Opinion
No. 98-C-4348
December 27, 1999
MEMORANDUM OPINION AND ORDER
In May 1997, the Comet-Montrose Limited Partnership made an assignment for the benefit of creditors, and the assignee sold certain assets of the Partnership, including paint supply molds, to the plaintiff, Plasti-World Products, Inc. Plasti-World intended to use the molds to manufacture plastic paint supplies — boxes, brushes and trays. However, the defendant, Burgundy Products Manufacturing, Inc., would not release the molds to Plasti-World. Burgundy had the molds because it had previously manufactured plastic paint supplies for the now defunct Comet-Montrose, and it refused to release the molds to Plasti-World — the new owner — because it claimed a statutory lien on the molds to secure a Comet-Montrose debt of just over $75,000. Plasti-World alleges that because Burgundy would not release the molds, Plasti-World could not fulfill its customers' orders and suffered lost sales.
Plasti-World filed this replevin action in state court seeking to recover the paint supply molds, to be declared owner of the molds free and clear of Burgundy's alleged statutory lien, and for damages caused by Burgundy's alleged wrongful retention of the molds. Burgundy removed the case to federal court. Shortly after the case was removed, Judge James Moran entered an agreed order directing Burgundy to release the molds, and in exchange Plasti-World posted a $100,000 replevin bond, thus rendering moot the replevin claim. The only remaining issues are liability on plaintiff's other claims, and damages.
Plasti-World has moved for summary judgment as to liability on its claim that Burgundy wrongfully retained the molds. Burgundy likewise seeks summary judgment on Plasti-World's claims, arguing it had a valid prior lien over the molds under the Illinois Tool and Die Lien Act, 770 ILCS 105/1. For the reasons set forth below, the Court denies Plasti-World's motion and grants Burgundy's motion.
Plasti-World's request that the Court deny Burgundy's motion to supplement the record is denied as moot. Judge Moran granted Burgundy's motion to supplement the record and allowed Plasti-World to file a response, which it has. We have therefore considered all of the materials submitted by the parties on summary judgment.
FACTUAL BACKGROUND
Comet-Montrose Limited Partnership ("Comet-Montrose") was formed in 1992 to acquire the assets of Comet Industries Corporation ("Comet") and Montrose Products, Inc. ("Montrose"). Comet-Montrose's general partner was Comet-Montrose, Ltd., whose shareholders were Eric Larson, Lawrence Acciari and Gregory Teister. Comet-Montrose manufactured and sold art and craft supplies, including paint brushes, boxes and trays, through its Montrose Division, and toy planes through its Comet Division.Burgundy manufactured plastic components for both Comet-Montrose divisions. Comet-Montrose owned molds which it supplied to Burgundy to make these components. Burgundy never made any repairs or improvements to the molds. It used them to manufacture components on Comet-Montrose's account up until October 30, 1997, when Comet-Montrose's account balance had exceeded $75,000. Comet-Montrose was unable to pay this and its other outstanding debts, and by February 18, 1998, its financial condition was such that it had to execute an assignment for the benefit of creditors — an out-of-court liquidation.
On February 18, 1998 — the same day as the assignment — David Abrams, the assignee, sent notice of the assignment to all of Comet-Montrose's creditors, including Burgundy. The next day Burgundy advised Comet-Montrose that it was enforcing a statutory lien under the Tool and Die Lien Act to secure Comet-Montrose's $75,491.11 account balance. The letter was received by Comet-Montrose on February 24, 1998.
As the assignee, Abrams coordinated the liquidation. He took title to Comet-Montrose's assets, sold them, and collected approximately $900,000 in proceeds. Comet-Montrose's primary secured creditor, the First National Bank of Chicago, was owed in excess of one million dollars, so no funds were available for distribution to Burgundy and other creditors.
