In re: Phoenix Heliparts Inc.

FILED
MAY 07 2018
SUSAN M. SPRAUL, CLERK
1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. AZ-17-1162-BLKu
)
6 PHOENIX HELIPARTS INC., ) Bk. No. 2:15-bk-12003-DPC
)
7 Debtor. ) Adv. No. 2:16-ap-00331-DPC
)
8 )
ROBERT REISH; KATHLEEN REISH; )
9 RYUKO, INC., )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1
)
12 PHOENIX HELIPARTS, INC. )
LIQUIDATION TRUST, )
13 )
Appellee. )
14 ______________________________)
15 Argued and Submitted on February 23, 2018,
at Phoenix, Arizona
16
Filed - May 7, 2018
17
Appeal from the United States Bankruptcy Court
18 for the District of Arizona
19 Honorable Daniel P. Collins, Bankruptcy Judge, Presiding
20
Appearances: Appellants Robert Reish, Kathleen Reish and Ryuko,
21 Inc., did not appear for argument; James E. Cross
of Cross Law Firm, PLC argued for appellee Phoenix
22 Heliparts, Inc. Liquidation Trust.
23
Before: BRAND, LAFFERTY and KURTZ, Bankruptcy Judges.
24
25
26
1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may have
(see Fed. R. App. P. 32.1), it has no precedential value. See 9th
28 Cir. BAP Rule 8024-1.
1 Appellants Robert Reish ("Reish"), Kathleen Reish, and Ryuko,
2 Inc. appeal an order granting summary judgment to the liquidating
3 trustee determining that a transfer of a helicopter from the
4 debtor to Reish was an unauthorized postpetition transfer and
5 ordering that the liquidating trustee recover from the Reishes the
6 proceeds from the sale of the helicopter to a third party.
7 Because we determine that the bankruptcy court applied an
8 incorrect legal standard and, as a result, material questions of
9 fact exist, we VACATE and REMAND for further proceedings.
10 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
11 A. Prepetition events
12 Phoenix Heliparts, Inc. ("PHP") was in the business of, among
13 other things, purchasing and refurbishing wrecked or salvaged
14 helicopters, bringing them back to airworthy status, then selling
15 them at retail. Prior to the petition date, PHP was owned by
16 three parties, including its former president, Tina Cannon.
17 Reish is a retired commercial airline pilot. Over the years,
18 he purchased several helicopters from PHP. According to Reish,
19 some helicopters were purchased for personal use while others were
20 purchased for commercial use. In the past, Reish has donated
21 flight services to various law enforcement agencies for search and
22 rescue and reconnaissance for locating illegal drug farms. The
23 Reishes own 100% of Ryuko, a Wyoming corporation, that was
24 established to hold title to helicopters used for Reish's law
25 enforcement-related efforts.
26 Two helicopters and a promissory note are at issue in this
27 appeal:
28
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1 MD Helicopter, Model 369FF, Serial No. 0041FF ("0041FF")
2 In 2009, PHP purchased the 0041FF from RotorMate USA. The
3 original owner of the 0041FF, Utility Aviation, Inc., transferred
4 the aircraft to XL Specialty Insurance Co., who transferred it to
5 RotorMate USA, who then transferred it to PHP. When the 0041FF
6 was owned by Utility Aviation, it was encumbered by a lien in
7 favor of Wells Fargo.
8 On February 13, 2014, PHP and Reish executed a contract to
9 sell the 0041FF to Reish for the "Base Project Price" of
10 $1,395,000. Reish was to make his first payment of $500,000 by
11 April 25, 2014. Reish paid an initial deposit of $5,000 prior to
12 the sales contract on December 16, 2013, when Cannon first offered
13 him the 0041FF for purchase. The "Total" price and "Final
14 Payment" date for the 0041FF was "TBD" (to be determined). The
15 0041FF was to be delivered to Reish in an airworthy condition
16 "F.O.B. Mesa, Arizona."
17 Since the 0041FF had been wrecked, PHP needed to make
18 significant repairs before it could deliver it to Reish "with all
19 systems operational, a current Airworthiness Certificate, Flight
20 records up to date, all mandatory Airworthiness Directives and
21 Service Bulletins complied with." The delivery date was to be
22 approximately seven months after Reish paid his deposit and after
23 the parties had agreed upon the scope of work. A bill of sale was
24 also executed on the sale date, which would be delivered to Reish
25 upon full payment of the purchase price.
