This bankruptcy adversary proceeding arises on direct appeal from the district court’s affirmance of the bankruptcy court’s finding that Ford Credit failed to properly perfect its security interest and
I. STATEMENT OF THE CASE
A. Background Facts
In January of 1980, the debtor, Dillard Ford, entered into an inventory financing agreement with the appellant, Ford Credit. Ford Credit promised to loan Dillard Ford money to purchase new and used cars for its inventory. This inventory financing agreement included a security agreement which directly referenced a Ford Credit Manual that supplemented the agreement with additional standardized terms. This security agreement granted Ford Credit a security interest in various property interests owned by Dillard Ford.
There were two related parts to this financing agreement. First, Ford Credit advanced Dillard Ford the funds needed tо buy cars to fill its inventory. On a weekly basis, Dillard Ford was to give Ford Credit an itemized inventory list. When Dillard Ford sold a car it would pay off the inventory financing loan on that car. Under the evolving line of credit provisions of the agreement, Dillard Ford would simultaneously take out another loan to buy another car to restock its inventory. Second, Ford Credit participated in consumer retail financing. When a consumer sought to finance a car, Dillard Ford had authority to write a sight draft against Ford Credit and to deposit it into Dillard Ford’s sales account. These sight drafts drawn on Ford Credit’s account were payment from Ford Credit to the dealer in exchange for the chattel paper signed by the consumer. The consumer was obligated by this chattel paper to pay Ford Credit for the automobile loаn. Thus, Ford Credit would send Dillard Ford two types of checks: one to finance its inventory and one to pay for the chattel paper sold to Ford Credit. In return, Dillard Ford was obligated to repay the inventory financing and send Ford Credit the chattel paper signed by the consumer.
The financing agreement also created a dealer proceeds withheld (“DPW”) account held by Ford Credit. Under the agreement, Ford Credit agreed to pay the dealership for the chattel paper an amount equal to the present value of the chattel paper. Ford Credit would then place a portion of the money owed the dealer into a special fund, called the DPW account, 1 in order to cover the risk of consumers’ defaulting on the loans. Whenever the fund rose above three percent of the balance on the outstanding chattel paper, Ford Credit would pay the dealership the surplus. When all the chattel paper was paid in full, Ford Credit agreed to refund to the dealer any money left in the fund.
On August 31, 1983, Ford Credit discovered that Dillard Ford had insufficient funds to cover two checks that were written to cover the dealer’s obligations under the inventory financing loan. The two checks totalled $17,374. One of Ford Credit’s managers promptly went to Dillard Ford and was told, by the president, that Dillard Ford either could not or would not cover the two checks. The Ford Credit manager informed the Dillard Ford president that he was suspending Dillard Ford’s inventory financing line of credit and its privilege of writing sight drafts against Ford Credit. The Ford Credit manager then conducted an audit of Dillard Ford’s inventory. During this аudit he found that Dillard Ford had mailed a third check (for $10,650) and had recently sold two cars that were being financed by Ford Credit. The Ford Credit manager informed the bookkeeper that Ford Credit would take the chattel paper on the two car loans and apply the money Ford Credit owed on the chattel paper to offset the losses on the three bounced checks. The Ford Credit manager told the bookkeeper not to write sight drafts for these two pieces of chattel paper or for any future sales.
The Ford Credit manager returned to his office and wrote two checks for the chattel paper and deposited the two checks in Ford
B. Procedural History
On September 9, 1983, Dillard Ford filed for chapter 7 liquidation. On November 18, 1983, the bankruptcy judge allowed Ford Credit to repossess all of Dillard Ford’s сars which had been inventory financed by Ford Credit. After sale of the cars, Dillard Ford still owed Ford Credit $54,943. Ford Credit, meanwhile, held $36,283 in Dillard Ford’s name in the DPW account and held the two disputed checks totalling $22,299.
The trustee brought this adversary action to recover the money in the dealer proceeds fund and the two disputed checks. On December 15, 1989, following a trial, the bankruptcy court awarded the trustee a verdict on both of his claims. On August 16, 1990, the district court affirmed. This timely appeal was then brought.
II. ANALYSIS
A. The Dealer Proceeds Withheld Account
One of the two disputes in this case involves the dealer proceeds withheld (DPW) account. The DPW account is held by Ford Credit to cover any losses that it incurs when it provides the financing for a consumer’s purchase of a car. The bankruptcy and district courts held that while Ford Credit had a security interest in the DPW acсount, it failed to properly perfect this security interest. The trustee argues that the lower courts erred because there was no security interest in the DPW account. Ford Credit argues that the lower courts erred because the security interests were properly perfected.
