/customer relationship.
Although it is not explicitly stated what exact documents Wills received in his capacity as Strategic president, or what he was reviewing on the witness stand at trial, it appears the documents in question were the Commercial Security Agreement between InnerWorkings and Debtor dated January 1, 2005 (Appellate Record pp. 79-82), the UCC Financing Statement dated March 29, 2005 (Appellate Record pp. 83-84), and the Fall 2007 Agreements between Strategic, InnerWorkings, and Debtor for InnerWorkings for InnerWorkings sale of books to Debtor (Appellate Record pp. 85-93). The Commercial Security Agreement contained the line "Despite any other provisions of this Agreement, Vendor is granted, and by virtue of the fact that it provided product to Grantor, has, a purchase money security interest in the goods that were sold to Grantor" about four or five paragraphs down on the first page entitled "Commercial Security Agreement" and not under its own separate headings. This statement is repeated in the 2005 Innerworkings-Debtor UCC Financing Statement as the very bottom paragraph, which the terms "Secured Party" and "Debtor" substituted for "Vendor" and "Grantor," respectively. Then, these documents were attached to the 2007 agreements describing InnerWorkings's interest in sales of books by Debtor.
On cross examination, Wills stated that, in the PMSI collateral agreements between InnerWorkings and Debtor, PMSI is never mentioned. It was also never mentioned in any conversation related to the agreements. Strategic did not prepare the agreements, but rather InnerWorkings prepared them. On redirect, Wills testified that he had reviewed InnerWorkings's Commercial Security Agreement and UCC Financing Statement. The first time he reviewed those documents was in April/May 2007. However, when counsel for InnerWorkings showed Wills the Commercial Security Agreement between InnerWorkings and Debtor, the document contained, on page one above the paragraph "Grantor's Representations and Warranties," that InnerWorkings maintained a PMSI in any goods sold to Debtor. However, Wills could not say that he was aware, as of April 2007, that InnerWorkings intended to sell books to Debtor on a PMSI basis.
On recross, counsel for Strategic noted that InnerWorkings Commercial Security Agreement came in a package that did not include an authenticated notice of PMSI. Neither Wills himself, nor to his knowledge anyone else at Strategic, ever received such a PMSI authenticated notice. No other evidence or witnesses were presented by either party.
The Bankruptcy Court ruled in favor of Strategic at trial, stating "[Strategic] is clearly right. The evidence is very clear. It is a slam dunk case for the plaintiff bank." In the order entered on May 6, 2009, after the conclusion of the trial, the Bankruptcy Court stated:
"Judgment is GRANTED for Plaintiff STRATEGIC CAPITAL BANK and against Defendant INNERWORKINGS, INC. f/k/a INNERWORKINGS LLC regarding the validity of a Purchase Money Security Interest of INNERWORKINGS for any collateral of Debtor SPORTS PUBLISHING, LLC, thus giving STRATEGIC CAPITAL BANK a first priority lien ...