Opinion
CASE NO. 7-97-03333-WSA-7; ADVERSARY PROCEEDING NO. 7-97-00283.
February 1, 2000.
John M. Lamie, Esq., Browning, Lamie Sharp, P.C., Abingdon, Virginia, Counsel for Sanders J. Nellie G. Russell.
Howard J. Beck, Jr., Esq., Gentry, Locke, Rakes Moore, Roanoke, Virginia and John L. Gregory, III, Esq., Young, Haskins, Mann, Gregory Smith, Martinsville, Virginia, Counsel for Mountain National Bank.
William E. Callahan, Jr., Esq., King, Higgs Callahan, Roanoke, Virginia, Trustee for Debtor.
MEMORANDUM OPINION
This adversary proceeding presents the conflict between Mountain National Bank's ("the bank") blanket security interest upon the property, including inventory, of the debtors' retail furniture store known as Triangle Discount Furniture and the rights of five purported consignors of furniture placed in that store for sale by the debtors. The debtors joined as defendants the bank and the five alleged consignors and sought a determination by this Court that the bank's security interest did not constitute a lien upon the goods owned by the consignors. Only the bank of all six defendants has filed an answer or otherwise participated in this proceeding, but it has not filed any cross-claim against the other defendants. The debtors have sought to protect in this proceeding the interests of the asserted consignors without whom the store apparently would have effectively ceased operations long before it actually did.
The debtors originally filed a Chapter 13 petition on August 22, 1997 but were unable to propose a plan which was confirmed by this Court. At a hearing held before this Court on December 20, 1999 at which the debtors' Third Modified Plan was denied confirmation, the Court granted the bank's motion to convert the case to one under Chapter 7.
Neither the Chapter 13 Trustee nor the Chapter 7 Trustee has been made a party to this proceeding and accordingly the rights of the bankruptcy estate vis-a-vis the bank and the consignors could not be adjudicated in this proceeding.
An evidentiary hearing was held before the undersigned judge's predecessor on May 5, 1998 and counsel for the debtors and the bank thereafter filed documentary exhibits and submitted written arguments in support of their respective positions. The Court took the matter under advisement in connection with a separate adversary proceeding involving the bank and the debtors. Counsel have agreed, however, that this proceeding stands on its own and is ready for decision. Although the undersigned judge did not preside at the hearing, Sanders Russell was the only witness and neither his testimony nor his credibility was seriously challenged by the bank in that hearing. The areas of disagreement between the parties principally relate to the legal consequences of undisputed facts.
The issues raised by the parties may be summarized as follows:
1. Whether the consignors' rights, whatever they may be, have been forfeited by their failure to participate in this proceeding?
2. Whether the consignment agreements are actually security agreements for money lent to the debtors to finance the continued operation of their store?
3. Whether the wording of the bank's security agreement and financing statements was sufficient to create a security interest in the furniture owned or financed by the consignors?
4. Whether the action of one of the consignors, Maurice Vaughn Furniture Company, in filing a financing statement for its furniture was sufficient to protect its rights against the bank even if the other consignors lose theirs?
5. Whether actual knowledge by responsible bank officials of the consignment arrangements made by the debtors with the consignors and its acquiescence in those arrangements precludes the bank from enforcing its security interest against the furniture financed or owned by the consignors if the latter failed to take all steps ordinarily necessary under applicable Virginia statutes to protect their rights?
Findings of Fact
On June 20, 1992 the debtors obtained a loan from the bank (then Patrick Henry National Bank) in the amount of $330,000 and executed a note in such amount payable to the order of the bank and secured by a credit line deed of trust upon four tracts of real property, including improvements, and a security agreement against the assets of the furniture store (Triangle Discount Furniture). The security interest was properly perfected by duly filed financing statements and this perfection was continued by timely filed continuation statements. As relevant to this proceeding the collateral subject to the security agreement and financing statements was stated to be
all the debtors' . . . inventory, . . . furniture and fixtures, . . . whether now owned or hereafter acquired or the proceeds thereof associated with the property located at Highway 100 in Carroll County, Virginia and the rental property in the old B. and L. Chevrolet Company in the Towne of Hillsville and in the business known as Triangle Discount Furniture and owned and operated by Sanders J. Russell and Nellie C. Russell. The factual and legal situations of the five alleged consignors are not identical. Maurice
Vaughn Furniture Company was a distributor of furniture in its own right and placed items of its furniture line or lines with Triangle Discount Furniture. In addition, it had its own attorney prepare a consignment agreement which provided that Triangle Discount Furniture could sell the consigned items at any prices it desired so long as they were at least the minimum price set by the consignor. In other words, the consignee could keep any profit it made in excess of the prices set by the consignor. Furthermore, Maurice Vaughn Furniture Company duly filed financing statements in the Circuit Court of Carroll County and the State Corporation Commission of Virginia to perfect its rights pursuant to Va. Code § 8.2-326(c)(3).