Abrams sold a portion of the assets of the Comet Division (toy planes) to Paul L. Guillow, Inc. He sold the assets of the Montrose Division (art and craft supplies), including the paint supply molds at issue here, to Plasti-World and executed a bill of sale on May 1, 1998. Plasti-World admits it was aware of Burgundy's claimed lien before it bought the molds and other assets. Shortly before the sale to Plasti-World, Burgundy had been manufacturing components for the Comet-Montrose assignee on a COD basis, and, with the assignee's consent, Burgundy released two molds to Tri-Par Die and Mold Corporation so that it could complete a rush order. After the order was complete, Burgundy reclaimed the two molds.
Before Abrams executed the May 1, 1998 bill of sale, the paint supply molds and Comet-Montrose's remaining assets were arguably encumbered by two other security interests. First, the First National Bank of Chicago had a security interest to secure $1,262,000 in loans it had made to Comet-Montrose. The bank's security interests were recorded with the Illinois Secretary of State on January 9, 1992 and then again on November 20, 1995.
Second, Comet and Montrose had a security interest in Comet-Montrose's assets to secure payment of a promissory note. This security interest, which was subordinate to the interest of First National Bank, was created on January 7, 1992, and it was recorded with the Illinois Secretary of State on January 15, 1992. Comet-Montrose was unable to pay its note to Comet and Montrose, so in December 1995, Larson, Acciari, and Teister, the shareholders of Comet-Montrose Ltd. (the general partner of Comet-Montrose), personally paid $150,000 to satisfy the note. To protect their right to obtain reimbursement from Comet-Montrose, the shareholders were assigned the security interest held by Comet and Montrose. Financing statements reflecting the assignment were executed by Comet, Montrose, and the four shareholders of those corporations — six financing statements altogether. Larson says that he believes that all six were filed with the Secretary of State, but only one of them is file-stamped — dated January 26, 1996. These financing statements reference the original security interest recorded with the Secretary of State on January 15, 1992. On January 14, 1998, Larson, Acciari and Teister filed new financing statements reflecting their security interests in the Comet-Montrose assets.
The May 1, 1998 bill of sale to Plasti-World conveying the Montrose Division assets specifically listed the paint supply molds that were in Burgundy's possession. It also provided that the sale was free and clear of any and all liens in favor of First National Bank, as well as any and all liens in favor of Larson, Acciari, and Teister, but not any liens that might be asserted under the Tool and Die Lien Act.
Also on May 1, the Bank executed a release of its security interest.Larson, Acciari, and Teister also executed releases of their security interest, but Plasti-World did not record the shareholders' releases. Plasti-World's attorney proposed that instead of releasing their security interests, the shareholders should assign them to Plasti-World so that the company would be protected against a claim by Burgundy that its claimed lien was now prior to Plasti-World's ownership interest in the molds. The shareholders agreed, and on June 1, 1998, Plasti-World paid them $5,000 in exchange for a partial assignment of their security interest. Notice of the assignment was filed with the Secretary of State on June 5, 1998.
The debt owed by Comet-Montrose to the Bank was paid partly from the proceeds of the sale of Comet-Montrose's assets, partly from the collection of its accounts receivable, and partly from the payment of $200,000 by Larson, Acciari, and Teister, who had personally guarantied the loan.
After the May 1, 1998 sale, Plasti-World requested that Burgundy turn over the molds. On May 11, Burgundy advised Plasti-World that it planned to sell the molds unless its was paid the $75,491.11 it is owed. That prompted the filing of this lawsuit.
DISCUSSION
The parties' cross motions for summary judgment raise two issues, both of which can be determined as a matter of law based on the undisputed facts: (a) whether Burgundy had a valid lien on the Comet-Montrose paint supply molds that survived the assignment for the benefit of creditors and subsequent sale of the molds to Plasti-World, and (b) whether that lien took priority over the shareholders' security interest that they assigned to Plasti-World.