1. Definitions
Before it is possible to determine whether there was a security agreement or whether this agreemеnt was properly perfected, we must first determine the proper definitions, under Article 9 of the Uniform Commercial Code, of each component part of this transaction. Clearly the dealer creates, and then sells to Ford Credit, chattel paper when the customer enters an agreement to finance a purchase of a car. According to the Uniform Commercial Code, chattel paper is “a writing ... which evidence^] both a monetary obligation and a security interest in [a] specific good[].” U.C.C. § 9-105(l)(b). 3 Neither party seriously disputes the fact that these consumer financing contracts are chattel paper.
It is also obvious that any security interest in the DPW account constitutes a security interest in a general intangible. A general intangible is “any personal property ... other than goods, accounts, chattel paper, documents, instruments, and money.” U.C.C. § 9-106. Nonetheless, both parties erroneously assume that the DPW account is an account. An account is a “right to payment for goods sold ... or for services rendered which is not evidenced by an instrument or chattel paper,” U.C.C. § 9-106. The dealer’s contingent right to the money in the DPW account is a right to
In order for Ford Credit’s security interest in the DPW account to be valid against the trustee in bankruptcy, the security interest 5 must comply with two basic requirements. First, the security interest must attach to the property in order to be enforceable. U.C.C. § 9-203. Second, the security interest must be perfected in order to prevail over a trustee in bankruptcy’s claim in a priority battle. U.C.C. § 9-301(l)(b) and § 9-301(3).
2. The Security Agreement
A security interest attaches when three conditions have been met. First, “the debtor[, Dillard Ford, must sign] a security agreement which contains a description of the collateral.” U.C.C. § 9-203(l)(a). Second, “value [must be] given.” U.C.C. § 9-203(l)(b). Third, the debtor [must have] rights in thе collateral.” U.C.C. § 9-203(l)(c).
The lower courts were correct in concluding that a security interest has attached to the DPW account. The financing agreement, which was signed by both parties, contains a description of the collateral in that it states that Ford Credit has a security interest in the DPW account. Value has been given in that Ford Credit gave the dealer money to finance its inventory. Finаlly, the debtor has rights in the collateral, albeit the rights are contingent.
3. Perfection
The lower courts held that this security interest is not enforceable against the trustee in bankruptcy because it was not properly perfected. See U.C.C. § 9-301(l)(b) and § 9-301(3). Ford Credit filed a UCC-1 financing statement which stated that Ford Credit had a security interest in Dillard Ford’s general intangibles and in other property rights owned by the dealer. The lower courts found that this financing statement was inadequate because it was too vague to place other hypothetical creditors on notice.
The lower courts are mistaken in their reading of Article 9 of the Uniform Com
B. The Setoff
Ford Credit also appeals the lower court’s rulings on the pre-petition setoff. Before Dillard Ford filed for bankruptcy, Ford Credit’s manager setoff part of the dealership’s debt to Ford Credit by cashing two checks that Ford Credit owed to the dealership. The dealership owed the debt to Ford Credit under the inventory financing agrеement. Ford Credit, in turn, was obligated to make payment on the two checks under the retail financing agreement. The lower courts held that this was an improper setoff under section 553 of the Bankruptcy Code. See 11 U.S.C.A. § 553 (West 1979).
A pre-petition setoff is valid as long as it complies with the state law governing a creditor’s right to setoff and with the requirements of section 553 of the Bankruptcy Code.
See Republic Nat’l Bank of Houston v. Sheinfeld,
However, the trustee argues that the setoff was a voidable preference under section 547 of the Bankruptcy Code. The lower courts correctly rejected this argument. The Bankruptcy Code is explicit that questions of setoff are governed exclusively by section 553 of the Bankruptcy Code. See 11 U.S.C.A. § 553 (West 1979) (“Except as ... provided in this section ... this Title does not affect any right of a creditor to offset a mutual debt”).
Ford Credit’s actions were proper as long as they comply with the requirements of section 553 of the Bankruptcy Code. Section 553 lists three requirements: (1) the setoff must involve a mutual debt so that both the creditor and debtor owe each other money, 11 U.S.C. § 553(a); (2) both sets of obligations must arise prior to the bankruptcy filing, id.; and (3) the setoff cannot fall within three exceptions, id. There can be no dispute that this setoff meets both the first and second requirements of section 553. Before Dillard Ford filed for bankruptcy, the dealership owed Ford Credit money for providing inventory financing and Ford Credit owed the dealership money for the chattel paper thаt it bought. The two parties seriously dispute, however, whether Ford Credit can meet the third requirement.