The other consignors were not in the furniture business but each of them entered into an agreement with Russell providing that he or she would provide the funds necessary to purchase items of furniture from a designated manufacturer or from a designated line of furniture. The designated manufacturer or designated line of furniture would be different from that purchased by any other consignor and from any furniture lines handled by Triangle Discount Furniture as a part of the debtor's own inventory. Mr. Russell arranged for an attorney to prepare a consignment agreement form which was used for each of these four other consignors. No financing statements were filed on behalf of any of these consignors. According to testimony by Russell, the attorney who prepared the agreement form told him that because each of these consignors was an individual rather than a corporation, no financing statement was necessary to protect their respective interests.
According to the evidence before the Court, each item of consigned furniture was posted with a tag containing the initials "TDC", standing for "Triangle Discount Consignment," and containing a number which identified the specific consignor having provided or paid for the item of furniture in question. When an item of consigned furniture was sold, the proceeds were placed in the store's general account and remitted to the consignor upon request or in accordance with any remittance schedule which had been established between that consignor and Mr. Russell.
There was no evidence that any consignor gave written notice to the bank that it was supplying furniture to Triangle Discount Furniture on a consignment basis.
Mr. Russell testified at the hearing as follows concerning the bank's knowledge of those consignment arrangements:
Q. Now, did the Bank. . . . the Patrick Henry Bank have any knowledge of how you were operating?
A. Other than. . . . Mr. Carl Davis and I talked about it on three or four occasions. I would partial consignment back when I first started. And he and I both. . . . he agreed with me that a full consignment was what I was going to have to do to maintain an inventory.
Q. When did you talk to Mr. Carl Davis?
A. In 1996 and. . . . early 1996. We had. . . . we started planning just after December 1996 for the requested foreclosure proceeding.
Q. Are you talking about December of 1996, or are you talking about a year earlier?
A. We sold it in June of 1996, I think.
Q. So December of 1995? Is that the date you are talking about? You said before December of 1996.
A. No, it was. . . . it was before the foreclosure. We had about four months of negotiating what to do on the foreclosure.
Q. And during that period of time who did you negotiate with?
A. Carl Davis.
Q. And at that time was he an officer of the Bank?
A. He was an officer, I think, over three banks. He was a senior officer.
Q. Do you know what title he had, or anything like that?
A. No, sir, I don't.
Q. What information did you give to him concerning that the consignments?
A. That my inventory was down. I wasn't selling enough to keep my payments on the property up. And we needed to sell free items. I gave him the same information. He and I both discussed about the consignments.
Q. And what did he say about your consignment arrangement?
A. He never said anything, "yea" or "nay". No disapproval nor approval. He just listened and accepted what I had said. But now, Mr. Shockley at the time of the deed of trust, I offered him a chance for consignment. He declined because it could be, he said, a conflict of interest. But he did go tell Mr. Davis at that time that that is what I was going to do.
MR. BECK: Your Honor, I don't think that Mr. Russell knows that, that Mr. Shockley told Mr. Davis anything.THE COURT: That probably would not be admissible.
MR. LAMIE: Well, let me ask him.
Q. Do you have a basis for. . . . did Mr. Shockley make a statement to you to that effect, that he had told Mr. Davis?
A. Yes.
Q. He made that statement to you?
A. He made that statement.
Q. When did he make that statement to you?
A. Before he retired. Before he left the Bank.
Q. Was Mr. Shockley there at the same time that Mr. Davis was?
A. At the early part. Mr. Shockley was the Branch Manager in Hillsville, and Mr. Davis, I think, correlated the three banks together.
