7 ABR 78
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA
In re: ) ) THOMAS N. GREENE and LINDA M. ) Case No. A00-00870-DMD GREENE, dba Cozy Moose Antiques & ) Chapter 7 Gifts, ) ) Debtors. ) ) ____________________________________________ )
ORDER DENYING MOTION FOR RELEASE OF FUNDS AND
MOTION TO STRIKE PLEADINGPending before the court are the motions of creditor, Warren G. Kellicut, for release of funds and to strike pleading. Having reviewed the motions and responses thereto, as well as reviewed the other papers and \ pleadings on file in this proceeding,
IT IS ORDERED that the motion for release of funds, filed December 21, 2000, and the motion to strike pleading, filed January 25, 2001, are denied.
Discussion
The debtors owned the Cozy Moose Antiques & Gifts, which was a retail store that also sold antiques on consignment. Kellicut had a consignment arrangement with debtor Linda Greene and, prior to the time the Greene's bankruptcy petition was filed, had delivered approximately 20 pieces of furniture to her to be sold on consignment at the Cozy Moose. Under the consignment arrangement between Kellicut and Greene, she was to receive a 20% commission on any item she sold for Kellicut, and he was to receive the balance of the sale proceeds. Although Greene did have a written consignment agreement form that she had used with other customers, apparently one was not signed by Kellicut.
Greene sold some of the furniture prepetition and placed the proceeds from
7 ABR 79 sale into a general account which she maintained for the business. All business deposits were placed into, and all business expenses were paid from, this account. Kellicut's share of the proceeds from sale of the furniture is $1,750.00. It was still in the business account when the Greenes filed their bankruptcy petition. This account has now been turned over to the chapter 7 trustee.
The Greenes confirmed the consignment arrangement they had with Kellicut at their § 341 meeting. They also indicated on their statement of financial affairs that they are holding $1,750.00 in their business account for Kellicut. (1) Kellicut filed the motion for release of these funds after the trustee refused to voluntarily surrender them to him.
Kellicut argues that, while the commissions Greene earned from the sale of the furniture are estate assets, the remaining proceeds are not and should be turned over to him. Prior to the adoption of the Uniform Commercial Code ("UCC"), this would have been the proper analysis. (2) The enactment of the UCC has changed this, however.
The U.C.C. distinguishes between a "true" consignment and a consignment intended as a security interest. If it is one intended as a security interest, it will be deemed a security interest by definition (section 1-201(37)) regardless of any effort by the parties to label it otherwise, and it will fall within the scope of Article 9 (section 9-102). This means that in order to protect the "security interest" and attendant secured creditor status in a subsequent bankruptcy, a financing statement must be filed to perfect the "consignor's" rights. Failure to perfect the interest by filing a financing statement will render the "consignor's" claim subordinate to the rights of an intervening judicial lien creditor (section 9-301(b)) and, therefore, render it void as against the trustee asserting such rights under section 544(a). The "consignor" will thereby be relegated to the status of general unsecured creditor with no specific property interest
On the other hand, if the arrangement is deemed a "true" consignment it will not be subject to all of the provisions of Article 9 but must first be viewed within the terms of Article 2 on Sales. Section 2-326 provides that a consignment (not intended as a security interest) is treated like a sale-or-return contract for purposes of determining the rights of the buyer's creditors. While the goods are in the possession of the consignee, they are subject to the claims of the possessing party's creditors unless the consignor complies with an applicable sign-posting statute, the possessing party is known by his or her creditors to be dealing in the goods of others, or the consignor complies with the filing provisions of Article 9 . . . . (3)
Alaska has adopted the UCC. (4) AS 45.02.326 covers goods delivered for sale or return. Subsection (b) of AS 45.02.326 specifies that such goods are subject to claims of the buyer's creditors while they are in the buyer's possession. AS 45.02.326(c) provides:
(c) If goods are delivered to a person for sale and the person maintains a place of business at which the person deals in goods of the kind involved under a name other than the name of the person making delivery, then, with respect to claims of creditors of the person conducting the business, the goods are considered to be on sale or return. This subsection is applicable even though an agreement purports to reserve title to the person making delivery until payment or resale or uses such words as 'on consignment' or 'on memorandum.' However, this subsection is not applicable if the person making delivery
(1) complies with an applicable law providing for a consignor's interest or the like to be evi- denced by a sign;
(2) establishes that the person conducting
(3) complies with the filing provisions of AS 45.09. (5)
Kellicut's consignment arrangement with the Greenes falls within the scope of AS 45.02.326 as a delivery of goods for sale or return. Such goods are subject to the claims of the Greene's creditors, while they are in the Greene's possession, unless Kellicut can establish one of the exceptions contained in AS 45.09.326(c)(1) - (3). He has failed to do so. Similarly, Kellicut's entitlement to the proceeds from the sale of the furniture would prime the claims of secured creditors of the Greenes only if he had complied with the provisions of AS 45.09.326(c)(3) or given written notification of his interest in the furniture to the Greene's secured creditors. (6) Kellicut hasn't done this, either.
Kellicut's interest in the furniture proceeds is akin to that of a creditor holding an unperfected security interest. Such interests are subordinate to the claims of judicial lien creditors. (7) The trustee's interest in the proceeds from the sale of the furniture will therefore prime Kellicut's claim to them, under 11 U.S.C. § 544(a)(1). (8) Kellicut's motion for release of funds will be denied. He holds a general unsecured claim for the amounts he is owed under the commission arrangement he had with the Greenes, and must share in the distribution of this bankruptcy estate accordingly.
With reference to Kellicut's motion to strike pleading, the court file contains no "untitled pleading," so it is unclear which document he wishes to have stricken. Second, presuming Kellicut is seeking to strike the trustee's second opposition to the motion to release funds, Kellicut has not been prejudiced by the trustee's retention of counsel to further brief the issues which have been raised. In fact, Kellicut has responded to the points raised in the second opposition in his motion to strike pleading. Finally, matters should be resolved on the merits rather than by procedural ambush. The entire record has been considered in this case to resolve the motion for release of funds. The motion to strike pleading will be denied.
DATED: March 1, 2001
BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge
N O T E S:
1. Statement of Fin. Affairs, ¶ 14, filed Sept. 14, 2000 [Docket No. 12]. 2. 5 Collier on Bankruptcy ¶ 541.06[1][b] (15th ed. revised 2000). 3. Id. at pp. 541-27 to 541-28 [emphasis added]. 4. AS 45.01.101 et. seq. 5. AS 45.02.326 has been revised, by a delayed amendment to become effective July 1, 2001 (§ 9 ch 113 SLA 2000). The existing subsection (c) of this statute will deleted as of July 1, 2001. 6. AS 45.09.114. 7. AS 45.09.301. 8. See In re BRI Corp., 88 B.R. 71, 74 (Bankr. E.D. Pa. 1988).