Ipc (Usa), Inc. v. Kathryn Ellis , 917 F.3d 1130 ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE PETTIT OIL COMPANY, No. 17-60081
Debtor,
BAP No.
WW-16-1424-
IPC (USA), INC., a California KuFB
corporation,
Appellant,
OPINION
v.
KATHRYN A. ELLIS, Chapter 7
Trustee,
Appellee.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel
Kurtz, Faris, and Brand, Bankruptcy Judges
Argued and Submitted December 6, 2018
Seattle, Washington
Filed March 11, 2019
2 IN RE PETTIT OIL CO.
Before: William A. Fletcher and Jay S. Bybee, Circuit
Judges, and Larry A. Burns, * Chief District Judge.
Opinion by Judge Burns
SUMMARY **
Bankruptcy
The panel affirmed the Bankruptcy Appellate Panel’s
affirmance of the bankruptcy court’s summary judgment in
favor of a bankruptcy trustee who brought an adversary
proceeding seeking avoidance of transfers.
The debtor, a distributor of bulk petroleum products,
entered into a consignment agreement with IPC (USA), Inc.
Under the agreement, IPC delivered fuel to “card lock” sites
from which the debtor’s commercial customers purchased
fuel using access cards. When the debtor filed for
bankruptcy, it had in its possession IPC fuel as well as
proceeds from sold fuel, in the form of cash and accounts
receivable, that had not yet been remitted to IPC.
U.C.C. § 9-319(a) grants a consignee “rights and title to
the goods.” If a consignee files for bankruptcy, any
consigned “goods” in its possession become property of the
bankruptcy estate unless the seller has previously provided
*
The Honorable Larry Alan Burns, Chief United States District
Judge for the Southern District of California, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
IN RE PETTIT OIL CO. 3
public notice of its interest in the goods (normally by filing
a document known as a “financing statement”) and thereby
“perfected” its interest. The panel held that this rule also
extends to the proceeds from goods sold that are held by the
consignee on the date it files for bankruptcy. Thus, IPC’s
unperfected security interest in the fuel and the proceeds was
subordinate to the trustee’s interest.
COUNSEL
Edwin K. Sato (argued), Bucknell Stehlik Sato & Orth LLP,
Seattle, Washington, for Appellant.
Andrew H. Morton (argued), Deborah A. Crabbe, Foster
Pepper PLLC, Seattle, Washington, for Appellee.
OPINION
BURNS, Chief District Judge:
In a consignment transaction, a seller (the “consignor”)
delivers goods to a middleman (the “consignee”) who holds
the goods until they are sold to a buyer, at which point the
sale proceeds are transferred back to the seller. Under settled
bankruptcy law, if a consignee files for bankruptcy, any
consigned “goods” in its possession become property of the
bankruptcy estate unless the seller has previously provided
public notice of its interest in the goods (normally by filing
a document known as a “financing statement”) and thereby
“perfected” its interest. At issue in this case is whether this
rule also extends to the proceeds from goods sold that are
held by the consignee on the date it files for bankruptcy. We
4 IN RE PETTIT OIL CO.
conclude that it does, and affirm the judgment of the
Bankruptcy Court and the Bankruptcy Appellate Panel.
I.
The Debtor here, Pettit Oil Company, was a distributor
of bulk petroleum products. Part of Pettit’s business
involved operating “card lock” sites, where commercial
customers purchased fuel products using access cards. In
2013, Pettit entered into a consignment agreement with IPC
(USA), Inc. (“IPC”), under which IPC was to deliver
consigned fuel to card lock sites so Pettit could sell the fuel
to its customers. The aim was to reduce Pettit’s working
capital needs by outsourcing its fuel sales to IPC. In return
for being able to sell its fuel at Pettit’s stations, IPC paid
Pettit a monthly commission.
As with all “true” consignments, ownership of the fuel
remained with IPC until it was sold, at which time title
transferred to the purchaser. Whenever a customer
purchased consigned fuel, Pettit prepared an invoice and
instructed the customer to remit payment to IPC directly.
Despite this instruction, some customers continued to pay
Pettit for their purchases of IPC fuel. Anticipating this might
occur, the agreement provided that Pettit would “promptly
forward such payment[s] to IPC,” and Pettit did so regularly.
Nonetheless, when Pettit ultimately filed for bankruptcy, it
had in its possession not just IPC fuel but also proceeds from
sold fuel that had not yet been remitted to IPC. These
proceeds took two forms: (1) cash and (2) accounts
receivable—that is, balances owed by customers that had not
yet been paid. It is undisputed that IPC never filed a
financing statement or otherwise perfected its interests in the
consigned fuel, the accounts receivable, or the cash.
