Kaiser Agricultural Chemicals v. Beaver Dam Grain, Inc. (In Re Beaver Dam Grain, Inc.)

43 B.R. 283 (1984)

In re BEAVER DAM GRAIN, INC., Debtor.
KAISER AGRICULTURAL CHEMICALS, Plaintiff,
v.
BEAVER DAM GRAIN, INC., Defendant.

Bankruptcy No. 4-81-00417, Adv. No. 4-82-00350.

United States Bankruptcy Court, W.D. Kentucky.

October 3, 1984.

Russ Wilkey, Owensboro, Ky., trustee.

Ronald Bamberger, Owensboro, Ky., for debtor.

Robert P. Moore, Madisonville, Ky., for plaintiff.

R. Allen Wilson, Owensboro, Ky., for trustee/defendant.

MEMORANDUM OPINION

MERRITT S. DEITZ, Jr., Bankruptcy Judge.

Here we consider whether a landlord who takes over and runs a grain elevator no longer operated by his lessee, with no contractual connection between the two beyond the lease, thereby becomes liable under a security agreement reached years earlier by the tenant and a supplier. We hold that the landlord incurs no such liability.

A key figure in our analysis is the tenant, B.C. Christopher Co. (BC),^[1] which formerly did business sub nom "Beaver Dam Grain", and in so doing planted the seeds of this controversy. Principals to the dispute are the plaintiff-supplier, Kaiser Agricultural Chemical (Kaiser), and the defendant-landlord, Beaver Dam Grain, Inc. (BDG, Inc.),^[2] now bankrupt.

FINDINGS OF FACT

In February of 1977, Kaiser entered into a dealer contract^[3] with BC. The contract granted Kaiser a purchase money security interest in all products sold to BC by Kaiser under their dealership agreement. The contract also gave Kaiser a security interest in the proceeds from the sale or disposition of the supplied products. During the time it operated Beaver Dam Grain as a Kaiser dealer, BC leased the business facilities it used from BDG, Inc.

On or about March 4, 1977, Kaiser properly filed a financing statement which covered all "fertilizers, agricultural materials and supplies, crop protection chemicals, aluminum culvert, and other products, now or hereafter acquired by the borrower from vender, together with the proceeds thereof."^[4] B.C. Christopher Co., d/b/a Beaver Dam Grain was listed as the debtor on the financing statement.^[5]

BDG, Inc. took control of Beaver Dam Grain from BC in September of 1980. BDG, Inc. operated the business in much the same manner as BC did, until it filed for bankruptcy in December of 1981. During the period between October 12, 1980 and November 30, 1981, Kaiser sold to BDG, Inc. a large amount of farm products, including fertilizer, which were allegedly covered by the 1977 financing statement. All sales to the debtor by Kaiser were made in the name of Beaver Dam Grain.

BC and BDG, Inc. are unrelated entities which have never merged, owned stock or an interest in the other, or been a subsidiary or agent of the other. The only connections between these two organizations are: 1) that BDG, Inc. leased business facilities to BC; and 2) that BDG, Inc. took over the operations of Beaver Dam Grain from BC in 1980.

CONCLUSIONS OF LAW

The issue before the court is whether the 1977 financing statement gives Kaiser a valid security interest in the fertilizer it sold BDG, Inc. between October 12, 1980 and November 30, 1981. The plaintiff argues that it has a valid and perfected security interest in the fertilizer, even though BDG, Inc. was neither a party to the financing statement nor to the dealership/security agreement. It bases its argument on the legal principle "that a debtor cannot destroy the perfected security interest of a secured party by transferring title to the collateral or changing its name or corporate structure ..."^[6] and cites more than a dozen cases as authority. This court firmly agrees with the legal reasoning of these cases, but finds that they are all clearly distinguishable on their facts from the case at the bar. In the majority of these cases, the courts have allowed a security interest to be asserted against a "successor" entity because it was merely the original debtor with a new name.^[7] In the remaining cases cited by the plaintiff, the courts concluded that security interests remained valid where the original debtor had changed only its legal business form or both its name and form.^[8]

In the present case, the original security agreement and financing statement supposedly covering the fertilizer in question, arose between BC and Kaiser.^[9] Three years after the filing of the financing statement, BC transferred the operations of Beaver Dam Grain to an unrelated entity, BDG, Inc. Under Kentucky law, a security interest must "attach" in order for it to be valid.^[10] A security interest attaches when: 1) there is an agreement between the parties that the interest is to attach; 2) value is given; and 3) the debtor has rights in the collateral. Here, Kaiser's security interest in the fertilizer it sold to the debtor never attached for there was no agreement between the parties.^[11] Even if the security interest had attached, it would still be unperfected under Kentucky law because the 1977 Kaiser/BC financing statement does not meet the statutory requirements of KRS 355.9-402 for a valid financing statement covering a security agreement between the debtor and Kaiser.^[12]

In conclusion, the court notes that the takeover of Beaver Dam Grain's operations by BDG, Inc. from BC was done in a casual manner with no attention to legal formalities.^[13] There is nothing in the record to suggest a merger, acquisition, or even a purchase and sale. What apparently happened was that a landlord simply stepped in and continued a line of business that had been abandoned by his lessee. Kaiser was aware of this change^[14] and chose not to enter into a security agreement with the new operator of Beaver Dam Grain, BDG, Inc. Kaiser's failure to secure its interest in the products it sold to the debtor cannot be excused, under these circumstances, by BC's and BDG, Inc.'s noncompliance with certain legal requirements attendant to the transfer of a business. Therefore we hold that the security interest which Kaiser Agricultural Chemical claims in the fertilizer it sold to Beaver Dam Grain, Inc., is invalid and that its claim should be deemed unsecured. The court further holds that the trustee is authorized to sell the fertilizer and place the proceeds with the other funds being held for the debtor's estate.