A. Burgundy's Claimed Lien.
Burgundy says that it had and has a valid lien on the molds under the Illinois Tool and Die Lien Act, 770 ILCS 105/1, to secure Comet-Montrose's $75,000 debt. The Act provides that plastic or metal processors like Burgundy "shall have a lien on the tools, dies, molds, jigs, fixtures, forms or patterns in their possession belonging to a customer, for the balance due them from such customer for plastic or metal processing work, and for all materials related to such work." Id . Burgundy says that this statutory lien arose by operation of law and survived the assignment for benefit of creditors. Plasti-World disagrees. It argues that because Burgundy did not give notice of its lien until after the assignment for benefit of creditors, the lien did not attach prior to the assignment and thus did not survive the assignment.
An assignment for the benefit of creditors is a voluntary transfer of a debtor's property to an assignee, in trust, for the purpose of applying the property or proceeds to the payment of his debts and returning the surplus, if any, to the debtor. Illinois BellTelephone Co. v. Wolf Furniture House, Inc., 157 Ill. App.3d 190, 194-95, 509 N.E.2d 1289, 1291-92 (1987). The assignment "passes the legal and equitable title to the property absolutely, beyond the control of the assignor." Id . at 195, 509 N.E.2d at 1292 (citing Browne-Chapin Lumber Co. v. Union National Bank ofChicago , 159 Ill. 458, 465, 42 N.E. 967 (1886)). The assignee holds the property in trust for the creditors. Id.
The parties do not dispute that Comet-Montrose (assignor) and David Abrams (assignee) executed a valid and enforceable assignment for the benefit of creditors. What is disputed is whether Burgundy's claimed lien attached prior to the assignment. In order for a lien on property to survive an assignment for the benefit of creditors, it must be a valid and perfected lien prior to the assignment. P.C. Hanford Oil Co. v. First National Bank ofChicago , 126 Ill. 584, 21 N.E. 483 (1888); see alsoRand v.Francis , 168 Ill. 444, 48 N.E. 159 (1897) (landlord had no lien where tenant's property passes to assignee for the benefit of creditors prior to the attachment of that lien). If Burgundy's lien had attached prior to the assignment for benefit of creditors, the assignee (and thus Plasti-World, who purchased from the assignee) took the Comet-Montrose assets subject to that lien.
To determine when Burgundy's lien attached, we look first to the Tool and Die Lien Act. The Act provides in Section 1 that plastic and metal processors "shall have a lien" on the tools, dies, molds, etc. in their possession belonging to a customer for the balance due from the customer for plastic or metal processing work. Section 1 also provides that the processors may retain possession of the items until the balance is paid, "subject only to a security interest properly perfected pursuant to Article 9 of the Uniform Commercial Code." 770 ILCS 105/1. A separate section, Section 3, provides that "[b]efore enforcing such lien, an initial notice in writing shall be given to the customer," stating that a lien is claimed in a particular amount and demanding payment. 770 ILCS 105/3. Section 4 provides that if the processor has not been paid within 90 days after the customer receives the Section 3 notice, the processor may sell the dies or molds at auction after compliance with Section 5, which requires sending a second notice stating the processor's intention to sell the item and providing details about the time and place of the sale, as well as other information. 770 ILCS 105/4, 5.
In this case, Burgundy did not give notice under Section 3 of the Act until after Comet-Montrose had made the assignment for benefit of creditors. The question posed is whether the processor's lien under the Act attaches at the time that the services are rendered for which payment is sought, or at the time the processor gives notice.
The Tool and Die Lien Act has been interpreted by only one court, the Second District of the Illinois Appellate Court. SeeAffiliated Bank v. Evans Tool and Manufacturing Co. , 229 Ill. App.3d 464, 593 N.E.2d 145 (1992). Affiliated Bank involved an issue of priority as between the plaintiff bank and the defendant plastic and metal processor. The bank had a security interest in the borrower's assets that it perfected in 1986, and it made loan advances to a borrower in late January 1991 which the borrower did not repay. The defendant manufactured goods for the borrower using the borrower's molds; the dates on which this took place are not stated in the court's decision. On February 1, 1991, defendant gave notice that it was claiming a lien on the molds under the Tool and Die Lien Act to secure payment of the $81,000 that the borrower owed. This prompted the bank to file a lawsuit against the borrower and the defendant to obtain the molds. Id. at 465-66, 593 N.E.2d at 147.