Q. When did you have a conversation with Mr. Shockley about his getting involved?
A. Probably in 1993. Probably in 1993.
Transcript pp. 23-25
No evidence was offered that any bank representative made any representation either to its customer or any of the consignors that the bank would subordinate its rights under its security agreement or that the consignors did not need to take actions otherwise required by law to protect their interests. Accordingly, the Court finds that the bank was aware of and had actual knowledge that its customer was utilizing consignment arrangements to maintain a respectable store inventory and acquiesced in such arrangements but that it did not engage in any other conduct which promoted these arrangements or otherwise would have lulled the consignors to fail to protect themselves.
The Court further finds that the bank did not advance any loan funds in reliance upon the consignors' furniture. Indeed the reason that the Russells initiated the consignment arrangements was that all of the debtors' cash flow was needed to make the regular loan payments to the bank and it was unwilling to make any additional advances to them. Therefore, the bank was clearly benefitted by the addition of the consignors' furniture to its customer's inventory and would receive a "windfall" if its security agreement captures such furniture.
While the Court finds that the bank knew of the consignment arrangements, no evidence was offered that Triangle Discount Furniture's creditors generally were aware that it was engaged in selling consignment goods. The debtors' bankruptcy schedules reflect that they had in excess of thirty creditors at the time they filed their petition.
Conclusions of Law
Issue # 1: Whether the consignors' rights, whatever they may be, have been forfeited by their failure to participate in this proceeding? The complaint which initiated this proceeding sought a determination that the bank's security interest did not attach to the consignors' furniture. The relief sought was favorable to the consignors and no relief against them was requested. Accordingly, their failure to appear and participate cannot by itself result in an adverse determination against them. While a default may result in the relief sought against the defaulting party being granted, it cannot properly result in relief more extensive than that demanded in the pleading which has been served upon such party.
Issue # 2: Whether the consignment agreements are actually security agreements for money lent to the debtors to finance the continued operation of their store? While the arrangements with the consignors other than Maurice Vaughn Furniture Company have some characteristics of a financing operation rather than a true consignment, under the facts of this proceeding it makes no difference in which way they are characterized. In the absence of evidence that the debtors were generally known by their creditors to be engaged in selling consignment goods, the initial step necessary for the consignors to protect themselves, the filing in the correct offices of a sufficient UCC financing statement, was the same as would be required if they were purchase money inventory financiers. Va. Code § 8.2-326. Therefore, there is no need to decide whether these arrangements are true consignments.
The remaining issues for decision necessarily implicate the interests of the Chapter 7 Trustee.
The Court has concluded that it should not render a decision purporting to adjudicate the rights of the consignors vis-a-vis the bank without the joinder of the bankruptcy trustee as a party to this adversary proceeding. If this Court were to decide in favor of either the bank or the consignors, particularly as to the four consignors who did not file any financing statements to give any public notice of their arrangements with the debtors, it could well be faced with having to revisit these same issues at the instance of the Chapter 7 Trustee. The evidence before the Court is that all of the consignors' unsold furniture was located on the store premises at the time of the debtors' filing.
Because Virginia no longer has a consignment "sign" law and no evidence was presented that the debtors' creditors generally were aware that the debtors were engaged in selling furniture on consignment, under Va. Code § 8.2-326 the consignors were bound to file financing statements in order to prevent their property from becoming subject to the claims of their consignee's creditors. It is clear that the rights of the bankruptcy trustee would not be affected by any knowledge or asserted inequitable conduct on the part of the bank. Accordingly, in the absence of the trustee the Court is not able to make a final and binding determination of the rights of the parties in this furniture. See In re Marcoly, 32 B.R. 423, 424 (Bankr. W.D. Pa. 1983); In the Matter of High-Line Aviation, Inc., 149 B.R. 730, 738 (Bankr. N.D. Ga. 1992).
While it appears that the position of Maurice Vaughn Furniture Company, which was the only consignor to file UCC financing statements, is probably valid against the bankruptcy trustee and that its real contest is with the bank upon the latter's prior filed financing statements to be determined under the priority rules of Va. Code § 8.9-114, subject to arguments on the possible application of equitable estoppel and unjust enrichment principles, the Court concludes that the possibility that the Trustee might assert a claim against Vaughn's furniture is sufficient reason to decline to rule on the issue in the absence of the Trustee as a party to this proceeding.