APPENDIX A

NOTES

[1] B.C. Christopher Co., is a Missouri limited partnership.

[2] Beaver Dam Grain, Inc., is a Kentucky Corporation.

[3] See Appendix A.

[4] See Appendix B.

[5] The financing statement was signed by Bob Clemens on behalf of B.C. Christopher Co., d/b/a/ Beaver Dam Grain. Mr. Clemens has never been connected with Beaver Dam Grain, Inc. in any capacity.

[6] Matter of Serrins Automative Warehouse, Inc., 18 B.R. 718, 719 (Bkrtcy.W.D.Penn.1980), Fliegel v. Associates Capital Co. of Delaware, Inc., 272 Or. 434, 537 P.2d 1144 (1975).

[7] In re Kittyhawk Television Corp., 516 F.2d 24 (6th Cir.1975); Siljeg v. National Bank of Commerce of Seattle, 509 F.2d 1009 (9th Cir.1975); In re McBee, 20 B.R. 361 (Bkrtcy.W.D.Tex.1982); In re Icon Industries, Inc., 10 B.R. 693 (Bkrtcy. W.D.N.Y.1981); American Heritage Bank & Trust Co. v. O. & E., Inc., 40 Colo. App. 306, 576 P.2d 566 (1978); Continental Oil Co. v. Citizens Trust & Savings Bank, 57 Mich.App. 1, 225 N.W.2d 209 (1974), aff'd, 397 Mich. 203, 244 N.W.2d 243 (1976); In re Pasco Sales Co., 77 Misc. 2d 724, 354 N.Y.S.2d 402 (S.Ct.1974).

[8] In re West Coast Food Sales, Inc., 637 F.2d 707 (9th Cir.1981); Ryan v. Rolland, 434 F.2d 353 (10th Cir.1970); In re Taylorville Eisner Agency, Inc., 445 F. Supp. 665 (S.D.Ill.1977); Matter of Serrins, 18 B.R. at 718; Fliegel v. Associates Capital Co. of Delaware, Inc., 537 P.2d at 1144.

[9] See Appendices A and B.

[10] Ky.Rev.Stat. § 355.9-204(1) (Banks-Baldwin 1983) [Hereinafter cited as KRS].

[11] The plaintiff argues that there was an agreement between Kaiser and BDG, Inc. because BC was an "apparent" agent of BDG, Inc. at the time it signed the security agreement and financing statement. The burden of proving the existence of the agency is on Kaiser, the party pleading and relying on the agency. Cincinnati Ins. Co. v. Clary, 435 S.W.2d 88 (Ky.1968). Kaiser has not produced any evidence indicating that a formal agency relationship existed between BC and BDG, Inc.

It is true that under Kentucky law "[a]uthority to contract on behalf of the principal may arise from a usage or custom of business". R.H. Kyle Furniture Co. v. Russell Dry Goods Co., 340 S.W.2d 220, 223 (Ky.1960). However, this rule applies in situations involving "implied agencies" i.e. actual agencies which are created by the acts of principals and agents and are proved by deductions or inferences from other facts. In the present case the plaintiff is not seeking to show an implied agency but, is seeking to impose an agency by estoppel. An agency by estoppel is created by operation of law and by proof of acts by the principal which would reasonably justify others in believing that an actual agency relationship did exist. In this case, the evidence shows that Kaiser knew that it was dealing with BC as a separate entity and not as an agent for BDG, Inc. and that therefore it was not justified in believing that an actual agency relationship existed.

[12] KRS § 355.9-402 provides that: "A financing statement is sufficient if it is signed by the debtor and the secured party..." (emphasis added). In the present case, the 1977 statement was not signed by either the debtor, BDG, Inc., or its agents. Although Kentucky case law holds that a financing statement is sufficient even if it is not signed by the creditor, Riley v. Miller, 549 S.W.2d 314 (Ky.App.1977), under these circumstances the statute requires that the financing statement must be signed by the debtor in order to be valid. See also note 11, supra.

Counsel for the plaintiff has also argued that the 1977 filing was sufficient because the statement contained the trade name of the debtor and was signed by a representative of that business. It is a well established rule of law that filing a financing statement under a trade name is insufficient to perfect a security interest. In re Leichter, 471 F.2d 785-88 (2nd Cir.1972).

[13] It was alleged by the plaintiff that the provisions of article 6 of the Uniform Commercial Code relating to "bulk transfers" were not followed by the parties during the transfer of Beaver Dam Grain. However, since this point was not further argued by counsel, it was not considered by the court in this opinion.

[14] Transcript of hearing on Motion to Determine Validity of lien, Kaiser Agricultural Chemicals v. Beaver Dam Grain, Inc., January 20, 1983 at PP. 12, 18.