IN RE PETTIT OIL CO. 5
After Pettit filed for bankruptcy, the Trustee commenced
this proceeding seeking, among other things, the value of the
fuel, accounts receivable, and cash proceeds for the benefit
of the bankruptcy estate. The Trustee maintained that IPC’s
interest in the fuel, the cash proceeds, and accounts
receivable was subordinate to the Trustee’s because IPC
hadn’t filed a financing statement or otherwise perfected its
interest. The Bankruptcy Court entered summary judgment
in the Trustee’s favor, and the Bankruptcy Appellate Panel
affirmed.
II.
We independently review decisions of the Bankruptcy
Court and the Bankruptcy Appellate Panel. Carrillo v. Su
(In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). Conclusions
of law are reviewed de novo, while factual findings are
reviewed for clear error. Id.III.
IPC’s principal argument is that the bankruptcy courts
erred in concluding that the Trustee’s interest in the cash and
accounts receivable was superior to IPC’s. In IPC’s view,
although the Trustee may have a superior interest in the
“goods”—i.e., the fuel—that interest does not extend to cash
proceeds and accounts receivable that happened to be in
Pettit’s possession when it filed for bankruptcy. IPC’s
argument presents a single question of law: whether U.C.C.
§ 9-319(a), which grants a consignee “rights and title to the
goods,” also grants the consignee an interest in the proceeds
of those goods that were generated prior to bankruptcy. We
hold that it does.
6 IN RE PETTIT OIL CO.
A.
When a debtor goes into bankruptcy, the bankruptcy
trustee is automatically granted a judicial lien over all
property the debtor owns as of the petition date. See 11
U.S.C. § 544(a)(1). A creditor wishing to shield a particular
asset from the reach of the trustee can do so only if the
creditor can show that its interest in the asset is superior to a
judicial lien, a determination governed by various statutory
priority rules. Otherwise, the trustee’s judicial lien remains
superior and the trustee can “avoid” (i.e., block) any
transfers of the asset outside the bankruptcy estate.
IPC maintains that we should apply traditional property
law principles to hold that the proceeds in Pettit’s possession
are outside the scope of the Trustee’s avoidance powers
because the proceeds were not owned by Pettit. More
specifically, IPC maintains that we should treat the proceeds
as if they were the product of a bailment—that is, a transfer
of possession without a transfer of ownership. See, e.g., 5
Collier on Bankruptcy ¶ 541.05[1][b] (16th ed.) (2018) (“In
ordinary commercial practice, a consignment is equivalent
to a bailment for care or sale, wherein there is no obligation
to purchase in the consignee.”). Although this logic would
also suggest that the goods themselves are outside the
Trustee’s avoidance powers, IPC concedes (as it must) that
Article 9 of the Uniform Commercial Code (“U.C.C.”)
forecloses this argument. Section 9-319(a) of the U.C.C.
provides, “for purposes of determining the rights of creditors
of . . . a consignee, while the goods are in the possession of
the consignee, the consignee is deemed to have rights and
title to the goods identical to those the consignor had.”
(emphasis added). This provision means that even though a
consignee doesn’t truly own the consigned goods, the U.C.C.
treats the consignee as having an ownership interest. So,
IN RE PETTIT OIL CO. 7
here, with Pettit’s ownership interest established, the parties
agree that IPC’s unperfected security interest in the fuel is
subordinate to the Trustee’s judicial lien. See In re First T.D.
& Inv., Inc., 253 F.3d 520, 525 (9th Cir. 2001) (“Under 11
U.S.C. § 544(a), unperfected security interests are avoidable
and can be relegated to the status of general unsecured
claims.”).
Nonetheless, IPC argues that even if its interest in the
fuel is subordinate to that of the Trustee, its interest in the
cash and accounts receivable is superior because these assets
aren’t “goods.” In other words, according to IPC, because
the drafters of U.C.C. § 9-319(a) said “goods” instead of
“goods and proceeds,” Article 9—which governs priority
and perfection rules related to various types of security
interests, including consignments—cannot dictate the rules
regarding the proceeds of the goods. The problem with this
strained reading of section 9-319 is that it ignores numerous
references throughout the U.C.C. that treat a consignment as
a security interest for all practical purposes. See, e.g., U.C.C.
