Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: March 23, 2005
Appeal from the United States Bankruptcy Court for the District of Alaska. Honorable Donald MacDonald IV, Chief Bankruptcy Judge, Presiding. Bk.No. 00-00695. Adv. No. 03-90051.
Before: SMITH, BRANDT, AND KLEIN, Bankruptcy Judges.
MEMORANDUM
This appeal is from a final order denying Cherrier & King Partnership, Cherrier King Cherrier Fishery Partnership, and Dragnet Fisheries Company, Inc.'s (" CK Group" or " Appellant") motion for summary judgment and granting summary judgment in favor of the trustee, Larry Compton (" Trustee"). We affirm.
FACTS
The relevant facts of this case, which involves a failed sales transaction, are uncontested. Intending to set up a new fish processing company in the Bristol Bay region of Alaska, Chris Fischer (" Fischer") formed Triton Fisheries, LLC, which later became King Fischer Fisheries, LLC (" KFF" or " Debtor"). In early March of 2000, Fischer and CK Group entered into several agreements for the purchase of real and personal property including two fish processing plants, two fish buying stations, a barge and the M/V Dragnet (" the Properties"). The purchase price for all assets was $3,351,000. Fischer paid $50,000 in earnest money. The closing was scheduled for May 1, 2000. Debtor hired E& E Foods of Seattle Washington (" E& E") as its agent for directing and overseeing inventory, marketing, sales, collection, and administrative costs related to the marketing of Debtor's fish product.
To address CK Group's concerns about Fischer's ability to obtain financing, the parties executed a Second Addendum to the Purchase Agreements on April 14, wherein Fischer agreed to provide proof of financing within 10 days and to surrender the Properties if the purchase did not close within 45 days. On April 28, Fischer provided a financing commitment letter. CK Group, however, was not satisfied with the letter and wanted additional time to verify the prospective lender's qualifications.
With the fishing season fast approaching, Fischer needed to take possession of the Properties immediately. Consequently, he and CK Group entered into a Third Addendum on May 2. Under this arrangement, Fischer agreed to provide additional security for the purchase in the event the closing did not occur by June 13. If Fischer could not obtain sufficient financing by June 13, the Third Addendum directed E& E to deposit the first $1.7 million in fish proceeds from the 2000 fishing season, payable to KFF, into an escrow account as " additional security" for the purchase of the Properties. If the sale closed after June 13 but before July 18, these proceeds were to be applied to the sale price. If the sale did not close before July 18, the parties agreed that the money would serve as reasonable rent for the facilities.
On May 22, in a letter to Fischer and representatives for CK Group, E& E acknowledged its obligation to deposit fish sale proceeds collected before June 13 into escrow for the benefit of CK Group as requested by the parties. As of June 14, however, the parties were still negotiating the terms of the escrow instructions. In fact, the parties never agreed on or signed any escrow instructions, never deposited any sale proceeds into the escrow account, and failed to abide by numerous provisions of the Third Addendum. In short, the Third Addendum was never implemented.
Instead, on July 10, counsel for Fischer and KFF wrote to CK Group seeking to modify the terms of the Third Addendum because KFF was facing a " cash crunch." Fischer requested that KFF be allowed to retain $300,000 of immediately available funds for operating expenses and that the next $500,000 be paid to CK Group as a lease payment for the 2000 season with the proviso that the full payment could be used as part of a down payment should KFF close the sale. This new agreement was memorialized in the July 10 letter to E& E and provides in part:
[CK Group and Debtor] have agreed to a modification of the instructions with regard to the initial payments you are to make. By this letter, which is signed by the attorneys for the parties, you are directed to make distributions as follows:
1. The first $300,000 of net proceeds shall be distributed to or at the direction of Chris Fischer or Triton Fisheries.
2. The next $500,000 of net proceeds shall be distributed to [CK Group] as a minimum rental for all facilities based on current production. . . .
3. Unless and until you are otherwise directed in writing signed on behalf of the [CK Group and Debtor], you shall then continue to make payments into the National Bank of Alaska account pursuant to the instructions you previously acknowledged until such time as an additional $1.2 million has been paid into the account or you are advised that the sale of the properties contemplated by the transaction among the parties has closed.