In the absence of the Chapter 7 Trustee, the operations of Triangle Discount Furniture having long ceased and the debtors claiming no interest in the consignors' furniture, there would be no strong basis in the Court's view for it to decide a controversy between non-debtors, the outcome of which would be controlled by Virginia law, and that it would be preferable were the Trustee not added for this Court to abstain from hearing the proceeding in favor of the Virginia court in which actions brought by the bank against the consignors have been pending asserting the same claims against the consignors which it seeks to assert here.
An order shall be issued contemporaneously with this Memorandum Opinion adding the Chapter 7 Trustee as a party defendant to this proceeding and directing that he file such pleadings as he may be advised within thirty (30) days of the entry of such order.
SUPPLEMENTAL MEMORANDUM OPINION
This Opinion supplements the Court's Memorandum Opinion dated February 1, 2000 and should be read together with it. The Chapter 7 Trustee, William E. Callahan, has been added as a party to this adversary proceeding and he has filed a Memorandum asserting a right superior to all parties in all of the purported consignors' furniture other than that of Morris Vaughn Furniture Company, the only consignor to file a financing statement.
The issues remaining for decision are as follows:
3. Whether the wording of the bank's security agreement and financing statements was sufficient to create a security interest in the furniture owned or financed by the consignors?
4. Whether the action of one of the consignors, Maurice Vaughn Furniture Company, in filing a financing statement for its furniture was sufficient to protect its rights against the bank even if the other consignors lose theirs?
5. Whether actual knowledge by responsible bank officials of the consignment arrangements made by the debtors with the consignors and its acquiescence in those arrangements precludes the bank from enforcing its security interest against the furniture financed or owned by the consignors if the latter failed to take all steps ordinarily necessary under applicable Virginia statutes to protect their rights?
The Court will address these issues in reverse order.
5. Whether actual knowledge by responsible bank officials of the consignment arrangements made by the debtors with the consignors and its acquiescence in those arrangements precludes the bank from enforcing its security interest against the furniture financed or owned by the consignors if the latter failed to take all steps ordinarily necessary under applicable Virginia statutes to protect their rights?
There is a fairly significant body of case law which has grappled with the issue of under what circumstances, if any, the courts ought to permit exceptions to the security interest priority rules of the Uniform Commercial Code when a strict enforcement of same would produce a seemingly inequitable or unjust result. See Annot., Equitable Estoppel of Secured Party's Right to Assert Prior, Perfected Security Interest Against Other Secured Creditor or Subsequent Purchaser Under Article 9 of Uniform Commercial Code (Conder, Joseph B.), 9 A.L.R. 5th 708 (1993). Compare, In the Matter of High-Line Aviation, Inc., 149 B.R. 730 (Bankr. N.D. Ga. 1992) and Columbia International Corporation v. Kempler, 46 Wisc. 2d 550, 175 N.W.2d 465, 40 A.L.R. 3d 1066 (1970) with, In re Marcoly, 32 B.R. 423 (Bankr. W.D. Pa. 1983), Nolin Production Credit Assoc. v. Canmer Deposit Bank, 2 UCC Rep. Serv. 2d 636, 726 S.W.2d 693 (Ky.Ct.App. 1986) and Ninth Dist. Production Credit Assoc. v. Ed Duggan, Inc., 16 UCC Rep. Serv. 2d 853, 27 A.LR.5th 921, 821 P.2d 788 (Cob. 1991). See also 68A Am.Jr.2d, Secured Transactions § 788 (1993).
As to the controversy before this Court, Virginia provides the applicable law for decision because the Debtors' place of business where the consigned furniture was placed was in Carroll County, Virginia. Va. Code § 8.9-103 (2) (Repl. Vol. 1991). Accordingly, the rights of the parties and their relative priorities are determined by Virginia law. of course, however, the Trustee's claims derive from the status accorded him by section 544 of the Bankruptcy Code. To determine the effect under Virginia law of the bank's knowledge of and acquiescence in the consignment arrangements between the Russells (the Debtors) and the consignors, the Court has been guided by the Supreme Court of Virginia's opinion in the case of Grossman v. Saunders, 237 Va. 113, 8 UCC Rep Serv 2d 214. 376 S.E.2d 66 (1989), which dealt with competing claims in certain "instruments". The Court stated:
Generally, whether a secured party had actual notice of a prior security interest is not a relevant consideration in determining priorities. Code § 8.9 312(5) contains no provision establishing lack of notice as a prerequisite for its operation. . . . .
