In Re Aleris International, Inc.
OPINION 1
Bеfore the Court is a motion for relief from the automatic stay (the “Motion”) [Docket No. 719] filed by Holt Equipment Company, LLC (“Holt”), a creditor of Al-eris International, Inc. (“Aleris” or the “Debtor”). The Debtor objected to the Motion (the “Objection”) [Docket No. 745], and the Court has conducted argument on the Motion. For the following reasons, the Court will deny the Motion.
I. INTRODUCTION
The Motion requires the Court to determine whether a seller of goods has any rights to the goods against a debtor who has retained possession of the goods pursuant to a sales contract but has not paid for them. Specifically, is a seller entitled to relief from the automatic stay to gain immediate possession of goods for which the debtor has not paid if the seller has neither possession of the goods nor a perfected security interest in them? Based on an analysis of the relevant provisions of title 11 of the United States Code (the “Bankruptcy Code”) and the Uniform Commercial Code (the “U.C.C.”), the Court concludes that under these circumstances the seller is not entitled to relief from stay for the purpose of gaining immediate possession of such goods because the seller’s unperfected security interest is subject to avoidance.
II. BACKGROUND
On January 12, 2009, Aleris executed a customer purchаse order form (the “Sales Agreement”) in Kentucky pursuant to which Holt sold a 2007 Deere 644J 4WD Loader, Serial No. DW844JX61B081 (the “Equipment”) to Aleris for the sum of $141,173.98. Due to a prior rental arrangement between the parties, Aleris was already in possession of the Equipment since September 2008. The Sales Agreement included the following provision (the “Title Provision”).
ACKNOWLEDGMENTS: I (We) promise to pay the balance due (Line 9) shown hereon in case or to execute a Time Sale Agreement (Retain Installment Contract), or a Loan Agreement for the purchase price of the Equipment, plus additional charges shown thereon, or to execute a Lеase Agreement, on or before delivery of the Equipment ordered herein. Despite physical delivery of the Equipment, title shall remain in the seller until one of the foregoing is accomplished.
Based on the evidence before the Court, the parties executed no other agreements ■with respect to the Equipment. According to Holt, Aleris has used the Equipment at Aleris’s facility in Morgantown, Kentucky without remitting any payments to Holt as required by the Sales Agreement.
On February 12, 2009 (the “Petition Date”), Aleris, along with certain of its affiliates, voluntarily commenced its chapter 11 case in the United States Bankruptcy Court for the District of Delaware. On June 25, 2009, Holt filed the Motion seeking relief from the automatic stay to permit it to take immediate possession of the Equipment. On April 29, 2010, Holt filed a limited objection to the Debtors’ First Amended Joint Plan of Reorganization (the “Plan”), pursuant to which it objected to any impairment of its rights in and to the Equipment under the Plan, thereby preserving its rights, if any, to the Equipment. On May 10, 2010, the Debtor stated in its omnibus reply to filed objections to Plan confirmation that it had communicated to Holt’s counsel that the Debtor would honor whatever rights the Court determines Holt has in the Equipment. In reliance upon this communication, Holt withdrew its objection to Plan confirmation. On May 13, 2010, thе Court confirmed the Plan. Pursuant to the Plan, the Debtor transferred all of its assets to the reorganized entity and was thereafter dissolved on June 1, 2010.
The relevant facts as they relate to the Motion are undisputed. The parties agree that they entered into the Sales Agreement pursuant to which Holt sold the Equipment to Aleris. The parties also agree that Aleris has been in possession of the Equipment since September 2008, such that the Equipment had been delivered to Aleris prior to the execution of the Sales Agreement. The parties do not agree, however, on the legal consequences of this sequence of events.
Holt contends that it, and not Aleris, owns the Equipment, and that it seeks relief from the automatic stay simply “[o]ut of an abundance of caution ... to take possession of its own property.” Motion ¶ 6. In support of its ownership claim, Holt relies on the Title Provision in the Sales Agreement. Holt asserts that pursuant to this provision, Holt has retained title to the Equipment under U.C.C. § 2-401(3), and as such, the Equipment is not property of the Debtor’s estate and is therefore not subject to the automatic stay.
In the alternative, Holt argues that 11 U.S.C. § 362(d)(1) entitles it to relief from stay for “cause” because the Debtor has not provided Holt with adequate protection of its asserted ownership interest in the Equipment even though the value of the Equipment depreciates daily due to the Debtor’s continued use. Absent relief, Holt asserts that the Debtor will receive a windfall by being permitted to use the Equipment without being ordered to remit payments or relinquish possession to Holt.