As instructed, on July 13 and 14, E& E transferred approximately $377,000 and $93,120, respectively, to a non-escrow CK Group partnership account. To satisfy the remaining $29,381, KFF assigned three containers of fish to CK Group worth about $122,500.
On July 18, KFF filed for chapter 11 protection. Thereafter, between July 20 and July 25, E& E transferred an additional $29,380 to CK Group.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
Debtor's liabilities exceed $3.4 million and include fishermen's liens of $1,572,785, packers and processors' liens of $837,516, priority wage claims in the amount of $143,000, and general unsecured claims of $893,000. Under Alaska law, fisherman have statutory liens in all property of the processor, while packers have statutory liens in the fish product or output of the processing plant for which material or labor was furnished, and the plant itself, for the value of labor and material.
Fishermen, packers and processors are represented by the Official Fisher Creditors Committee (" the Fisher Committee").
On August 25, 2000, the bankruptcy court appointed Larry Compton as the chapter 11 trustee for the estate of KFF. The Trustee filed this adversary proceeding claiming that the two pre-petition transfers and the transfer of the interest in $1.7 million were avoidable as preferences under § § 547(b) and 550. The Trustee also alleged that CK Group's asserted interest in the net proceeds is avoidable under § § 544 and 550 because they failed to perfect their interest in the $1.7 million. Next, the Trustee claimed that the net proceeds are avoidable under § § 548 and 550 as fraudulent conveyances, i.e., transfers made for less than a reasonably equivalent value and without fair consideration. The post-petition transfers, the Trustee argued, are avoidable pursuant to § § 549 and 550. CK Group cross-claimed against the Fisher Committee.
The Trustee also sought declaratory relief that his rights were superior and paramount to those of the Fisher Committee but that issue has been settled and is not part of this appeal.
The parties filed cross-motions for summary judgment. In granting summary judgment in favor of the Trustee, the court found that the Third Addendum assigned an interest in accounts to CK Group which had to be perfected, but was not, under Article 9 of Alaska's Uniform Commercial Code (" UCC"). Accordingly, CK Group's unperfected security interest was determined to be subordinate to the statutory liens of the fishermen and packers, as well as to the interest of the Trustee as a lien creditor under § 544. The court also found that the post-petition payments made to CK Group were either preferences or unauthorized transfers. The court granted the Fisher Committee's motion for summary judgment as to the fishermen lien claims and awarded attorney's fees to the Fisher Committee pursuant to Alaska law, which provides for fees in cases where a committee is acting to enforce the statutory lien rights of fishermen.
CK Group appeals.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and § 157(b)(1) and (b)(2). This Panel has jurisdiction under 28 U.S.C. § 158(b)(1).
ISSUES
1. Whether CK Group's interest in the $500,000 in fish proceeds and fish containers was subordinate to the interest of the Trustee under § 544 and to the statutory liens of the fishermen and packers;
2. Whether the transfers of fish proceeds from E& E to CK Group before and following the bankruptcy filing were either preferential transfers avoidable under § 547 or unauthorized post-petition transfers under § 549; and
3. Whether the Official Committee of Fisher Creditors was entitled to attorney's fees under Alaska law.
STANDARD OF REVIEW
The Panel reviews summary judgment orders de novo. Paine v. Griffin (In re Paine), 283 B.R. 33, 36 (9th Cir. BAP 2002).
DISCUSSION
The legal issues presented by this appeal revolve fundamentally around the applicability of Article 9 of the UCC to CK Group's interest in the fish proceeds. We agree with the bankruptcy court's well-reasoned memorandum, including its findings that 1) the transaction at issue was subject to the perfection provisions of Article 9, whether characterized as a security interest or an assignment; 2) CK Group's unperfected security interest is subordinate to the interest of the Trustee and the statutory lien rights of the fishermen and packers; and 3) the transfers CK Group received prior to and after the bankruptcy filing were avoidable under § § 547 and 549.