The defendant claimed that its tool and die lien was entitled to priority over the bank's security interest. The court noted that Section 9-310 of the Uniform Commercial Code provides that "[w]hen a person . . . furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of such person given by statute or rule of law for such materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expresslyprovides otherwise. " Id. at 468, 593 N.E.2d at 147 (emphasis in original). The court said that assuming Section 9-310 applied,the statute creating this particular the lien does "provide otherwise": the Tool and Die Lien Act states that a lien under that act is "subject . . . to a security interest properly perfected pursuant to Article 9 of the Uniform Commercial Code." Id. at 467, 593 N.E.2d at 147. Furthermore, the court applied the Code's priority provision that "[a] person who becomes a lien creditor while a security interest is perfected takes subject to the security interest . . . to the extent that it secures advances made before he becomes a lien creditor or within 45 days thereafter. . . ." 810 ILCS 5/9-301(4).
In fact, the court held, Section 9-310 concerns only liens arising by virtue of the lienholder's work on the collateral that increases or preserves its value and thus does not apply to tool and die liens. Id. at 468, 593 N.E.2d at 148.
The court said that it was "not disputed" that the bank's loan advances "occurred prior to [defendant] becoming a lien creditor." It ruled that defendant's tool and die lien "did not attach until, at the earliest, February 1, 1991" — the date on which defendant had given written notice of its lien. Id. at 468, 592 N.E.2d at 148. Because the bank's security interest had already been perfected at that point, defendant took the lien subject to the bank's prior security interest. Id.
Based on the court's discussion, it is not clear whether the defendant in Affiliated Bank made the argument advanced by Burgundy here — that the lien arises at the time the work is done or is not paid for, rather than at the time notice is given. The passage quoted above suggests that the defendant did not make that argument; the court indicated that it was "not disputed" that defendant had not become a lien creditor until after the bank made its loan advances in late January 1991. Notwithstanding this, however, Affiliated Bank stands as some authority for the proposition urged by Plasti-World: that a lien under the Tool and Die Lien Act does not attach until the putative lienholder gives notice.
A federal court sitting in diversity jurisdiction applies state substantive law. Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938). When the state's highest court has not spoken, the federal court must predict how that court would decide the issue. The rulings of intermediate appellate courts constitute evidence of how the state supreme court would rule, but they are not the final word. "[F]ederal courts are not bound by the decision of a lower state court unless the state's highest court in the jurisdiction whose law governs the diversity action has ruled on the matter." Smith v. Navistar International Transportation Corp. , 957 F.2d 1439, 1443 (7th Cir. 1992) (affirming district court's refusal to follow the sole Illinois appellate court decision on point); Robinson v. Ada S. McKinley Community Services, Inc ., 19 F.3d 359, 363 (7th Cir. 1994) (federal court declined to follow Illinois appellate court because it was convinced the Illinois Supreme Court would decide the issue differently).
We do not believe the Illinois Supreme Court would decide the attachment/priority issue in the manner suggested by AffiliatedBank, for that court's decision is, we respectfully submit, contrary to the plain language of the Tool and Die Lien Act and the way in which other possessory liens attach. The Act clearly states that the processor's lien exists separate and apart from, and irrespective of, the giving of notice: Section 1 provides that the processor "shall have a lien" for the balance due for processing work. Section 3, the notice provision, concerns enforcement of the lien, not its existence or attachment. The Act requires dual notice before property subject to a lien can be sold, but nothing in the notice provisions or elsewhere in the Act suggests that the lien does not exist until notice is given. Indeed, Section 1 unambiguously says otherwise.