The Debtor objects to the Motion on the grounds that Holt holds neither title to the Equipment nor any valid interest in the Equipment entitling it to relief from stay. First, the Debtor contends that Holt has failed to assert a valid ownership claim
In the alternative, the Debtor insists that the Equipment is vital to its business operations. Therefore, should the Court find that Holt has a valid interest in the Equipment sufficient to warrant relief from stay, the Debtor requests an opportunity to provide Holt with adequate protection payments. This matter has been sufficiently briefed and argued, and it is ripe for decision.
III. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a “core proceeding” under 28 U.S.C. § 157(b)(2)(A), (E), (G), and (K).
IV. DISCUSSION
To prevail on the Motion, Holt may rely on one of two alternative legal theories: (1) Holt holds title to the Equipment; or (2) Holt holds a valid security interest in the Equipment. If Holt holds title to the Equipment, then it may be entitled to take immediate possession. If Holt holds an unassailable security interest in the Equipment, then Holt may be entitled to relief from stay or adequate protection payments.
A. The Effect of the Debtor’s Possession of the Equipment under U.C.C. § 2^01
As a preliminary matter, Article 2 of the U.C.C. governs the transaction between Holt and Aleris pursuant to which the Equipment was sold under the terms of the Sales Agreement. The parties’ respective interests in the Equipment are determined primarily by U.C.C. § 2-401, and both parties cite to this provision in support of their respective positions. As such, it is appropriate for the Court to begin with the text of the statute. As adopted in Kentucky, U.C.C. § 2-401 states, in relevant part:
(1) Title to goods cannot pass under a contract for sale prior to them identification to the contraсt, and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this chapter. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the article on secured transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.
(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place аt which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place;....
(3) Unless otherwise explicitly agreed where delivery is to be made without moving the goods,
(a) if the seller is to deliver a document of title, title passes at the time when and the place where he delivers such documents; or
(b) if the goods are at the time of contracting already identified and no documents are to be delivered, title passes at the time and place of contracting.
Ky.Rev.Stat. Ann. § 355.2-401 (West) (citation omitted).
Several rules pertaining to the passage of title in the context of the sales transaction at bar are set forth in U.C.C. § 2-401. First, although parties may contract around the default rules articulated in § 2-401(1), (2), and (3), such latitude is bounded by the limitations set forth in § 2-401(1). Second, once a seller relinquishes possession of sold goods, § 2-401(1) mandates that any retention or reservation of title by the seller provided for in the sales contract is deemed only a reservation of a security interest in such goods. Third, § 2-401(3) provides that if no delivery is required, title to identified goods passes at the time and place at which the contract is executed.
1. Holt’s Retention of Title to the Equipment
Holt argues that pursuant to U.C.C. § 2-401 and the Title Provision in the Sales Agreement, Holt retained title to the Equipment, despite the fact that the Equipment had been delivered to and has remained in the possession of Aleris. The Court disagrees.
While the interplay of § 2-401(1), (2), and (3) is an issue of first impression in this District and in the Third Circuit, another bankruptcy court has already grappled with the relationship between these three provisions.
In re J. Adrian Sons, Inc.,
[bjecause § 2-401(1) deals with express agreements regarding passage of title as a general rule, § 2-401(2) and § 2-401(3) can only be viewed as dealing with certain common fact patterns in which the parties did not make express аgreement regarding passage of title, and where, for example ... (as here) the goods are already in possession of the buyer.
Id. at 26-27. 2
Thus, although parties may explicitly agree in the contract how and when title to sold goods passes from the seller to the buyer, parties may not avoid all of the default rules set forth in these provisions because any modification is nonetheless “[sjubject to these provisions and to the provisions of the article on secured transactions (Article 9).” U.C.C. § 2-401(1) (emphasis added). Specifically, irrespective of any agreement between the parties, a seller may never retain title to gоods that have already been delivered to the buyer, and any such retention is always reduced to a mere security interest in the delivered goods. 3
While Holt concedes that § 2^101(1) and (2) limit the parties’ ability to contractually determine the passage of title, Holt con
2. Passage of Title to the Equipment
Holt argues that title to the Equipment has not passed to Aleris. However, U.C.C. § 2-401(3)(b) provides that where a sales transaction requires no delivery of either the sold goods or any documentation pertaining to suсh goods, title passes by default to the buyer at the time and place
[t]he factual situations in subsections (2) and (3) upon which passage of title turn actually base the test upon the time when the seller has finally committed himself in regard to specific goods.... [S]ubsection (3) turns on the seller’s final commitment, i.e. the delivery of documents or the making of the contract.
U.C.C. § 2-401 cmt. 4.
Consequently, where the seller has relinquished physical possession of the sold goods and where the buyer is already in possession of such goods, and where the parties have contemplated no further action on the part of the seller, the buyer acquires title to suсh goods at the moment the sales contract is executed.