A. The Third Addendum Conveyed a Security Interest Governed by Article 9 to CK Group.
Appellant contends that Third Addendum conveyed to it an absolute present assignment of property rights to the proceeds from Debtor's fish sales. It argues that, as such, those funds are not subject to avoidance because the transfers were made pursuant to E& E's independent contractual obligation owed to CK Group and did not involve property of Debtor's estate. Therefore, CK Group asserts, the perfection provisions of Article 9 do not apply and the transfers are not avoidable under § § 547, 549, or 544. Additionally, the argument continues, because the assignment was made irrevocable on June 13, a full eight days before operations began, it preceded any statutory lien rights claimed by the fishermen. We disagree with Appellant's analysis.
Generally speaking, a security interest is implicated where the assignee retains the right to a deficiency claim if the assignment does not provide sufficient funds to satisfy the debt. See Dewhirst v. Citibank (Arizona) (In re Contractors Equip. Supply Co.), 861 F.2d 241 (9th Cir. 1988) citing In re Evergreen Valley Resort, Inc. 23 B.R. 659, 661-62 (D. Maine 1982)(identifying factors relevant to determination whether security interest or absolute assignment is involved). A security interest is also indicated when the assignee acknowledges that his rights in the assigned property would be extinguished if the debt owed were to be paid from some other source. 23 B.R. at 659, 661-62. By contrast, assignments have been found to be absolute transfers where the assignment operates to discharge the underlying debt. Id.
By its very terms, the Third Addendum can only be characterized as a security assignment. As stated in the body of the agreement, " [Debtor] has proposed providing additional security for the sale . . ." and " The additional security for closing of the purchase will be . . . ." . (emphasis added). Appellant's attempt to minimize the significance of this language by arguing that these references appear only in the " preamble" to the agreement is unavailing. Nothing in the agreement suggests that the assignment was intended to discharge the underlying debt, which would have been an indication that it was " absolute" under the Evergreen analysis. Further, as the Trustee correctly points out, Fischer conditionally, not absolutely, agreed that funds would be deposited into escrow if the sale did not close on or before June 13. Had Fischer obtained financing and closed the sale, Appellant would no longer have an interest in Debtor's fish sale proceeds, indicating that the assignment was for security.
The Third Addendum provides, in relevant part:
As the court noted, CK Group's own characterization of its interest - " the right to receive payment from E& E, " " E& E's independent contractual obligation to make payment to CK, " an " assignment of revenue, " and " a property right, the contractual right to receive payment from E& E, " - is more consistent with a security interest in accounts than an absolute present interest. Therefore, we agree with the court's analysis and conclude that Appellant held a security interest in accounts which is governed by Article 9.
Former Article 9 applies with respect to CK Group's interest because the relative priorities of the parties were established when Debtor filed bankruptcy in July 2000, before Revised Article 9 became effective (July 2001). Under § 544, the Trustee's rights as a judicial lien creditor and the relative rights and priorities of the parties become fixed as of the commencement of the case, even though they had not been finally determined by the court. See e.g., In re Chorney, 277 B.R. 477, 486 (Bankr. W.D.N.Y. 2002); In re Wiersma, 283 B.R. 294, 299 (Bankr. D. Ida. 2002)(interpreting Idaho's savings clause, which is similar to Alaska's (codified at AS § 45.29.702 (2004)), and noting that courts consistently apply former Article 9 when a debtor files for bankruptcy before the effective date of Revised Article 9); see also, AS § 45.29.709(a)(2004) which provides that Revised Article 9 determines the priority of conflicting claims to collateral unless the relative priorities of the claims were established before July 1, 2001, in which case Former Article 9 determines priority.
B. Even if the Third Addendum is Characterized as an " Absolute Assignment, " it is Still Subject to the Provisions of Article 9.
