Jipping v. First National Bank Alaska

Filing 24

DECISION & ORDER ON APPEAL: the judgment of the bankruptcy court is REVERSED and the case is REMANDED to the bankruptcy court with direction to enter summary judgment in favor of the Trustee (see order for full details). Signed by Judge Sharon L. Gleason on 03/08/2017. (AEM, CHAMBERS STAFF)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA

NACOLE M. JIPPING, TRUSTEE,
Appellant,
v.

Case No. 3:16-cv-00125 -SLG

FIRST NATIONAL BANK ALASKA,
Appellee.

BK. A15-00076-HAR
ADV. No. A15-90018-HAR
BAP No. AK-16-1155

DECISION & ORDER ON APPEAL
Appellant Nacole M. Jipping, Trustee of the Chapter 7 bankruptcy estate of Omni
Enterprises, Inc. (“Omni”), appeals the United States Bankruptcy Court for the District of
Alaska’s order granting summary judgment to First National Bank Alaska (“FNBA”). The
bankruptcy court determined that FNBA held a valid security interest in the bank account
owned by Omni in the months preceding Omni’s filing a Chapter 7 bankruptcy petition,
and therefore held that FNBA’s sweep of the account was supported by its lien rights and
not avoidable under 11 U.S.C. § 550. 1 On January 25, 2017, the Court heard oral
argument on the appeal. Having considered the documents filed with the Court, the
applicable law, and the arguments of the parties, the bankruptcy court’s ruling granting
summary judgment to FNBA and denying summary judgment to the Trustee is

1

Various provisions of the Bankruptcy Code grant a Chapter 7 trustee the power to avoid certain
transfers of property for the benefit of the bankruptcy estate. See, e.g., 11 U.S.C. §§ 544, 545,
547, 548, 549, 553(b), 724(a). Once a transfer has been deemed avoidable in a bankruptcy case,
§ 550 is the vehicle a trustee uses to recover such property. The mechanics or proper application
of these provisions are not at issue in this case.

REVERSED and REMANDED with directions to enter summary judgment in favor of the
Trustee.
BACKGROUND/JURISDICTION
Before filing for bankruptcy, Omni operated retail stores in Bethel, Alaska. 2 It
maintained a bank account at FNBA from at least 2005 up to the date it filed for
bankruptcy in 2015. 3 Omni and FNBA also maintained a borrower-lender relationship at
certain times during that period. In July 2009, Omni borrowed $1.3 million from FNBA
(the “2009 Loan”). 4 The 2009 Loan was secured by a Commercial Security Agreement
(the “2009 Security Agreement”), which included as collateral “Deposit Accounts.” 5 The
2009 Security Agreement contained a future advances clause as well as a crosscollateralization clause that provided that the 2009 Security Agreement secured “all
obligations, debts and liabilities, plus interest thereon, of Grantor to Lender . . . whether
now existing or hereafter arising.” 6

The 2009 Security Agreement also contained a

“Perfection of Security Interest” section stating: “This is a continuing Security Agreement
and will continue in effect even though all or any part of the Indebtedness is paid in full

2

Docket 4-1 (Compl.) at 4.

3

Id. at 6.

4

Id. at 4.

5

Docket 4-9 (2009 Security Agreement) at 1. Article 9 of the Alaska Uniform Commercial Code
(“UCC”) provides that “‘deposit account’ means a demand, time, savings, passbook, or similar
account maintained with a bank except that the term does not include investment property or
accounts evidenced by an instrument.” ALASKA STAT. § 45.29.102(a)(36). Omni’s FNBAmaintained bank account, which FNBA swept in 2015, was a Deposit Account. Docket 4-1
(Compl.) at 6.
6

Docket 4-9 (2009 Security Agreement) at 1.