The trustee claims that this setoff is invalid because it fell within one of the three exceptions to setoff listed in section 553(a)(l)-(3). It is clear, however, that
Section 553(b), however, allows a court to reduce the amount of setoff if it occurs within 90 days оf the bankruptcy filing and if the creditor used this setoff to better its position. The lower courts found that the setoff allowed Ford Credit to better its position so they reduced Ford Credit’s setoff to zero. Under section 553(b), the court is required to calculate the “insufficiency” of the debt on two separate days and then compare these two calculations. The insufficiency equals the amount the debtor (Dillard Ford) owes the creditor (Ford Credit) less the amount the creditor owes the debtor. This calculation must be done for the day the setoff occurs and for Day 2. 6 Should the insufficiency on the date of the setoff be less than the insufficiency on Day 2, the creditor must refund the difference.
The district court and Bankruptcy Court erred in applying this section of the Bankruptcy Code. The lower courts noted the setoff and concluded that Ford Credit must have improved its position. The lower courts, however, never compared the insufficiency on the day of the setoff to the insufficiency on Day 2. In fact, the lower courts never determined which day was Day 2. In a constantly changing commercial relationship with revolving lines of credit and changing levels of financed inventory, one can only guess what the insufficiency would have been on Day 2. In short, this portion of the case needs to be remanded for further factual findings before this Court can rule on the propriety of the setoff.
III. CONCLUSION
We REVERSE the lower courts' determination that Dillard Ford lacked a perfected security interest in the DPW account. We also REMAND the case to the bankruptcy court to make findings of fact on the insufficiency and tо recalculate the setoff in a manner consistent with this opinion.
Notes
. The DPW account is merely an accounting device. The money is held in Ford Credit’s general funds and is not segregated.
. Of the four checks written by the manager for the chattel paper, two of them involved cars which were originally part of the inventory financed by Ford Credit. The trustee has not contested Ford Credit’s right to withhold payment оn the chattel paper for these two cars. The trustee is contesting Ford Credit’s right to take the chattel paper without payment for the two cars for which Ford Credit did not provide financing.
. Both parties agree that this transaction is governed by Georgia’s version of the Uniform Commercial Code which is found at Ga.Code Ann. § 11-1-101 et seq. Because Georgia’s version is to be read "liberally” in order to prоmote uniform law "among the various jurisdictions,” Ga. Code Ann. § ll-l-102(l)-(2) (1982), our citations will reflect the most current edition of the Uniform Commercial Code, rather than Georgia’s version. Of course, in the event of any variations in the two separate codes, we will follow Georgia’s version. Similarly, in our application of state law, we are bound by the Georgia courts’ interpretation of the code.
. The term "service" is not defined either in Article 9 or in section 1-201 of the Uniform Commercial Code. The only implication we can draw is that the drafters of the Code therefore desired private parties and the courts to interpret the phrase in light of common understanding. Cf. U.C.C. § 1 — 102(1)—(2) (stating the purposes of the code). The transaction in the case at hand does not involve a payment for a service rendered. To simplify matters considerably, in this transaction the dealers give Ford Credit chattel paper and in exchange Ford Credit pays the dealers in two separate installments: one payment occurs at the beginning of the transaction and the second payment occurs when the consumer pays off the chattel paper. Viewed in this light, the dealers have a right to the seсond payment only because of their sale of chattel paper to Ford Credit. This right does not arise from any service rendered. Of course, the analysis would differ if Ford Credit’s obligation to make the second payment arose in exchange for the dealer’s performance of some service such as the dealer taking steps to collect the customers’ debts.
. It is peculiаr for Ford Credit to have a security interest in a debt that it owes to the dealer; however, such a security interest is valid under Article 9. As is clear from the definitions, this debt is a general intangible owned by the dealer. Section 9-102 of the Uniform Commercial Code states that Article 9 covers “any transaction (regardless of form) which is intended to create a security interest in personal property ... including genеral intangibles.” U.C.C. § 9-102(l)(a). Section 9-102 requires us to look at the substance, not the form, of a transaction. If in fact Ford Credit was split into two separate corporations, one engaging in inventory financing and the other specializing in consumer financing, the situation would be much less peculiar: the consumer financing corporation would owe the dealer the money in the DPW account; the deаler would owe the inventory financing corporation for its inventory financing; and the inventory financing corporation could have a security interest in the DPW account money owed to the dealer. Nothing in Article 9 prohibits Ford Credit from consolidating these two hypothetical corporations and then obtaining a security interest in a debt that it owes to the dealer.
. "Day 2" is a term we have devised to simplify matters. Day 2 is the later of 90 days prior to the bankruptcy petition or the first day within those 90 days that an insufficiency arises.