Other possessory liens likewise attach when work or a service is performed upon goods in the secured party's possession, without any requirement of notice. See , e.g. , Twin Sewer and Water, Inc.v. Midwest Bank and Trust Co. , Nos. 1-98-2407, 1-99-0695, 1999 WL 1001131, at * 3 (Ill.App. Oct. 29, 1999) (common law attorney retaining lien is invoked by attorney's possession of the client's documents or papers); Lake River Corp. v. Carborundum Co. , 769 F.2d 1284, 1287 (7th Cir. 1985) (explaining that had the defendant manufacturer refused to pay for the plaintiff warehouse operator's services, then the warehouse operator would have had a form of an artisan's lien on the goods in its possession to coerce payment); In re KDT Industries , 31 B.R. 61, 62 (S.D.N.Y. 1983) (carrier acquired lien at moment it accepted debtor's goods for shipment).
It might be objected that allowing a party in possession of property to have an enforceable lien without providing notice will make it difficult for other potential secured creditors to determine whether property in which they hope to take a security interest is encumbered. But such risks are inherent in Article 9, which, for example, provides that a lien creditor whose lien arises before a security interest is perfected has priority over the holder of the later-perfected security interest, see 810 ILCS 5/9-301(1)(b), without requiring notice or filing in order to give priority to the lienholder.
Possession of collateral by a creditor serves much the same purpose as filing a financing statement; it puts parties on notice that that creditor may hold an interest in the collateral. SeeLaurel Motors, Inc. v. Airways Transportation Group of Companies,Inc. , 284 Ill. App.3d 312, 317, 672 N.E.2d 785, 788 (1996); Edibles Corp. v. West Ontario Street Limited Partnership , 273 Ill. App.3d 550, 554, 653 N.E.2d 45, 47 (1995). This is especially true when the party is the owner of the collateral and thus has clear notice of the secured party's rights by its possession of the collateral. Under the Labor and Storage Lien Act, for example, the notice provision only applies if the collateral is returned to the owner because, "no notice need be given where the chattel is in the possession of the [secured party]." Wolman v. Raphael , 278 Ill. App. 172, 1934 WL 3025, at *2 (1934); 770 ILCS 45/1-2 (lien arises automatically when services on collateral in secured party's possession are provided, but if collateral is returned to owner, notice of lien must be given or lien will cease to exist). Likewise, we believe that under the Tool and Die Act notice is unnecessary for the lien to attach, at least where the owner's molds are in the hands of the secured party.
We therefore conclude, contrary to Affiliated Bank, that a lien under the Act arose in favor of Burgundy sometime in 1997,prior to the assignment for benefit of creditors. For this reason, the assignee took the Comet-Montrose assets, and thus sold them to Plasti-World, subject to Burgundy's lien. See Allied VanLines, Inc. v. Small Business Administration , 507 F. Supp. 397, 401 (E.D.Mo. 1980) (an assignee for the benefit of the creditors takes subject to all superior claims at the time of the assignment), aff'd , 667 F.2d 751 (8th Cir. 1982); In Re SamuelAugust Co. , 228 F. Supp. 443, 445 (D.N.J. 1964); Division ofLabor Law Enforcement v. Stanley Restaurants , Inc. 228 F.2d 420, 425 (9th Cir. 1955); see also 6 Am. Jur.2d Assignments For Benefit of Creditors § 82 (1999) ("An assignment of property covered by a valid and bona fide lien or encumbrance passes the property to the assignee subject thereto.").
The parties agree that Burgundy first began producing plastic parts for Comet-Montrose using the Comet-Montrose molds sometime in 1997 and that by October 1997 a balance of over $75,000 was unpaid. Cplt. ¶¶ 7-8; Ans. ¶¶ 7-8. They have not provided the Court with the exact date on which Burgundy began to produce goods for Comet-Montrose, but defendants estimate that it was sometime between May and October of 1997. Def. Reply at 10.