See, e.g., In re Gull Air, Inc.,
The Court is therefore satisfied that the requisite factual predicate for the application of U.C.C. § 24t01(3)(b) has been established by the Debtor and remains undisputed by Holt. The parties entered into a purchase and sale transaction, whereby Aleris agreed to purchase and Holt agreed to sell the Equipment, after Aleris had already been in physical possession of the Equipment pursuant to the parties’ prior rental arrangement. Because the Sales Agreement did not contemplate delivery of the Equipment by Holt, pursuant to § 2-401(3)(b), title to the Equipment passed to Aleris on January 12, 2009, the date on which the Sales Agreement was executed.
Accordingly, the Court finds that, pursuant to the provisions in U.C.C. § 2-401, Aleris acquired title to the Equipment, at the latest, on the date the Sales Agreement was executed. Thrоugh the operation of the Title Provision, Holt retained merely an Article 2 security interest in the Equipment.
B. The Enforceability of Holt’s Security Interest in the Equipment
Although Holt retained a security interest in the Equipment arising under Article 2, under Article 9, a seller’s security interest must attach to the delivered goods to be enforceable against the buyer, and it must be perfected to be enforceable against third parties. 7
Under U.C.C. § 9-203 as it was adopted in Kentucky, a security interest attaches to collateral when the following three conditions are satisfied: (1) the debt- or has signed a valid security agreement; (2) the creditor has given value; and (3) the debtor has rights in the collateral. Ky.Rev.Stat. Ann. § 355.9-203(2). Upon attachment, the security interest becomes enforceable against the debtor. Id. § 355.9-203(1).
With respect to the first requirement, the Court finds that Aleris authenticated a valid security agreement. The Sixth Circuit Court of Appeals has held that a provision in the contract that provides for title to sold goods to remain in the seller pending full payment by the buyer suffices as a security agreement for the purpose of attaching the seller’s security interest to the goods as required by U.C.C. § 9-203(b)(2).
Derryberry v. FCA Leasing Cory. (In re DeVita Fruit Co.),
As for the second requirement, the Court finds that Holt has given value in exchange for the security interest because it had relinquished possession of the Equipment to Aleris. There is no dispute that the Equipment is valuable to both parties. Thus, the second requirement has been satisfied.
Finally, with respect to the third requirement, the Court finds that Aleris had rights in the collateral when the security interest was created pursuant to U.C.C. § 9-203(b)(2) because the Debtor was in possession of the Equipment.
Conn. Bank & Trust Co. v. Schindelman (In re Bosson),
As a matter of law, a security interest must be perfected to provide notice to and be enforceable against third parties. The purpose of this notice requirement is to discourage and prevent the creation of secret liens.
Marlow v. Oakland Gin Co. (In re The Julien Co.),
The intention of the parties with respect to the passage of title is not determinative.
See Associated Indus.,
Under the laws of the State of Kentucky, to perfect a security interest in the collateral that is enforceable against third parties, a creditor must file a U.C.C. financing statement with the Secretary of State in Kentucky. Ky.Rev.Stat. Ann. § 355.9-501;
Marlow,
The Court notes that as between Holt and the prepetition Debtor, Holt’s security interest would be enforee
C. Relief from Stay
Upon the commencement of a bankruptcy case, 11 U.S.C. § 362(a) provides for an automatic stay of all actions against the debtor and the debtor’s property.
United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Associates, Ltd.,
1. Whether the Equipment is Subject to the Automatic Stay
By its terms, 11 U.S.C. § 362(a) applies only to property of the estate. Thus, the automatic stay does not protect property in which a debtor holds no interest. Property of the estate is defined in 11 U.S.C. § 541(a)(1) as “all legal or equitable interests of the debtor in property as of the commencement of the case,” subject to several exceptions that do not apply in this case. Holt contends that the stay does not apply to the Equipment because it maintains that Holt, and not the Debtor, holds title to the Equipment. However, as discussed above, the Court has concluded that title to the Equipment had vested in the Debtor through the operation of 11 U.S.C. § 2^401 before Aleris filed its bankruptcy petition. Accordingly, as a matter of law and contrary to Holt’s assertions, the automatic stay does in fact apply to the Equipment.
2. Whether Holt is Entitled to Relief from Stay
Section 362(d)(1) enables a party in interest to request relief from the automatic stay upon a showing of “cаuse.” Initially, the Court must determine whether Holt has made a prima facie showing that it is entitled to the requested relief.
In re RNI Wind Down Corp. et al.,
Here, Holt seeks relief from stay to gain immediate possession of the Equipment. Under the circumstances, the only legal theory that could afford Holt immediate possession is the remedy of re-plevin. However, to replevy the Equipment, Holt must establish that it is entitled to the immediate possession of the goods sought to be replevied.