The Third Addendum purported to assign to CK Group " the first $1.7 million in net proceeds from seafood sales." The Alaska Uniform Commercial Code - Secured Transactions, defines " goods" to include " all things that are movable at the time the security interest attaches." AS § 45.09.105(a)(8)(repealed 2001). Seafood is a good, the sale of seafood creates a right to payment, and the net proceeds from seafood sales constitute " accounts" under the UCC. See e.g., Bank of Stockton v. Diamond Walnut Growers, Inc., 199 Cal.App.3d 144, 244 Cal.Rptr. 744, 747-48 (Cal. Court. App. 1988)(farmer's walnuts were " goods" and right to receive proceeds from their sale was an " account" under California UCC); Matter of Bindl, 13 B.R. 148, 149 (Bankr. D. Wis. 1981)(milk is a " good" and farmer's right to payment for proceeds from milk sales is an " account" under Wisconsin UCC). An " account" is a " right to payment for goods sold or leased or for services rendered that is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." AS § 45.09.106 (repealed 2001).
AS § 45.09.105(a)(8) defines " goods" as including all things that are movable at the time the security interest attaches or that are fixtures but does not include money, documents, instruments, investment property, accounts, chattel paper, general intangibles, or minerals or the like (including oil and gas) before extraction; " goods" also includes the unborn young of animals, growing crops, and standing timber that is to be cut and removed under conveyance or contract for sale; . . .
The assignment of accounts, whether absolute or for security, is governed by Article 9, which requires that such assignments be perfected by filing a UCC-1 statement. In re Contractors Equip. Supply Co. Inc., 861 F.2d at 245. Failure to perfect as required by Article 9 may leave the transferee's ownership of the receivables subject to the claims of third parties, such as the seller's lien creditors or a trustee in bankruptcy. PEB Commentary No. 14 to UCC 9-102, as printed in 8A Anderson on the Uniform Commercial Code (3d ed. Cum. Supp. June 2003) § 9-102:1.5.
See AS § 45.09.102(a), in effect at the relevant time, which provides that the perfection rules of Article 9 apply to transactions intended to create a security interest in personal property or fixtures, including goods, documents, instruments, general intangibles, chattel paper, or accounts; as well as the sale of accounts or chattel paper.
CK Group does not dispute that its interest was never perfected, but insists that because the assignment was absolute, and not one for security, the filing requirements of Article 9 are not implicated. As the bankruptcy court correctly determined, however, whether the fish proceeds were assigned for security purposes or were assigned as an absolute present transfer, the assignment is governed by Article 9 and had to be perfected by filing to be effective against statutory and judgment lien creditors. See Octagon Gas Systems, Inc. v. Rimmer (In re Meridian Reserve, Inc.), 995 F.2d 948, 955 (10th Cir. 1993).
None of Appellants' remaining arguments lead us to a different result.
C. E& E was Acting as Debtor's Agent and Did Not Have an Independent Obligation to Pay CK Group.
CK Group also claims that its assignment was absolute because under the May 22 letter agreement from E& E, Debtor had no right to receive payment from E& E, while E& E had an absolute, independent contractual duty to pay CK Group. The letter states, in relevant part:
Please find enclosed and attached hereto a copy of the THIRD ADDENDUM TO EARNEST MONEY RECEIPTS AND AGREEMENTS TO PURCHASE AND AGREEMENTS TO SELL. Please note my signature on said document in acknowledgment of the provisions for E& E's obligation to remit 100 percent of net proceeds . . . directly into escrow for the benefit of sellers at Pacific Northwest Title of Alaska, Anchorage pursuant to the provisions of the agreement.
In reading the agreement, I do not find any provision for notice to E& E as to the status of our role on June 14. In simple language, we will be looking for Mr. Mahoney, together will Mr. Davis [counsel for CK Group and Fischer/KFF], to provide nonconflicting instructions as to the disposition of sales funds post June 13, as well as notice of satisfaction, in the event of escrow.