26 Ultimately, PHP failed to complete the repairs required to
27 render the 0041FF airworthy, and it was not delivered to Reish as
28 agreed under the sales contract prior to PHP ceasing operations.
-3-
1 As late as September 2015, Reish was still pushing PHP to finish
2 the 0041FF so he could sell it to another party. As of the date
3 of the commencement of the adversary proceeding, the 0041FF was
4 still not airworthy.
5 Although no party submitted documentary evidence to the
6 bankruptcy court showing that PHP and Reish ever agreed upon a
7 final scope of repairs or final sale price for the 0041FF, it is
8 undisputed that by March 26, 2015, Reish had paid $1,220,000 in
9 cash to PHP towards his purchase of it. Reish stated at his Rule
10 2004 examination that $1,395,000 was the "Total" price, regardless
11 of the "TBD" designation, and that if any scope of work on the
12 0041FF did change after the contract was signed it did not add any
13 additional cost to the project. Also, at times, Reish claimed
14 that the 0041FF was purchased for personal use, but at other times
15 indicated that it was purchased for commercial use. The court
16 recognized this factual issue was in dispute.
17 MD Helicopter, Model 369D, Serial No. 1170229 (the "Delta")
18 PHP and Reish executed a contract on February 19, 2014, to
19 sell the Delta to Reish for a total price of $975,000. Reish paid
20 the initial deposit of $150,000 on the same date. At the time,
21 the Delta was essentially a hull. The contract for the Delta
22 contained the same terms regarding the delivery of an airworthy
23 craft to Reish and place of delivery. It is undisputed that,
24 prepetition, Reish had paid $875,000 in cash to PHP for the Delta.
25 At the time of PHP's bankruptcy filing, it was believed that the
26 Delta was an incomplete shell, unable to fly, and that PHP was
27 still in possession it.
28 ////
-4-
1 The Ryuko Note
2 Sometime in early 2015, Cannon approached Reish for a loan so
3 PHP could fulfill an alleged project with Boeing. Reish agreed to
4 loan PHP $850,000. To get the $850,000, Reish explained that he
5 could sell investments worth $1,275,000, but after payment of
6 taxes only $850,000 would be available to lend. Thus, PHP would
7 have to pay back $1,275,000 in exchange for the $850,000.
8 On April 17, 2015, on behalf of PHP, Cannon executed an
9 installment note ("Ryuko Note") in favor of "Ryuko, Inc., Trustees
10 Robert C. Reish and/or Kathleen A. Reish" calling for payment by
11 PHP of $1,275,000 on or before April 1, 2016. Ryuko wired
12 $850,000 to PHP in connection with the Ryuko Note on April 21,
13 2015. PHP never made any payments on the Ryuko Note.
14 B. Postpetition events
15 PHP filed its chapter 112 bankruptcy case on September 18,
16 2015. The bankruptcy filing was precipitated by a January 2015
17 state court judgment against PHP for $26 million and the state
18 court's subsequent order requiring PHP to post a supersedeas
19 appellate bond for $6,765,260.89. Neither Reish nor Ryuko was
20 listed as a creditor in PHP's bankruptcy schedules or was
21 otherwise notified of the bankruptcy case. Louie Mukai
22 ("Trustee") was appointed chapter 11 trustee for PHP on
23 October 22, 2015.3
24
2
25 Unless specified otherwise, all chapter, code and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
26 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
3
27 Mr. Mukai also later served as the liquidating trustee in
PHP's case. We refer to him as "Trustee" throughout the rest of
28 (continued...)
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1 1. Sale of the 0041FF
2 After PHP's bankruptcy filing and Trustee's appointment,
3 Cannon, without permission from Trustee or the court, orchestrated
4 a sale of the 0041FF to the Azerbaijan Ministry of Defense
5 ("AMOD"). Because PHP and RotorMate had failed to properly
6 document PHP's 2009 purchase of the 0041FF, Cannon arranged for
7 title to the 0041FF to finally be transferred from RotorMate to
8 PHP and for the Wells Fargo lien to be released. Then Cannon
9 transferred title to the 0041FF from PHP to Reish and facilitated
10 the transfer of the 0041FF from Reish to AMOD on November 11,
11 2015. AMOD agreed to pay $2,322,000 for the 0041FF, but wired
12 only $2,150,000 to Reish. No evidence was submitted indicating
13 why AMOD transferred only $2,150,000 to Reish, or if AMOD ever
14 paid Reish the remaining agreed purchase price. On November 25,
15 2015, AMOD, through its legal counsel, executed an unconditional
16 acceptance of the 0041FF in its condition as of that date.4
17 Reish was not aware of PHP's bankruptcy when the sale of the
18 0041FF to AMOD took place in November 2015. He eventually learned
19 of PHP's bankruptcy filing in January 2016. The bankruptcy court
20 deemed the Reishes' and Ryuko's five untimely proofs of claim as
21 timely, given the lack of notice. Trustee objected to all five
22 claims, but those matters are not at issue in this appeal.
