Ipc (Usa), Inc. v. Kathryn Ellis
917 F.3d 1130 (2019)
Rule of Law:
U.C.C. § 9-319(a), which grants a consignee rights and title to consigned goods for the benefit of its creditors, also extends to the identifiable proceeds from those goods held by the consignee at the time of bankruptcy, making an unperfected consignor's interest in both the goods and their proceeds subordinate to a bankruptcy trustee's judicial lien.
Facts:
- Pettit Oil Company (Pettit) operated "card lock" sites for commercial customers to purchase fuel products.
- In 2013, Pettit entered into a consignment agreement with IPC (USA), Inc. (IPC), under which IPC delivered consigned fuel to Pettit's card lock sites for sale to customers.
- The consignment agreement specified that ownership of the fuel remained with IPC until it was sold to a customer, at which point title transferred to the purchaser.
- Customers were instructed to remit payment directly to IPC for purchased consigned fuel, but the agreement also provided that Pettit would promptly forward any direct payments it received to IPC.
- When Pettit filed for bankruptcy, it was in possession of both unsold IPC fuel and proceeds from sold fuel (in the form of cash and accounts receivable) that had not yet been remitted to IPC.
- IPC never filed a financing statement or otherwise perfected its interests in the consigned fuel, the accounts receivable, or the cash proceeds.
Procedural Posture:
- Pettit Oil Company filed for bankruptcy.
- Kathryn A. Ellis, the Chapter 7 Trustee, commenced an adversary proceeding in the Bankruptcy Court, seeking the value of the fuel, accounts receivable, and cash proceeds for the benefit of the bankruptcy estate.
- The Bankruptcy Court entered summary judgment in favor of the Trustee.
- IPC (USA), Inc. appealed the Bankruptcy Court's decision to the Ninth Circuit Bankruptcy Appellate Panel (BAP).
- The Bankruptcy Appellate Panel affirmed the Bankruptcy Court's summary judgment.
- IPC (USA), Inc. (Appellant) appealed the BAP's affirmance to the Ninth Circuit Court of Appeals (this court).
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Issue:
Does U.C.C. § 9-319(a), which deems a consignee to have rights and title to consigned goods for creditor purposes, also extend that rule to the proceeds of those goods held by the consignee at the time of bankruptcy, thereby subordinating the consignor's unperfected interest in such proceeds to the bankruptcy trustee's judicial lien?
Opinions:
Majority - Chief District Judge Burns
Yes, U.C.C. § 9-319(a) extends to the proceeds from goods sold that are held by the consignee on the date it files for bankruptcy, thereby subordinating the consignor's unperfected interest in the proceeds to the bankruptcy trustee's judicial lien. The court reasoned that when a debtor files for bankruptcy, the trustee automatically obtains a judicial lien over all property the debtor owns, superior to unperfected security interests, under 11 U.S.C. § 544(a)(1). While IPC argued for traditional property law principles where proceeds would be outside the trustee's reach due to IPC's retained ownership, U.C.C. § 9-319(a) explicitly deems a consignee to have "rights and title to the goods identical to those the consignor had" for creditor purposes. This provision establishes the consignee's ownership interest for priority determination, making IPC's unperfected interest in the fuel subordinate to the Trustee, as per In re First T.D. & Inv., Inc. The court rejected IPC's narrow reading of "goods" in § 9-319(a) to exclude "proceeds," citing numerous other U.C.C. provisions (e.g., §§ 9-102(a)(73)(C), 1-201(b)(35), 9-102(a)(12)(C)) that consistently treat a consignor's interest in goods and related proceeds as a security interest for all purposes of perfection and priority. Furthermore, U.C.C. § 9-324(b) explicitly grants a perfected interest in inventory priority over identifiable cash proceeds, implying the reciprocal loss of priority for unperfected interests. The court emphasized that U.C.C. § 9-319(a) cannot be read in isolation but must be interpreted consistent with Article 9 as a whole. Additionally, U.C.C. § 9-202 states that Article 9's provisions apply regardless of where legal title to collateral lies, rendering IPC's retention of title to the proceeds irrelevant for priority. The court underscored the policy rationale of protecting unwary creditors and preventing "secret liens," which would be undermined if proceeds were carved out from perfection rules. Finally, the court found no barrier to the Trustee claiming an interest in pre-petition proceeds under 11 U.S.C. § 544(a), as the Trustee's interest is identical to that which IPC had and could have perfected.
Analysis:
This decision significantly clarifies the scope of U.C.C. § 9-319(a) in bankruptcy proceedings, establishing that the deeming provision for consigned "goods" extends unequivocally to their "proceeds." This interpretation ensures a consistent application of Article 9's perfection and priority rules, thereby closing a potential loophole that consignors might exploit to claim superior interests in proceeds despite failing to perfect their security interest. The ruling reinforces the fundamental policy of Article 9 to protect general creditors from undisclosed security interests or "secret liens," compelling consignors to provide public notice of their claims on both goods and their derivatives. Future cases involving consignments and bankruptcy will rely on this precedent to confirm that any consignor seeking to insulate its interests from a bankruptcy trustee must undertake the necessary steps to perfect its security interest in both the consigned inventory and any identifiable cash or non-cash proceeds generated from its sale.