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and even though for a period of time Grantor may not be indebted to Lender.”7 Omni paid
off the 2009 Loan in full in July 2011, and had no indebtedness to FNBA until August
2013. 8
In August 2013, Omni borrowed $2.6 million from FNBA for equipment for a new
grocery store (the “2013 Loan”). 9 The Commercial Security Agreement securing the 2013
Loan (the “2013 Security Agreement”) granted FNBA a lien on a detailed list of specific
items of equipment, but did not explicitly include “Deposit Accounts” or refer to the 2009
Security Agreement. 10 The 2013 Security Agreement contained an integration clause
stating that “[t]his Agreement, together with the Related Documents, constitutes the entire
understanding and agreement” between FNBA and Omni with respect to the 2013 loan.11
In early 2015, Omni defaulted on the 2013 Loan. FNBA debited Omni’s FNBAmaintained bank account to satisfy the mortgage payments for January and February
2015. 12 In March 2015, FNBA swept Omni’s account, seizing roughly $1.3 million, which
it applied against the 2013 Loan. 13 The Trustee then filed this adversary action in
bankruptcy court to recover the seized funds. 14 On cross-motions for summary judgment,

7

Docket 4-9 (2009 Security Agreement) at 1.

8

Docket 4-1 (Compl.) at 5.

9

Id.

10

Id. at 5.

11

Docket 4-9 (2013 Security Agreement) at 8.

12

Docket 4-1 (Compl.) at 6–7.

13

Id. at 7.

14

Id. at 1–2.

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the bankruptcy court entered summary judgment for FNBA, after finding that (1) FNBA’s
security interest in the “Deposit Accounts” in the 2009 Security Agreement did not
terminate when the 2009 Loan was paid off; and (2) the integration clause in the 2013
Security Agreement did not exclude the 2009 Security Agreement from applying to the
2013 loan. 15 Accordingly, the bankruptcy court concluded that the FNBA sweep was
supported by its lien rights on Omni’s bank account, and the Trustee could not avoid it
under the Bankruptcy Code. 16
The Trustee filed a timely notice of appeal on June 1, 2016. 17 FNBA then filed a
notice of election to have the appeal decided by the district court, 18 to which the case was
then transferred. 19 This Court has jurisdiction to review final orders of a bankruptcy court
under 28 U.S.C. § 158(a)(1).
ISSUES PRESENTED/STANDARD OF REVIEW
The parties agree that resolution of this appeal turns on whether FNBA held a
valid security interest in Omni’s FNBA-maintained bank account when FNBA swept the
account in early 2015. 20 The Trustee challenges both of the findings of the bankruptcy

15

Docket 4-10 (Order Granting FNBA’s Mot. for Summ. J. and Final J. for Def.) at 1–2.

16

Docket 4-8 (Mem. Decision Regarding Cross-Mots. for Summ. J.) at 17–18.

17

Docket 3-1 (Transmittal Form) at 4–5.

18

Docket 3-2 (Appellant Statement of Election).

19

Docket 3 (Notice of Transfer of Appeal from Bankruptcy Court).

20

Docket 12 (Appellant’s Br.) at 8 n.6; Docket 14 (Appellee’s Br.) at 14. The parties agree that if
FNBA had a valid lien in the bank account, it may retain the swept funds and, if it did not, it must
return the swept funds to the Trustee.

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court. 21
“The issues raised here involve interpretation of a security agreement executed
between [Omni and FNBA] and the scope of a claimed security interest. The Alaska
Uniform Commercial Code and applicable state law regarding contract interpretation will
govern their resolution.” 22 Under Alaska law, “[t]he objective of contract interpretation is
to determine and enforce the reasonable expectations of the parties.” 23
This Court reviews de novo a bankruptcy court’s ruling on cross-motions for
summary judgment, its interpretation of security agreements, and its interpretation of state
law. 24 Here, the parties agree that whether FNBA held a valid security interest in Omni’s
bank account when FNBA performed the sweep in early 2015 should be reviewed de
novo.
DISCUSSION
The Trustee seeks reversal of the bankruptcy court’s decision for two reasons.
First, she argues that the 2009 Security Agreement, which provides that it terminates
once the “Indebtedness” is paid in full, terminated in 2011 when Omni paid off the 2009

21

Docket 12 (Appellant’s Br.) at 6.