Because E& E had a duty to pay CK Group rather than Debtor, Appellant argues, CK Group is entitled to retain the payment without the need for a UCC filing or other perfection of its interest because the property did not belong to Debtor at the time of its transfer. This argument is difficult to follow because it requires transformation of the relationship between Debtor and E& E from one of principal-agent to one of debtor-creditor. That did not occur. Debtor's contract with E& E is an unambiguous agency agreement that does not create a debtor-creditor relationship. Under the contract, E& E held any fish proceeds it received from the sale of Debtor's fish for the benefit of Debtor. E& E did not purchase fish from Debtor with a resulting E& E account debt that was assigned to CK Group and paid from E& E's own funds. Indeed, E& E never held an ownership interest in the funds. E& E was simply Debtor's agent, not an account debtor.
Most of Appellant's argument is focused on the applicability of UCC § 9-318(a)(1)(codified as AS § 45.09.318(a)) which governs rights between an account debtor and an assignee. We conclude, however, that § 9-318(a)(1) is inapplicable here. It provides
Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in AS § 45.09.206, the rights of an assignee as subject to (1) all the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom; and (2) any other defense or claim of the account debtor against the assignor which accrues before the account debtor received notification of the assignment.
AS § 45.09.318(a).
The section does not address competing claims to the right of payment from the account debtor asserted by competing assignees and lien creditors. Those rights are determined by the priority rule of Article 9 which are a function of the perfection provisions.
Appellant's earmarking doctrine argument is also unavailing. That doctrine applies when a third party lends money to a debtor for the specific purpose of paying a selected creditor. E& E was not a co-debtor or guarantor of the obligation to Debtor's obligation to Appellant; it simply disbursed Debtor's fish proceeds to one of Debtor's creditors in accordance with instructions from its principal, the Debtor. Further, E& E was not independently obligated to pay CK Group from any source of revenue other than that belonging to Debtor.
We agree with the bankruptcy court and the Trustee that the two cases on which Appellant primarily relies, Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997) and Commerce Bank v. Chrysler Realty, 244 F.3d 777 (10th Cir. 2001), are not relevant. Broadcast Music is distinguishable because it involves an assignment of royalties that are governed by recording rules established under the Copyright Act, which is clearly not applicable here. In Commerce Bank, the Tenth Circuit held that an account debtor's contractual right to offset amounts due under a contract is a valid defense that, by statute, is enforceable against the assignee who held a perfected security interest in the accounts receivable, because the contractual right to offset was in the original account debtor's agreement. Id. at 781. The case before us does not involve an assignment to a third party, nor is the discussion of the offset instructive as there is no offset issue here.
D. Preferential Transfers
Consistent with its earmarking argument, CK Group maintains that because the transfer of the fish proceeds was " controlled" by E& E, and because E& E contractually agreed to remit the funds directly to CK Group, the proceeds never became property of the estate and, therefore, no interest in property of Debtor was transferred within the meaning of § 547(b). This argument fails, however, because E& E, as Debtor's agent, did not hold an ownership interest in the funds. Notwithstanding the agreement regarding their disbursement, title to the funds were, at all relevant times, held by Debtor.
In addition, both the $1.7 million in fish sale proceeds assigned to Appellant under the Third Addendum, and the $500,000 in transfers paid as minimum rental under the July 10 letter agreement, were ultimately to be applied against the purchase price for the assets, an obligation which was an antecedent debt. Finally, the $29,380 post-petition payment to CK Group was made from funds belonging to the bankruptcy estate and was made without authority of the court. Accordingly, we agree with the Trustee and the court, that the transfers are recoverable under § § 547 and 549.
Section 547 (b) provides
E. Attorney Fees
CK Group appeals the court's order awarding the fishermen $54,611 in attorney fees, arguing that because there is not enough money to pay the principal amount of the lien, such an award acts as a deficiency judgment for personal liability. Because CK Group had no contractual relationship with any of the lien claimants, Appellant argues, there is nothing to support an in personam judgment against it because this is an in rem priority dispute over fish proceeds.
In certain cases, an award of attorney's fees is authorized under AS § 34.35.005(b) which provides
In an action to enforce a lien, the court shall allow as part of the costs all money paid for drawing the lien and for filing and recording the lien claim, and a reasonable attorney fee for the foreclosure of the lien.