23 2. Creation of the Liquidation Trust
24 Thereafter, the bankruptcy court entered orders approving the
25
3
26 (...continued)
the Memorandum.
27
4
Despite the sale to AMOD, the Liquidation Trust still
28 possesses the 0041FF.
-6-
1 sale of most of PHP's assets and confirming a plan of liquidation.
2 The plan created the PHP Liquidation Trust and appointed Trustee.
3 The Liquidation Trust was vested with all unadministered assets of
4 PHP, including the rights to pursue avoidance and turnover
5 actions.
6 3. Reish's adversary complaint and the parties' summary
judgment motions
7
8 Reish filed an adversary complaint against the Liquidation
9 Trust, seeking a determination of the nature, extent and validity
10 of his interest in the 0041FF and the sale proceeds thereof and
11 the nature of his interest in the Delta. Reish sought a
12 declaration confirming that he owned the 0041FF, which he asserted
13 was never property of the estate, and that he owned the $2,150,000
14 in sale proceeds.
15 Trustee filed his answer and counterclaims against the
16 Reishes under §§ 549 and 550, and a counterclaim against counter-
17 defendant Ryuko under § 548. In the counterclaims against the
18 Reishes, Trustee sought to avoid the transfer of the 0041FF, which
19 he contended was estate property when PHP filed its bankruptcy
20 case, and to recover $2,322,000 — the value of the 0041FF at the
21 time of the sale to AMOD. Trustee also sought a determination
22 that the Delta was estate property.
23 Thereafter, Trustee moved for summary judgment on his
24 counterclaims ("MSJ"). He argued that the only issue regarding
25 the 0041FF was the date title transferred to Reish and whether it
26 was before or after the petition date. Trustee argued that, under
27 the sales contract, three things had to occur for both parties to
28 have performed under the agreement: (1) full payment by Reish;
-7-
1 (2) issuance of a Certificate of Airworthiness evidencing that the
2 0041FF was fully repaired; and (3) delivery of an FAA Bill of Sale
3 transferring title to Reish.
4 Trustee argued that, because the FAA Bill of Sale to Reish
5 was not drafted until October 27, 2015, and because neither party
6 performed their obligations prior to PHP's bankruptcy filing,
7 title for the 0041FF did not transfer to Reish prior to the
8 bankruptcy filing on September 18, 2015, and therefore the 0041FF
9 was estate property on the petition date. Thus, the unauthorized
10 transfer to Reish was a postpetition transfer avoidable under
11 § 549. Because the value of the 0041FF was $2,322,000 on the date
12 it was sold to AMOD, Trustee argued that the Liquidation Trust
13 could recover that amount under § 550.
14 The Reishes and Ryuko opposed the MSJ and the Reishes filed a
15 cross-motion for summary judgment. They argued that no basis
16 existed to avoid the transfer of the 0041FF because it was a
17 consumer goods purchase and therefore was never estate property as
18 a matter of Arizona law. Specifically, the Reishes argued that
19 they had a "special property interest" in the 0041FF, which arose
20 on the contract formation date of February 13, 2014, and was
21 superior to the Liquidation Trust's interest. The Reishes
22 maintained that they had paid for the 0041FF in full prior to the
23 petition date between cash payments and an "offset credit" of
24 $175,000 on the Ryuko Note applied the day the $850,000 in Ryuko
25 loan funds were wired to PHP.
26 In reply, Trustee maintained that no documentary evidence
27 supported the contention that an "offset credit" of $175,000 was
28 applied to the 0041FF. Trustee also contended that the Reishes'
-8-
1 claim that the 0041FF was purchased for personal use was
2 contradicted by their proof of claim charging for lost rents. In
3 any event, Trustee argued that the 0041FF was estate property on
4 the petition date and even if the Reishes had a special property
5 interest in it prepetition it was subject to the estate's
6 interest.