22

In re Alaska Fur Gallery, 457 B.R. 764, 765 (Bankr. D. Alaska 2011) (footnote omitted); see
also Butner v. United States, 440 U.S. 48, 55 (1979) (finding that whether a security agreement
creates a lien on particular assets is a question of state law).

23

Norvill v. Carr-Gottstein Foods Co., 84 P.3d 996, 1004 (Alaska 2004).

24

See Trunk v. City of San Diego, 629 F.3d 1099, 1105 (9th Cir. 2011) (summary judgment);
Conrad v. Ace Prop. & Cas. Ins. Co., 532 F.3d 1000, 1004 (9th Cir. 2008) (interpretation and
meaning of contracts); see also Salve Regina Coll. v. Russell, 499 U.S. 225, 231 (1991)
(interpretation of state law).

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Loan. 25 FNBA responds that the 2009 Security Agreement defines “Indebtedness” to
specifically include future advances 26 and also includes a cross-collateralization clause. 27
Therefore, FNBA maintains that the 2009 agreement, which included Omni’s FNBAmaintained “Deposit Accounts” as collateral, was not terminated when the 2009 Loan was
paid off. 28 FNBA cites to a provision in the 2009 Security Agreement that it “is a continuing
Security Agreement and will continue in effect even though all or any part of the
Indebtedness is paid in full and even though for a period of time Grantor may not be

25

Docket 12 (Appellant’s Br.) at 16–30. The 2009 Security Agreement includes a “Survival of
Representations and Warranties” clause that states:
All representations, warranties, and agreements made by Grantor in this Agreement shall
survive the execution and delivery of this Agreement, shall be continuing in nature, and
shall remain in full force and effect until such time as Grantor’s Indebtedness shall be paid
in full.

Docket 4-9 (2009 Security Agreement) at 4.
26

The 2009 Security Agreement states, “In addition to the Note, this Agreement secures all future
advances made by lender to Grantor regardless of whether the advances are made a) pursuant
to a commitment or b) for the same purposes.” Docket 4-9 (Security Agreement) at 1.
27

The “Cross-Collateralization” clause in the 2009 Security Agreement provides:
In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus
interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims
by Lender against Grantor or anyone or more of them, whether now existing or hereafter
arising, whether related or unrelated to the purpose of the Note, whether voluntary or
otherwise, whether due or not due, direct or indirect, determined or undetermined,
absolute or contingent, liquidated or unliquidated, whether Grantor may be liable
individually or jointly with others, whether obligated as guarantor, surety, accommodation
party or otherwise, and whether recovery upon such amounts may be or hereafter may
become barred by any statute of limitations, and whether the obligation to repay such
amounts may be or hereafter may become otherwise unenforceable.

Docket 4-9 (Security Agreement) at 1.
28

Docket 14 (Appellee’s Br.) at 24–33.

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indebted to Lender.”29
As discussed below, the Court has determined that the second issue raised in this
appeal is dispositive. Therefore, the Court will assume, without deciding, that the 2009
Security Agreement remained in effect after Omni paid off the 2009 Loan and turn to this
second issue: whether the 2013 Security Agreement’s integration clause precludes
FNBA’s reliance on the 2009 Security Agreement as security for the 2013 Loan.
The 2013 Security Agreement contains the following integration clause:
Amendments.
This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the matters
set forth in this Agreement. No alteration or amendment to this Agreement shall
be effective unless given in writing and signed by the party or parties sought to be
charged or bound by the alteration or amendment. 30
FNBA maintains that the integration clause does not exclude the 2009 Security
Agreement and instead argues that the 2009 Security Agreement is implicitly included as
a “Related Document[]” referenced in the integration clause itself. 31 The bankruptcy court
agreed with FNBA, concluding, “The reference to the 2009 Security Agreement is not
specific, and is in fact exceedingly obscure. But, in parsing the meaning of Related
Documents, I conclude the 2009 Security Agreement is not excluded by the integration
clause; it is in fact included.” 32 The bankruptcy court reasoned:
The answer lies in the somewhat circular definitions of “Related Documents” and
“Indebtedness” in the 2013 Security Agreement. It becomes a chicken-and-egg
29

Docket 4-9 (2009 Security Agreement) at 1.