Although lack of notice is not a prerequisite to operation of Code § 8.9 312 (5), Code § 8.1-203 provides that "[e]very contract or duty with this act imposes an obligation of good faith in its performance or enforcement." Accordingly, allegations and proof of "a leading on, bad faith or inequitable conduct" on the part of a secured party may affect the priorities established under Code § 8.9-312(5) by estopping the assertion of a priority. [citations omitted]
113 Va. at 124-25, 376 S.E.2d at 72. While this decision did not deal with the rights of consignors versus the rights of consignees' secured creditors, it is apparent that Va. Code § 9-114 (Repl. Vol. 1991) essentially accords the same treatment to consignors as it does to purchase money secured parties vis-a-vis prior perfected security interests. Accordingly, the Court concludes that the Grossman decision would be applied by the Supreme Court in Virginia in applying § 8.9-114 to resolve a priority dispute between a consignor and its consignee's prior perfected secured patty against property of the same kind. This Court has made a finding of fact that while the bank was aware of the consignment arrangements in general, it did not engage in any affirmative conduct to promote those arrangements or lull the consignors to fail to perfect themselves. While there was some slight evidence suggesting that one of the bank's officials encouraged Mr. Russell to pursue the consignment arrangements, the decided weight of the evidence was that it simply acquiesced in them and took no real action either to encourage or discourage them. Certainly there was no evidence introduced that the bank made any representations to or even had any contact at all with any of the consignors; similarly. there was no evidence that any of the consignors relied in any way on anything done or not done by the bank in deciding what to do to protect his, her or its interests. Accordingly, whatever the bank's rights are against the disputed furniture inventory, the Court finds that its knowledge of the consignment arrangements does not preclude it from asserting such rights against the consignors.
4. Whether the action of one of the consignors, Maurice Vaughn Furniture Company, in filing a financing statement for its furniture was sufficient to protect its rights against the bank even if the other consignors lose theirs?
In the absence of evidence that Triangle Discount Furniture was generally known by its creditors to be selling furniture on consignment, a consignor of furniture to such business was bound under Virginia law not only to file financing statements at the local Clerk's Office and the State Corporation Commission, but also to give specific written notice of its status and actions to the holder of any prior secured creditor whose filed financing statements would affect the consignee's inventory. Va. Code § 8.2-326(c) and § 8.9-114 (Repl. Vol. 1991). There having been no evidence introduced that Morris Vaughn Furniture Company gave any notice to the bank of its consignments to the Russells, its rights would be subordinate to the bank's security interest if the latter's security interest attached to the consignor's furniture.
3. Whether the wording of the bank's security agreement and financing statements was sufficient to create a security interest in the furniture owned or financed by the consignors?
What seemingly would be the easiest issue to resolve has proved the most troublesome to the Court. Certainly at the time the security interest to the bank was granted and perfected, the parties had no contemplation of any consigned furniture being a part of the Russells' inventory. All of their then inventory was clearly owned by them and both parties intended to create a security interest in the bank's favor against such inventory. Neither the security agreement nor the financing statements, understandably, made any reference to consigned goods. As previously noted, both the security agreement and the financing statements stated the collateral subject to the bank's security interest to cover:
all the debtors'. . . inventory, . . . furniture and fixtures, . . . whether now owned or hereafter acquired or the proceeds thereof, associated with the property [description omitted] and in the business known as Triangle Discount Furniture and owned and operated by Sanders J. Russell and Nellie C. Russell [emphasis added].