7 The bankruptcy court entered its under advisement ruling
8 partially granting the MSJ and denying the Reishes' cross-motion
9 and dismissing their complaint with prejudice. In summary, the
10 court found that the 0041FF and the Delta were estate property
11 and, because the postpetition transfer of the 0041FF to Reish was
12 an avoidable transfer, Trustee could recover from the Reishes the
13 sale proceeds of $2,150,000. The court denied the MSJ as to the
14 Liquidation Trust's claim against Ryuko under § 548 to avoid all
15 but the $850,000 of the Ryuko Note as a fraudulent transfer.5
16 To reach its decision, the bankruptcy court determined that
17 no valid setoff of $175,000 occurred to finish satisfying Reish's
18 purchase price for the 0041FF because mutuality of the parties was
19 lacking; Reish could not apply a credit of $175,000 owed to Ryuko
20 for a Reish project such as the 0041FF. The same was true for the
21 Delta and the alleged $100,000 setoff. Alternatively, the court
22 found that even if there were setoffs for the 0041FF and the
23 Delta, and that Reish had fully paid for them prepetition, both
24 aircraft nonetheless remained property of PHP and, subsequently,
25 of the Liquidation Trust. The court also determined that Reish
26
27 5
Trustee has not cross-appealed the court's award of only
$2,150,000 or its ruling on the Liquidation Trust's claim against
28 Ryuko. Therefore, we do not address these issues.
-9-
1 never had a "special property interest" in either aircraft because
2 they were not "goods" within the meaning of ARS § 47-2105(B);
3 rather, they were only "future goods." Thus, no "special property
4 interest" arose and Trustee's hypothetical lien under § 544 was
5 superior to any interests Reish could assert against either
6 aircraft.
7 The bankruptcy court entered an order partially granting the
8 MSJ ("MSJ Order"), which provided that under Rule 7054 there was
9 no just reason for delay in the entry of a final judgment as to
10 the claims and parties.
11 This timely appeal followed.
12 II. JURISDICTION
13 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
14 and 157(b)(2)(H) & (K).6 We have jurisdiction under 28 U.S.C.
15 § 158.
16 III. ISSUES
17 1. Did the bankruptcy court have subject matter jurisdiction
18 over the Delta?
19 2. Did the bankruptcy court err in determining that Reish did
20 not have a special property interest in the 0041FF?
21 3. Did the bankruptcy court err in granting the MSJ?
22 IV. STANDARDS OF REVIEW
23 We review de novo questions of subject matter jurisdiction.
24 Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189, 1193
25 (9th Cir. 2005).
26 Whether property is included in a bankruptcy estate is a
27
6
To the extent the bankruptcy court lacked jurisdiction, we
28 discuss that issue below.
-10-
1 conclusion of law reviewed de novo. Groshong v. Sapp (In re MILA,
2 Inc.), 423 B.R. 537, 542 (9th Cir. BAP 2010).
3 We review the bankruptcy court's interpretation of the Code
4 and of state law de novo. Hopkins v. Cerchione (In re Cerchione),
5 414 B.R. 540, 545 (9th Cir. BAP 2009).
6 We review the bankruptcy court's decision to grant partial
7 summary judgment de novo. Guerin v. Winston Indus., Inc., 316
8 F.3d 879, 882 (9th Cir. 2002).
9 V. DISCUSSION
10 A. The bankruptcy court lacked subject matter jurisdiction over
the Delta.
11
12 While this appeal was pending, the parties learned that the
13 Delta had been made airworthy and was sold prepetition on
14 April 30, 2015, by PHP to a party named Winco, a bona fide
15 purchaser. Trustee concedes that, due to this prepetition sale,
16 the Delta was never property of the estate or the Liquidation
17 Trust. The Reishes argue, however, that this does not moot the
18 issue of ownership interests the bankruptcy court determined for
19 the Delta. Trustee did not respond to this argument.
20 The bankruptcy court ruled that the Delta was estate property
21 and that the Reishes had no interest in it. However, since the
22 undisputed facts demonstrate that the Delta was never property of
23 the estate, the court lacked subject matter jurisdiction to make
24 any rulings as to this aircraft. Thus, any determinations the
25 court made with respect to the Delta are VOID. See Ministry of
26 Def. & Support for the Armed Forces v. Cubic Def. Sys., 385 F.3d
27 1206, 1226 (9th Cir. 2004) (a judgment is void if the issuing
28 court lacked subject matter jurisdiction over the matter).
