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In re Pettit Oil Co.

United States Bankruptcy Appellate Panel of the Ninth Circuit

October 23, 2017

In re: PETTIT OIL COMPANY, Debtor.
v.
KATHRYN A. ELLIS, Chapter 7 Trustee, Appellee. IPC (USA), INC., Appellant, Adv. No. 3:14-ap-04222-PBS

          Argued and Submitted on September 28, 2017 at Seattle, Washington

         Appeal from the United States Bankruptcy Court for the Western District of Washington Honorable Paul B. Snyder, Bankruptcy Judge, Presiding

          Edwin K. Sato of Bucknell Stehlik Sato & Orth, LLP, argued for appellant, IPC (USA), Inc.

          Andrew H. Morton of Foster Pepper PLLC argued for appellee, Kathryn A. Ellis, Chapter 7 Trustee.

          Before: KURTZ, FARIS, and BRAND, Bankruptcy Judges.

          OPINION

          KURTZ, BANKRUPTCY JUDGE.

         Kathryn A. Ellis, chapter 7[1] trustee (Trustee), filed an adversary complaint against appellant, IPC (USA), Inc. (IPC), seeking to avoid under § 544(a) (1), IPC's unperfected security interest in consigned fuel inventory, accounts receivable (A/R), and cash (Cash) all of which were in the possession of the debtor, Pettit Oil Company (Debtor), on the petition date.

         The bankruptcy court granted partial summary judgment in favor of Trustee, ruling that the agreement between IPC and Debtor was a "true" consignment under Revised Article 9 (Article 9) of the Uniform Commercial Code (U.C.C.) § 9-102 (a) (20) . Under U.C.C. § 9-319(a), for purposes of determining the rights of Debtor's creditors while the fuel inventory was in its possession, Debtor is deemed to hold rights and title to the goods identical to those the consignor, IPC, had or had power to transfer. In contrast, under U.C.C. § 9-103(d), IPC is deemed to hold only a purchase-money security interest in the consigned goods as against creditors of Debtor-consignee. It is undisputed that IPC did not perfect its interest in the consigned fuel. Applying these statutes, the bankruptcy court found that IPC s interest in the fuel inventory was subordinate to the rights of Trustee as a judicial lien creditor.

         Subsequently, the court granted partial summary judgment in favor of Trustee, ruling that IPC's interests in the A/R and Cash generated from the sale of the consigned fuel and held by Debtor on the petition date was also subordinate to the rights of Trustee because IPC had not complied with the U.C.C.'s perfection rules for priority in accounts receivable or cash.

         In a final ruling, the bankruptcy court granted summary judgment in favor of Trustee awarding damages in the amount of $5, 493, 498.69 on her claims against IPC, consisting of: $1, 161, 754.00 for the fuel inventory, $3, 895, 961.69 for the A/R, and $435, 783.00 Cash that was in Debtor's bank account on the petition date.

         IPC argues on appeal that the bankruptcy court erred by including the value of the A/R and Cash in the judgment. IPC contends that under U.C.C. § 9-319, Trustee could reach only the "goods" - the fuel inventory - in the possession of Debtor on the petition date because the U.C.C. definition of "goods" does not include A/R and Cash. In short, U.C.C. § 9-319 should not be applied beyond its scope. Relying on the underlying consignment agreement between the parties, IPC contends that it is the only party with an interest in the A/R and Cash.

         For the reasons explained below, we find no support for IPC's proposition in Article 9 or elsewhere. Accordingly, we AFFIRM.

         I. FACTS

         A. The Consignment Agreement Between IPC and Debtor

         Debtor was a distributor of bulk oil, gas, diesel and lubricant products and sold fuel products at self-fueling sites known as "cardlock sites."[2]

         On September 1, 2013, IPC entered into a Consignment and Service Agreement (CSA) with Debtor. Under the CSA, IPC provided fuel to various cardlock sites owned or leased by Debtor. IPC retained title to the fuel until the fuel was sold to end user customers. Debtor was obligated to maintain the financial records for the consignment transactions, including booking and accounting for receivables and administering, invoicing, collecting, and remitting payments to IPC for the full cost of all consigned fuel sold by Debtor. In consideration, IPC agreed to pay Debtor a monthly commission.

         Debtor was also required to instruct its customers to make payments directly to IPC s lockbox account at Union Bank in San Francisco. However, upon implementation of the CSA, many cardlock customers continued to send payments for IPC fuel purchased at Debtor's cardlock sites to Debtor's account, a lockbox with Debtor's lender, KeyBank National Association (KeyBank). The CSA provided that if Debtor's customers sent payments to Debtor instead of IPC, Debtor was to promptly forward those payments to IPC. California law governed the interpretation of the CSA.

         It is undisputed that IPC never filed a financing statement or otherwise perfected its interests in the consigned fuel, the A/R, or Cash.

         B. Bankruptcy Events

         Debtor filed a chapter 11 petition in November 2013 (Petition Date). At the time of filing, there was an unquantified amount of IPC fuel remaining in the tanks at Debtor's cardlock sites. In addition, there were unpaid accounts receivable for IPC fuel that had been sold and invoiced to Debtor's customers, accounts receivable outstanding for sales of IPC fuel that had been sold but not yet invoiced to Debtor's customers, and cash in Debtor's KeyBank lockbox for sold and invoiced IPC fuel that customers had mistakenly sent to Debtor ...


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