The Security Agreement further provided that the Debtors granted to the bank "a security interest in all rights to which the owner of the collateral is now or may hereafter become entitled by virtue of owing such collateral. . . ." [emphasis added] Further, the Debtors represented and warranted "with respect to each part of the Collateral" that they had "good and marketable title to it" and that it was not subject to any "claim, lien . . . or security interest of any other person." Lastly, as relevant to this discussion, such agreement provided that it would be construed according to Virginia law and the rights provided to the bank under the agreement were "in addition to all rights, powers and remedies given to the Secured Party by virtue of any statute or rule of law."
If, therefore, the security interest had been granted after the consignment arrangements had been made, with the bank having the same knowledge about such arrangements which the Court has found that it gained later, the Court would have to conclude that the intent of the parties as evidenced by the wording they chose to incorporate in their agreement was to limit the security interest to that inventory actually owned by the Russells. The rub is in attempting to apply the agreement's wording to a situation contemplated by neither party when the agreement was made. Whatever the bank's later frame of mind may have been, it is abundantly clear both from Mr. Russell's testimony and the wording of the consignment agreements that he considered the consigned furniture to be owned by the consignors and protected from the bank's claim against the inventory which he owned. Indeed, it appears that he was incensed by the bank's laying claim to furniture which belonged, in his view, not to the Russells but to other consignors.
There is definitely a tension between enforcing the actual understanding of the parties as delineated in the language utilized in their agreement and the goal of the Uniform Commercial Code as enacted in Virginia to bring uniformity of result in addressing conflicting claims upon the same property. Va. Code § 8.9-114 (Repl. Vol. 1991) provides in relevant part as follows:
(1) A person who delivers goods under a contract consignment which is not a security interest and who would be required to file under this title by paragraph (3)(c) of § 8.2-326 has priority over a secured party who is or becomes a creditor of the consignee and who would have a perfected security interest in the goods if they were the property of the cosignee. . . if
(a) the consignor complies with the filing provision of the title on sales with respect to consignments (paragraph 3(c) of § 8.2-326) before the consignee receives possession of the goods; and
(b) the consignor gives notification in writing to the holder of the security interest if the holder has filed a financing statement covering the same types of goods before the date of the filing made by the consignor; and
(c) the holder of the security interest receives the notification within five years before the consignee receives possession of the goods; and
(d) the notification states that the consignor expects to deliver goods on consignment to the consignee, describing the goods by item or type.
(2) In the case of a consignment which is not a security interest and in which the requirements of the preceding section have not been met, a person who delivers goods to another is subordinate to a person who would have a perfected security interest in the goods if they were the property of the debtor. [emphasis added]
However, this statutory provision is subject to the overarching general principle of the Uniform Commercial Code that "[t]he effect of provisions of this act may be varied by agreement". Va. Code § 8.1-102(3) (Repl. Vol. 1991). It is clear, therefore, that notwithstanding the above quoted language in § 8.9-114 which would mandate the same result of priority for consigned goods as "if they were the property of the consignee" as would be the case for goods owned and acquired by the debtor by virtue of credit provided by a supplier or purchase money financier, the consignors would nevertheless prevail if the Bank's security agreement had expressly excluded consigned or non-owned furniture inventory from its reach. Under Va. Code § 8.9-201, unless "otherwise provided by this act a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors." Here the agreement did not expressly exclude consigned goods, but the consistency of its language embracing the concept of title and ownership, a concept which the Commercial Code generally attempts to negate, raises a substantial issue as to whether the security interest created by such agreement was broad enough in its scope to encompass furniture owned by others but physically made a part of the store's inventory. To be more specific, instead of the agreement covering "all inventory", it covered "all debtors . . . inventory". Are these terms in fact one and the same? Standing alone they certainly would be very close to the same. Instead of covering inventory "now existing or hereafter acquired or located on the premises", the agreement referred to inventory "now owned or hereafter acquired". Again, should different legal consequences attach to wording which is quite similar in meaning but not identical? In the agreement the debtors warranted that they owned each part of the collateral and that none of it was subject to any other claim. To what extent should this be taken as indicating the parties' intent that they only intended to create a security interest in property actually owned by the Debtors rather than extending to any rights which they had the power to grant to a lender by reason of being in possession of property with the power to sell it? In fact all of the language in the security agreement seems consistent in referring to property "owned" by the Russells as being the Bank's collateral.
Each provision of this title with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor." Va. Code § 8.91-202 (Repl. Vol. 1991).