-11-
1 B. The bankruptcy court erred in determining that Reish did not
have a special property interest in the 0041FF.
2
3 The bankruptcy court found that at no time pertinent to the
4 transaction for the 0041FF was it both an identified and an
5 existing good. Consequently, the aircraft did not constitute a
6 good for purposes of A.R.S. § 47-2105(B); rather, it was a future
7 good. As a result, the court found that Reish never obtained a
8 special property interest in the 0041FF. The Reishes argue that
9 the bankruptcy court erred in finding that the aircraft was not
10 both identified and existing. We agree.
11 To determine the issue before us, a discussion of the
12 pertinent provisions of the Arizona Commercial Code is in order.
13 A.R.S. § 47-2105, in relevant part, defines goods as:
14 A. "Goods" means all things (including specially
manufactured goods) which are movable at the time of
15 identification to the contract for sale . . . .
16 B. Goods must be both existing and identified before any
interest in them can pass. Goods which are not both
17 existing and identified are "future" goods. A purported
present sale of future goods or of any interest therein
18 operates as a contract to sell.
19 A.R.S. § 47-2105(A), (B) (emphasis added).
20 The identification of a good in a contract creates a special
21 property interest. A.R.S. § 47-2501. In addition, "[t]itle to
22 goods cannot pass under a contract for sale prior to their
23 identification to the contract[.]" A.R.S. § 47-2401(1). Hence,
24 the precondition for obtaining a special property interest in
25 goods and for title to pass is that the goods must be "identified
26 to the contract."
27 Identification of goods occurs in one of three ways: (1) at
28 the time and manner expressly agreed to by the parties; (2) when
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1 the sale contract is made, if the sale is for goods already
2 existing and identified; or (3) if the contract involves the sale
3 of future goods — i.e., those goods which are not both existing
4 and identified — when the goods are shipped, marked or otherwise
5 designated by the seller as the goods referenced in the contract.7
6 "[T]he general policy is to resolve all doubts in favor of
7 identification." A.R.S. § 47-2501, cmt. 2.
8 The bankruptcy court found that, while the 0041FF might have
9 been identified, it was not existing at any point because the
10 repairs required to make it airworthy were never completed; it was
11 merely a shell, and the necessary components which needed to be
12 installed were not. In essence, the court determined that,
13 because the aircraft was not far enough along in the repair
14 process, it was not an existing good. To reach this
15 determination, the court relied on In re Carman, 399 B.R. 599
16 (Bankr. D. Md. 2009).
17 In Carman, the buyer contracted with the seller to build a
18
7
A.R.S. § 47-2501 provides, in pertinent part:
19
A. The buyer obtains a special property and an insurable
20 interest in goods by identification of existing goods as
goods to which the contract refers even though the goods
21 so identified are non-conforming and he has an option to
return or reject them. Such identification can be made at
22 any time and in any manner explicitly agreed to by the
parties. In the absence of explicit agreement
23 identification occurs:
24 1. When the contract is made if it is for the sale of
goods already existing and identified;
25
2. If the contract is for the sale of future goods
26 . . . when goods are shipped, marked or otherwise
designated by the seller as goods to which the contract
27 refers.
28 A.R.S. § 47-2501(A)(1)-(2).
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1 32-foot motorboat for $140,000. The buyer paid $107,000 of the
2 purchase price, but the boat was never completed or delivered to
3 him. The seller ultimately filed a chapter 7 bankruptcy case.
4 The chapter 7 trustee wanted to sell the unfinished boat to a
5 third party. The buyer objected, claiming a special property
6 interest in the boat which gave him a vested right to recover the
7 boat from the seller upon making a tender of the unpaid purchase
8 price. Id. at 601-02. In rejecting the buyer's argument, the
9 bankruptcy court held that the unfinished boat was not an existing
10 good, but rather was a future good in which the buyer did not
11 obtain a special interest:
12 Under the liberal standard for identification in Section
2–501, when the 32' hull came out of the mold in late
13 2006, it was identified by Mr. Carman, as the seller, as
for the contract of the buyer, Mr. DeChello. Pursuant to
14 the limited legal precedent and authority cited to the
court by the parties, however, the hull was at best a
15 "future good"; it was not an existing "good" in which Mr.
DeChello, as buyer, was vested with a special interest.
16 [citation omitted]. It was a hull; it was a shell; it was
not a boat. It was a part, not a whole. It lacked
17 propulsion.
18 . . . .