Alaska courts interpret AS § 34.35.005(b) as providing for a mandatory award of attorney's fees whenever a party is successful in enforcing a lien created by AS § 34.35.005 to AS § 34.35.425. D.H. Blattner & Sons, Inc. v. Rothschild & Sons, Ltd., 55 P.3d 37, 56 (Alaska 2002).
The judgment here was decided in favor of the Fisher Committee as an entity enforcing its lien rights under AS § § 34.35.320 and 34.35.391, part of the statutory scheme designed to protect the interests of those who contribute labor or materials to the value of the processed fish products.
Appellant does not dispute that the Fisher Committee was enforcing the fishermen's statutory lien rights under Title 34, or that AS § 34.35.005(b) mandates a full fee award, but claims that while the " foreclosure of the lien" is an in rem proceeding, the award here is an in personam award not within the scope of AS § 34.35.005(b). There is no legal basis for CK Group's argument. As acknowledged in Alaska Civil Rule 82, Alaska follows the English rule of awarding Attorneys' Fees to the prevailing party in litigation, whether the matter is one in rem or in personam. Moody-Herrera v. State Dep't of Nat. Res., 967 P.2d 79, 89 (Alaska 1998); State v. Johnson, 958 P.2d 440, 443 (Alaska 1998). Further, the party against whom Attorney Fees are awarded does not have to be in contractual privity with the lien claimant. All that is required under AS § 34.35.005(b) is that the party against whom fees are awarded must simply have lost a lien priority dispute to a party enforcing statutory lien rights. 55 P.3d at 56.
Appellant's argument that the statute is unconstitutional is equally without merit. Appellant cites no authority supporting its position that the Alaska legislature is constitutionally prohibited from enacting fee-shifting statutes to provide remedial protections for a protected class of people. As the Trustee properly asserts, the remedial purpose behind the statutory lien statutes alone is sufficient to find a rational or compelling basis for AS § 34.35.005.
CONCLUSION
Based on the foregoing, we AFFIRM.
Because Buyer needs immediate possession, and cannot wait until additional documentation is available to verify the financing commitments he has submitted, Buyer has proposed providing additional security for the sale in the event the closing does not occur on or before June 13, as required under the existing documents. The additional security for closing of the purchase will be a deposit in escrow of the first $1.7 million in proceeds payable to [Debtor] from its seafood sales, which are anticipated to be received not later than the last week of June and first week of July. Those proceeds, less a payment in lieu of interest, will be applied to a closing of the sale of the properties on or before July 18, 2000. If closing does not occur on or before July 18, the deposit shall be paid to Sellers as compensation, and all property shall be returned to Sellers. * * * 1. Assignment and Escrow of the Sale Proceeds: If closing of the purchase of the properties pursuant to the underlying agreements does not occur on or before June 13, [Debtor] hereby irrevocably assigns to [CK Group] the first $1.7 million in net proceeds from seafood sales. E& E . . . which will be the sole Sale Agent for sales of processed seafood by Fischer and/or Triton Fisheries, shall deposit the first $1.7 million in net proceeds payable to Fischer and/or Triton in an interest bearing escrow that [CK Group] will establish with Pacific Northwest Title of Alaska, or such other escrow holder as may be designated unanimously by [CK Group]. Only E& E sales commissions and any reimbursements that may be due to E& E for marketing or shipping costs may be deducted from sale proceeds prior to making the Escrow deposit. 2. Ownership of Escrow Account: All funds deposited in the Escrow account shall, upon receipt, become the sole property of the [CK Group] free and clear of any claim, lien or right of the [Debtor] or [Debtor's] creditors . . . .
Emphasis added.
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property
(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made
(A) on or within 90 days before the date of the filing of the petition; or(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if
(A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and(C) such creditor received payment of such debt to the extent provided by the provisions of this title. And Section 549 provides, in relevant part
§ 549. Postpetition transaction.
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate
(1) that occurs after the commencement of the case; and(2) (A) that is authorized only under section 303(f) or 542(c) of this title [11 USCS § 303(f) or 542(c)]; or(B) that is not authorized under this title [11 USCS § § 101 et seq] or by the court.