Va. Code § 8.9-114 (Repl. Vol. 1991)[UCC § 9-114] was enacted in 1973. Its intent was clearly to require the same steps, that is, filing of financing statements and written notification of existing secured parties, of a consignor of inventory as it would of a regular trade supplier of inventory to the same business to be entitled to prevail against a prior perfected security interest in the inventory of such business. The only exception was where the business "is generally known by his creditors to be substantially engaged in selling the goods of others." Va. Code § 8.2-326(3)(b) (Repl. Vol. 1991). One might logically ask why under this statutory scheme a prior perfected secured party who knows of and acquiesces in the interests of consignor suppliers to its customer, the creditors of which generally are unaware that the customer sells the goods of others, prevails against the consignors, while a prior perfected secured party without knowledge, but whose customer's creditors generally are aware that the business sells the goods of others, loses to the consignors. The answer appears to be that is the policy choice which has been made to obtain greater certainty and consistency in commercial transactions. In such situations the statute expressly subordinates the rights of the consignor to those of "a person who would have a perfected security interest in the goods if they were the property of the debtor." Va. Code § 8.9-114. (emphasis added)
Virginia does not have a "sign law" which would protect consignors under § 8.9 326 (3)(a).
In resolving this conundrum, this Court has been influenced by the opinion of Chief Judge Krumm of this Court in the case of In re Shenandoah Warehouse Co., 202 B.R. 871 (Bankr. W.D. Va. 1996), in which he held that the "commercially reasonable interpretation" of "accounts receivable" in a security agreement included after-acquired receivables although the agreement did not specify such intent. The Court has also been influenced by language appearing in a book of standard UCC forms to create an interest in after-acquired inventory which is remarkably close to the language employed by the bank and the Russells in the document before the Court:
"[a]ll of Debtor's inventory of appliances located in its showroom at . . . and its warehouse at . . ., presently owned or hereinafter acquired. . ."
5D Bender's Uniform Commercial Code Service Forms and Procedures, Hart, Frederick M. and Willier, William F., § 94.08 at page 9-348, Form 9-9, Clause 13 (Matthew Bender Co. 1998). The Court concludes that the "commercially reasonable" interpretation of the language used in the security agreement includes all furniture actually constituting part of the inventory of the business, however acquired or titled. In short, the Court concludes that in the absence of express language in the security agreement which would have excluded consigned or non-owned furniture from its reach, the Court should give effect to Virginia law adopting the Uniform Commercial Code (UCC) which puts consignors at risk to prior perfected secured parties of their mutual customers. While the issue is a close one considering the language chosen and the actions of the parties, the burden of proof under the statutory scheme must be placed on the consignors who failed to do what was necessary to protect their interests to establish that the Russells and the bank did not intend for the security agreement to include non-owned or consigned merchandise. When the issue is left in doubt, the statute should be applied as written, even though its result in this case may be harsh and inequitable.
The Trustee has also raised the issue that the bank did not advance any funds in reliance upon the inventory provided by the consignors. That is true but irrelevant. Va. Code § 8.9-204(1) (Repl. Vol. 1991) states that "a security agreement may provide that any or all obligations covered by the security agreement are to be secured by after-acquired collateral." It being clear that the Bank made a substantial loan to the Russells when it obtained the security interest, its rights were established at that time, even against inventory subsequently acquired and made possible by the funds of others.
Conclusion
Because the Court has determined that the bank has not been proven to have engaged in any "leading on" or other affirmative inequitable conduct which caused the consignors not to take the actions required of them under Virginia law to protect their interests, no evidence has been offered to establish that Triangle Discount Furniture was generally known by its creditors to be engaged in selling the goods of others, and the language of the security agreement, which expressly adopted Virginia law, is sufficient to include within its scope consigned goods "as if they were the property" of the Russells, all of the consignors' furniture is subject to the bank's perfected security interest against the Russells' inventory. In the event that the bank's loans are otherwise paid through the liquidation of other collateral it holds, the Trustee would prevail over the rights of all consignors other than Morris Vaughn Furniture Company, the rights of which are superior to the Trustee but inferior to the bank.
This Court shall enter an Order contemporaneously in accordance with this Supplemental Memorandum Opinion.