19 The good contracted for by Mr. DeChello was a motorboat.
The bare 32' hull was not an existing boat. Therefore, it
20 was not a "good." It was not even a non-conforming good;
rather, it was a "future good." Mr. DeChello thus did not
21 obtain a special interest in the hull under Section 2–501
of Maryland's Commercial Law Code.
22
23 Id. at 602-03.
24 In basing its decision on the Carman case, the bankruptcy
25 court apparently chose to reject the weight of authority which
26 supports a finding that the 0041FF was an existing good despite
27 its unfinished state. This was error. See Jones v. One Fifty
28 Foot Gulfstar Motor Sailing Yacht, 625 F.2d 44, 47 n.2 & 3 (5th
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1 Cir. 1980) (holding that a yacht-construction of which "was not
2 totally complete" was a "good" within the meaning of the UCC and
3 that interest could pass); Arthur Glick Truck Sales, Inc. v.
4 Stuphen East Corp., 914 F. Supp. 2d 529, 542 n.17 (S.D.N.Y. 2012)
5 (holding that goods can qualify as "existing" despite that seller
6 has not yet completed installation and manufacturing and citing
7 authority from jurisdictions with statutes similar to A.R.S. § 47-
8 2501); Gonsalves v. Montgomery, 2006 WL 2711540, at *6-8 (N.D.
9 Cal. Sept. 20, 2006) (collecting authority for the proposition
10 that partially manufactured goods can qualify as existing and
11 holding that under California Commercial Code § 2105(2), which is
12 identical to A.R.S. § 47-2105(B), that a boat "consisting of a
13 shell and a number of parts" was an "existing" good and one in
14 which interest may be passed); Carey Aviation, Inc. v. Giles World
15 Mktg., Inc., 46 B.R. 458, 462 (Bankr. D. Mass. 1985) (applying
16 Arizona law; although not addressing the issue of existing
17 explicitly, the bankruptcy court held that the buyer obtained a
18 "special property interest" in a seized aircraft that was only
19 two-thirds complete at the time and identified by the seller after
20 contract formation in the seller's letter requesting funds from
21 the buyer to complete the project); Holstein v. Greenwich Yacht
22 Sales, Inc., 122 R.I. 211, 215-16 (R.I. 1979) (applying Rhode
23 Island's version of UCC § 2-501, which is identical to A.R.S.
24 § 47-2501(B), and holding that the boat identified in the sales
25 contract as "Newport 27 #551" was an existing good even though the
26 boat was not outfitted with all the extras agreed to under the
27 contract at the time the secured creditor seized it from the
28 builder's shipyard; accordingly, the buyer obtained a special
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1 property interest in the boat superior to the security interest
2 held by the floor-plan financier).
3 All of the above authorities relied, to some extent, on
4 comment 4 to § 2-501 of the UCC, which is found in A.R.S. § 47-
5 2501 and states: "In view of the limited function of
6 identification there is no requirement in this section that the
7 goods be in deliverable state or that all of the seller's duties
8 with respect to the processing of the goods be completed in order
9 that identification occur." Id. at cmt. 4. See also 3A Anderson,
10 Uniform Commercial Code, § 2-501:18 (3d. ed. 2017) ("Anderson
11 UCC") ("Whether the goods are in such a condition that they
12 conform to the contract and may be delivered in performance of the
13 contract is distinct from the question of whether the goods have
14 been identified to the contract").
15 We are persuaded by the reasoning of these courts and
16 conclude that a good does not need to be complete in order to be
17 an existing good. Therefore, the bankruptcy court erred in
18 determining that the 0041FF was not an existing good. Further,
19 while Carman supports the bankruptcy court's finding that the
20 0041FF was not an existing good prior to PHP's bankruptcy filing,
21 we find it distinguishable from this case. Here, the 0041FF was
22 not being manufactured from scratch, as was the boat in Carman; it
23 was once an airworthy aircraft, with an assigned serial number,
24 that was damaged and in need of repair to make it airworthy again.