Plasti-World argues that Burgundy "waived" its lien because it released two molds to Tri-Par and thus failed to comply with Section 4 of the Act, which Plasti-World argues requires the processor to maintain possession of the molds to preserve its lien. Nothing in these events indicates any intention by Burgundy to give up its lien or any action that would have that effect. Possession is a prerequisite to enforcement of the lien, not its attachment. See 770 ILCS 105/4 (after giving the required notice, processor may sell molds at public auction if the mold is still inthe processor's possession ). Burgundy had all of the molds in its possession prior to any attempt to enforce the lien, as it had reclaimed the molds after Tri-Par completed Abrams' rush order. There was no waiver.
B. Priority of Interests.
We must next determine whether Burgundy's lien on the molds was subordinate to the security interest held by Comet-Montrose's shareholders, which Plasti-World acquired by assignment. A lien under the Tool and Die Act is subordinate to a security interest properly perfected under Article 9 of the Code. See 770 ILCS 105/1.
Notice of the security interest now held by Plasti-World was first filed on January 15, 1992 by the original holders of that interest, Comet Industries Inc. and Montrose Products, Inc. By operation of law, this filing lapsed on January 15, 1997. See 810 ILCS 5/9-403(2) (financing statement lapses five years after filing unless continuation statement is filed within six months from the expiration of the five year period). The security interest was not re-filed until January 14, 1998 by the assignees of that interest, the shareholders of Comet-Montrose Ltd. The security interest was therefore unperfected throughout 1997, when Burgundy's lien attached. Seeid. ("Upon lapse the security interest becomes unperfected"); see also Provident Hospital Training Assoc. v. GMAC Mortgage Co. , 79 B.R. 374, 377-78 (N.D.Ill. 1987) ("If the financing statement is not continued within the time required by law, its effectiveness as a notice of security interest to third parties lapses.").
The shareholders received their assignment of the security interest in December 1995, and in January 1996 they recorded the assignment. This recordation did not operate as a continuation of the security interest beyond its expiration in 1997, because it did not comply, even substantially, with the Code's requirements for a continuation notice. First, the assignment notice did not state or suggest that the original financing statement would remain effective beyond five years — one of the key requirements for an effective continuation notice. See 810 ILCS 5/9-403(3). Second, even if the assignment notice had reflected an anticipated continuation, it was not filed within or anywhere near the six month period preceding the expiration of the original financing statement, as required by the statute. Id. While "[a] financing statement substantially complying with the requirements of [the UCC] is effective even though it contains minor errors which are not seriously misleading," 810 ILCS 5/9-402(8), here there was no substantial compliance, for the assignment notice did nothing to tell others that the security interest would extend beyond five years.
Nor did the shareholders' refiling of the security interest in January 1998, after Burgundy's lien had attached, serve to vault the shareholders ahead of Burgundy in terms of priority. Nothing in the Tool and Die Lien Act hints at the possibility that a processor with a valid lien can have that lien defeated by another creditor's later perfection of a security interest. Such a construction would completely defeat the purpose of the lien created by the Act.
The undisputed facts establish that as a matter of law the shareholders' perfected security interest had lapsed as of the time that Burgundy's lien arose, making that interest an unperfected one junior to Burgundy's lien. We thus need not address defendants' contentions that the assignment of the shareholders' security interest to Plasti-World in May-June 1998 was a fraudulent transfer. By the time of the assignment for benefit of creditors, it was already too late for Comet-Montrose to transfer ownership of the molds free and clear of Burgundy's lien. When Plasti-World bought the molds, it bought them subject to the lien.
We reject Plasti-World's argument that the sale of Comet-Montrose's assets was a sale of the Bank's collateral which, under 810 ILCS 5/9-504(4), discharged both the Bank's security interest and all other subordinate security interests and liens, including Burgundy's lien. There was no sale here under section 9-504(4) of the Code; this was not a sale by the secured party, but rather was a sale by an assignee for the benefit of creditors.