§ 9-102(a)(73)(C) (defining “[s]ecured party” to include a
“consignor”); U.C.C. § 1-201(b)(35) (defining “[s]ecurity
interest” to include “any interest of a consignor”) (emphasis
added); U.C.C. § 9-102(a)(12)(C) (defining “[c]ollateral” to
mean “the property subject to a security interest” that
includes “goods that are the subject of a consignment”). The
most natural reading of these provisions is that a consignor’s
interest in goods (and the related proceeds) is a security
interest for all purposes—including for purposes of
perfection and priority—unless the U.C.C. specifically says
otherwise.
The best example of the inconsistency in IPC’s argument
is U.C.C. § 9-324(b), which states, “a perfected [interest] in
inventory has priority over a conflicting security interest in
8 IN RE PETTIT OIL CO.
the same inventory . . . and . . . also has priority in
identifiable cash proceeds of the inventory.” (emphasis
added). Had IPC availed itself of this protection by
perfecting its interest in the fuel, it would have had priority
over the Trustee’s judicial lien extending not just to the fuel,
but also to the proceeds. And there is no persuasive reason
to interpret Article 9 as limiting the reciprocal effect—that a
consignor loses priority in the proceeds when it fails to
perfect its interest.
Moreover, the “goods” provision of section 9-319 can’t
be read in a vacuum. “We must interpret the statute as a
whole, giving effect to each word and making every effort
not to interpret a provision in a manner that renders other
provisions of the same statute inconsistent, meaningless or
superfluous.” United States v. Neal, 776 F.3d 645, 652 (9th
Cir. 2015) (internal alterations and quotations omitted).
Consistent with this rule of construction, and read in light of
Article 9’s other provisions, we hold that the term “goods”
in section 9-319(a) includes the proceeds of those goods, and
that Article 9’s priority and perfection rules apply with equal
force to such proceeds.
Although IPC argues the result should be different
because it retained title to the proceeds, the U.C.C. is clear
that IPC’s retention of title does not matter. Section 9-202
of the U.C.C. states that “[e]xcept as otherwise provided
with respect to consignments . . . , the provisions of [Article
9] with regard to rights and obligations apply whether title
to collateral is in the secured party or the debtor.” Retention
of title affects the remedies IPC could employ to recover the
goods in the event of default, but title is irrelevant to whether
IPC or the Trustee has priority in the goods and proceeds.
See U.C.C. § 9-202, cmt. 3.a.
IN RE PETTIT OIL CO. 9
Our conclusion that the term “goods” in section 9-319
includes the proceeds of those goods is bolstered by the
policy rationale underlying these rules. To the outside
world, goods and proceeds held by a consignee appear to be
owned by the consignee, and creditors might reasonably
believe as much when they decide to lend the consignee
money. The perfection and priority rules—which require
that the consignor publicly announce its interest in the
consigned goods or else go to the back of the line when the
consignee goes bankrupt—serve to protect unwary creditors
and prevent “secret liens” in the goods that might otherwise
dissuade such lending. See In re Valley Media, Inc., 279
B.R. 105, 125 (D. Del. Bankr. 2002) (“The purpose of . . . 9-
319(a) is to protect general creditors of the consignee from
claims of consignors that have undisclosed consignment
arrangements with the consignee that create secret liens on
the inventory.”). A ruling that “proceeds” are outside the
scope of the perfection rules would disrupt the delicate
balance the U.C.C. drafters struck between the interests of
consignors and the interests of the consignee’s other
creditors. IPC has not provided a convincing basis for
disrupting this intended balance.
B.
We also reject IPC’s argument that the Trustee can’t
have an interest in the proceeds because 11 U.S.C.
§ 544(a)—which establishes the Trustee as a judicial lien
holder—doesn’t contain a “reachback” provision that would
allow it to claim an interest in cash and accounts receivable
that arose before Pettit filed its bankruptcy petition. Section
544 grants the Trustee “a judicial lien on all property on
which a creditor on a simple contract could have obtained
such a judicial lien.” 11 U.S.C. § 544(a)(1) (emphasis
added). However we characterize the Trustee’s interest in
10 IN RE PETTIT OIL CO.
the “property” (i.e., the proceeds), that interest is identical to
the interest held by IPC. See U.C.C. § 9-319(a) (“[T]he
consignee is deemed to have rights and title to the goods
identical to those the consignor had.”). IPC undoubtedly
could have secured a lien on the proceeds, so the Trustee
could have as well. Accordingly, the lack of a “reachback”
provision is no barrier to the Trustee claiming an interest in
proceeds that arose pre-petition.
AFFIRMED.