25 As for identification, Reish and PHP made no explicit
26 agreement as to the time when identification of the 0041FF would
27 occur. Therefore, identification occurred either: (1) at the
28 time of contract if the aircraft was already existing and
-16-
1 identified; or (2) if the aircraft was future goods, then at the
2 time it was "shipped, marked, or otherwise designated" by the
3 seller. A.R.S. § 47-2501(A)(1)-(2). The sales contract for the
4 0041FF referenced the make, model, serial number and airframe
5 hours. Thus, we conclude that it was identified when the contract
6 was made: February 13, 2014. See Mitchell v. Transamerica
7 Commercial Fin. Corp. (In re Doughty's Appliance, Inc.), 236 B.R.
8 407, 416 (Bankr. D. Or. 1999) (goods held by debtor as inventory
9 were identified to specific contracts if the goods either had been
10 tagged for specific buyers or corresponded to sales orders
11 specifying "manufacturer, model number, SKU number, description
12 and color"); Holstein, 122 R.I. at 215 (finding that the boat was
13 identified when the contract was made because the parties
14 specifically referred to it as "hull #151").
15 Accordingly, the 0041FF was an existing and identified good
16 in which Reish obtained a special property interest at the time of
17 contract, which was prior to PHP's bankruptcy filing. However,
18 our inquiry does not end there.
19 Identification serves only a "limited purpose." Anderson UCC
20 at § 2-501:17. While it gives a buyer a special property and
21 insurable interest in the goods, it does not shift title to the
22 buyer; it only allows title to pass. A.R.S. § 47-2501(A);
23 Anderson UCC at § 2-501:24.
24 A.R.S. § 47-2401 provides that "title passes to the buyer at
25 the time and place at which the seller completes his performance
26 with reference to the physical delivery of the goods," unless the
27 parties have explicitly agreed otherwise. A.R.S. § 47-2401(2).
28 The sales contract for the 0041FF is a "non-delivery" contract, in
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1 that Reish was to pick it up at PHP's facility in Mesa, Arizona.
2 Where delivery is to be made without shipping the goods, title
3 passes to the buyer at the time and place the contract is made,
4 unless the seller is required to deliver a "document of title."
5 A.R.S. § 47-2401(3). In that case, "title passes at the time when
6 and the place where [the seller] delivers such documents." A.R.S.
7 § 47-2401(3)(a).
8 The sales contract for the 0041FF states:
9 The SELLER warrants that the title of the Helicopter will
be free and clear of all encumbrances at the time of said
10 delivery of the helicopter to the PURCHASER and that the
FAA Bill of Sale conveying title is executed by a fully
11 authorized person and or persons.
12 Thus, PHP was to deliver a document of title — the "FAA Bill of
13 Sale conveying title" — at some future date to convey title. That
14 did not occur until the Reish sale to AMOD in November 2015, after
15 the petition date.8
16 We disagree with the Reishes' argument that the 0041FF could
17 never have been property of the estate. Based on the parties'
18 agreement about when title would pass, title to the 0041FF did not
19 pass to Reish until after the petition date, even if he did pay
20 full price for it prepetition. Accordingly, title to the 0041FF
21 was in PHP at the time of the petition, thereby giving the estate
22 at least some interest in it. See § 541(a)(1) (property of the
23 estate includes all legal or equitable interests of the debtor in
24 property as of the commencement of the case).
25 Even though title had not passed to Reish for the 0041FF
26
8
Even if one considers the sales contract a "destination"
27 contract, in that case title passes to the buyer at the time when
the goods are tendered. A.R.S. § 47–2401(2)(b). The 0041FF was
28 never tendered to Reish.
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1 until after the petition date, by virtue of his special property
2 interest he had rights with respect to the aircraft. See A.R.S.
3 §§ 47-2502 and 47-2716. First, if certain conditions are met, a
4 buyer has the right to recover the goods under A.R.S. § 47-2502.
5 Even if the goods have not been shipped, a buyer who has paid a
6 part or all of the price of goods in which he or she has a special
7 property interest may, on making and keeping good a tender of any
8 unpaid portion of their price, recover the goods from the seller
9 if: (1) in the case of goods bought for personal, family or
10 household purposes, the seller repudiates or fails to deliver as
11 required by the contract; or (2) in all cases, the seller becomes
12 insolvent9 within ten days after receipt of the first installment
13 on their price. A.R.S. § 47-2502(A)(1)-(2). In the case of
14 consumer goods, the buyer takes the goods free of any security
15 interest created by the seller if that security interest attached
16 to the goods after the goods had been identified to the contract.
17 A.R.S. § 47-2502, cmt. 3.
18 Second, a buyer with a special property interest has the
19 right of replevin. A.R.S. § 47-2716 provides that, in the case
20 where the goods have not shipped, the buyer "has a right of
21 replevin for goods identified to the contract if after reasonable
22 effort he is unable to effect cover for such goods or the
23 circumstances reasonably indicate that such effort will be
24 unavailing . . . ." A.R.S. § 47-2716(C). As with A.R.S. § 47-
25
26 9
An insolvency date for PHP was never established.