Stimson’s Ex’x v. Tharp,
Furthermore, where a creditor seeks relief from stay and claims an interest in property of the estate, an implicit requirement is a showing by the creditor that its claim is secured.
See In re Elmira Litho,
3. Whether “Cause” Exists for Relief from Stay
Assuming arguendo that Holt may nonetheless demonstrate its entitlement to seek relief from the automatic stay, it would still have to show that “cause” exists to warrant such relief. Although § 362(d)(1) does not define “cause,” the Third Circuit has held that courts should consider “the totality of the circumstances in each particular case” to determine whether “cause” for relief from stay exists.
Baldino v. Wilson (In re Wilson),
Even if Holt can demonstrate that its security interest entitles it to relief from stay, the balance of hardships nonetheless weighs against Holt. First, the Debtor has established that it will suffer harm if thе Court lifts the stay and allows Hoit to proceed on the basis of its asserted security interest in the Equipment. The Debtor insists that the Equipment is “essential to its operations.” Thus, any action taken by Holt that may deprive the Debtor of its possession or use of the Equipment is likely to cause the Debtor severe hardship and to affect its ability to consummate an effective reorganization.
Second, Holt has not shown that the hardship on Holt in the event that the stay is maintained considerably outweighs the hardship likely to be suffered by the Debt- or if the stay is lifted or modified. Although Holt has noted that the Equipment is depreciating in value because of the Debtor’s continued use, it has not shown that its continued dispossession would cause it greater hardship than the hardship on the Debtor in the event that the Debtor is dispossessed of the Equipment.
Finally, Holt has made no showing that it is likely to prevail against the Debtor on the strength of its security interest in the Equipment. Holt’s security interest in the Equipment is unperfected and thus susceptible to avoidance. 11 Accordingly, the Court holds that Holt has not made an adequate showing of cause sufficient to merit relief from stay.
V. CONCLUSION
For the foregoing reasons, the Court will deny the Motion. An appropriate Order follows.
. Pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procеdure, made applicable to this contested matter by Rule 9014(c), this Opinion constitutes findings of fact and conclusions of law.
Notes
.
See also New England Yacht Sales, Inc. v. Comm'r,
.
Marlow v. Oakland Gin Co. (In re The Julien Co.),
. In re J. Adrian Sons,
.
See, e.g., Derryberry v. FCA Lеasing Corp. (In re DeVita Fruit Co.),
. The analysis is not altered by the fact that Aleris has not paid Holt for the Equipment. U.C.C. § 2-401(1) makes no exception for the retention of title to goods that have been delivered but for which the seller has not received payment. The determinative fact is whether the goods have been delivered to the buyer.
See, e.g., Derryberry,
473 F.2d at
588; Malloy v. Brazeal (In re Callahan),
No. 07-10070-R, Adv. No. 07-1021-R,
. U.C.C. § 9-110 provides that a security interest arising under U.C.C. § 2-401 attaches to the collateral and is deemed perfected so long as the buyer is not in possession of such collateral, such that the seller mаy enforce the security interest against the buyer even in the absence of an authenticated security agreement otherwise required for attachment or a filed financing statement otherwise required for perfection, as mandated by § 9 — 203(b)(2). Id. § 355.9-110(1). Because a security interest that arises through the operation of U.C.C. § 2-401 is non-consensual, there is no need for the seller to show the existence of a security agreement as long as the seller has retained possession of the collateral. White & Summers, U.C.C. § 30-11 (6th ed.2010). Likewise, while the seller is in possession of the collateral, there is no need for perfection to put third parties on notice of the security interest. Id. However, once the buyer obtains possession of the sold collateral, the protections of U.C.C. § 9-110 disappear and a seller holding an Article 2 security interest must abide by the rules of attachment and perfection under Article 9 to enforce its security interest in the collateral.
. Similarly, another bankruptcy court held that a letter confirming the terms of the contemplated sale of equipment could serve as a security agreement if combined with other documents, although the court did not specify to which documents it was referring.
In re Phillips,
. An Article 2 security interest that has attached to the collateral is deemed perfected so long as the seller retains possession of the collateral. Section § 9-309 of the U.C.C. provides that a security interest arising under § 2-401 is deemed perfected when the security interest attaches to the goods and remains perfected so long as the buyer does not obtain possession of the goods. KyRev.Stat. Ann. § 355.9-309(6). Here, it is undisputed that Aleris, not Holt, has physical possession of the Equipment, such that Holt may not rely on § 9-309 for satisfaction of the perfection requirement.
. Holt has made no showing that it is entitled to immediate possession of the Equipment based upon other grounds.
. In the event that the Debtor avoids Holt’s unperfected security interest in the Equipment, Holt would nonetheless retain an unsecured claim for the purchase price of the Equipment arising out of the Sales Agreement.