Evidence suggested that perhaps PHP was insolvent by April 17,
27 2015, the day PHP executed the Ryuko Note, or by January 30, 2015,
the date the state court judgment was entered against PHP. This
28 appears to be a disputed material fact.
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1 2502, a consumer buyer who acquires a right of replevin takes free
2 of a security interest created by the seller if that security
3 interest attached to the goods after the goods had been identified
4 to the contract. See A.R.S. § 47-2716, cmt. 3.
5 Whether Trustee's hypothetical lien interest under § 544 is
6 superior to that of Reish's special interest will have to be
7 determined on remand. That answer will largely turn on whether
8 the 0041FF is a consumer or commercial good. The Reishes
9 presented evidence that the 0041FF was purchased for personal use.
10 On the other hand, a proof of claim filed for that aircraft and
11 various emails between Reish and PHP indicated that it may have
12 been purchased for commercial use. Trustee took the position that
13 the 0041FF was a commercial transaction based on the proof of
14 claim. Because the court found that the 0041FF was not an
15 existing and identified good in which Reish obtained a special
16 property interest, it did not decide the disputed issue of whether
17 the 0041FF was a consumer or commercial good.
18 The factual determination of whether the 0041FF is a consumer
19 or commercial good is important here, as it affects what remedies
20 Reish may have against the Liquidation Trust and whether his
21 interest in that aircraft trumps that of the Liquidation Trust.
22 On remand, the bankruptcy court will have to make that factual
23 determination.
24 The Reishes also contend that the bankruptcy court erred in
25 conclusively determining that no credits were or could be issued
26 for the 0041FF when that issue was in dispute. The court
27 determined that no valid setoff of $175,000 occurred to finish
28 satisfying Reish's purchase price for the 0041FF because mutuality
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1 of the parties was lacking. In other words, Reish could not apply
2 a credit of $175,000 owed to Ryuko for a Reish project such as the
3 0041FF. The court apparently made its determination based on a
4 term in the Ryuko Note, which said: "Principle's [sic] funds to
5 be credited to Phoenix Heliparts, Inc. to cover the expenses of
6 ongoing and future Ryuko, Inc. projects including, but not limited
7 to, Aircraft S/N 0175FF; S/N 0041FF; and S/N 270082D."
8 The court viewed the Ryuko Note as unambiguous, in that
9 credits could be applied only to Ryuko projects to satisfy the
10 Ryuko debt. However, the Ryuko Note was not so clear. Although
11 it stated that credits could be applied to "ongoing and future
12 Ryuko projects," the Ryuko Note specially included "S/N 0041FF" –
13 a Reish project. Accordingly, it appears that credits for some or
14 all of the debt could or would be applied to at least one Reish
15 project. Given the lack of clarity here, it was not proper for
16 the court to resolve this disputed issue on summary judgment.
17 C. The bankruptcy court erred in granting the MSJ.
18 Summary judgment is properly granted when no genuine issues
19 of disputed material fact remain, and, when viewing the evidence
20 most favorably to the non-moving party, the movant is entitled to
21 prevail as a matter of law. Fed. R. Civ. P. 56 (applicable in
22 adversary proceedings by Rule 7056); Celotex Corp. v. Catrett, 477
23 U.S. 317, 322-23 (1986). Material facts are those that may affect
24 the outcome of the case under applicable substantive law.
25 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). And
26 issues are genuine only if the trier of fact reasonably could find
27 in favor of the nonmoving party on the evidence presented. Far
28 Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001)
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1 (citing Anderson, 477 U.S. at 248-49).
2 The bankruptcy court made an error of law because it applied
3 an incorrect standard for determining whether the 0041FF was an
4 existing and identified good. Because of this, the court never
5 made a determination on the disputed factual issue of whether the
6 0041FF was a consumer good. Further, the terms of the Ryuko Note
7 and whether credits for Reish projects could be applied toward the
8 debt was not clear. Accordingly, because material factual issues
9 remain in dispute regarding the 0041FF, Trustee was not entitled
10 to judgment as a matter of law, and the court erred in granting
11 him partial summary judgment.
12 VI. CONCLUSION
13 We VACATE the MSJ Order and REMAND the issues regarding the
14 0041FF to the bankruptcy court for further determination
15 consistent with this decision.
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