30

Docket 4-9 (2013 Security Agreement) at 8.

31

Docket 14 (Appellee’s Br.) at 33–37.

32

Docket 4-8 (Mem. Decision Regarding Cross-Mots. for Summ. J.) at 18–19 (emphasis in
original).

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question—does the integration clause exclude the 2009 Security Agreement or
not? Despite this circularity, the Related Documents definition in the 2013 Security
Agreement is sufficiently clear to mean, in this case [emphasis and bracket matter
added]:
Related Documents.
The words “Related Documents” mean all
promissory notes, credit agreements, loan agreements, environmental
agreements, guaranties, security agreements [such as the 2009
Security Agreement], mortgages, deeds of trust, security deeds, collateral
mortgages, and all other instruments, agreements and documents, whether
now or hereafter existing [such as the 2009 Security Agreement],
executed [by virtue of the Future Advances clause in the 2009 Security
Agreement] in connection with the Indebtedness [such as the 2013
loan]. 33
The Court finds, however, that FNBA and the bankruptcy court’s interpretation
constitutes a strained reading of the Related Documents clause, as perhaps best
evidenced by the parentheticals added by the bankruptcy court. In this Court’s view, a
more natural reading of the Related Documents clause favors the Trustee’s position. For
the 2009 Security Agreement to secure payment for the 2013 Loan, the 2009 Security
Agreement must be a “Related Document[],” meaning that it was “executed in connection
with the Indebtedness.”

The bankruptcy court concluded that the 2009 Security

Agreement was “executed in connection with” the 2013 Loan because the definition of
“Indebtedness”34 in the 2013 Security Agreement refers to “future advances,” which the

33

Id. at 18 (footnote omitted; emphasis in original); Docket 4-9 (2013 Security Agreement) at 9.

34

The 2013 Security Agreement states:
The word “Indebtedness” means the indebtedness evidenced by the Note or Related
Documents, including all principal and interest together with all other indebtedness and
costs and expenses for which Grantor is responsible under this Agreement or under any
of the Related Documents. Specifically, without limitation, Indebtedness includes the
future advances set forth in the Future Advances provision, together with all interest
thereon and all amounts that may be indirectly secured by the Cross-Collateralization
provision of this Agreement.

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bankruptcy court then interpreted to extend to the future advances clause of the 2009
Security Agreement. 35 But, as the bankruptcy court acknowledged, this interpretation of
the 2013 clause constitutes a “somewhat circular” construction of the relevant terms so
as to result in an “exceedingly obscure” connection between the 2009 and 2013 Security
Agreements. 36
Giving ordinary words their ordinary meaning, as required by Alaska law, 37 it is
more logical to construe “in connection with the Indebtedness” in the 2013 Security
Agreement to refer solely to those documents executed with respect to the 2013 Loan,
thus excluding from “Related Documents” the 2009 Security Agreement, as that
document was executed in connection with the 2009 Loan. And FNBA offers no evidence
by way of conduct or independent contractual language that shows that FNBA or Omni
intended to incorporate the 2009 Security Agreement into the 2013 Security Agreement.
Moreover, the Alaska Supreme Court has articulated an objective standard to
contract interpretation. 38 A third party examining the 2013 Security Agreement would be
unlikely to discern that the 2009 Security Agreement was incorporated into the 2013

Docket 4-9 (2013 Security Agreement) at 9.
35

The “Future Advances” provision in the 2009 Security Agreement states: “In addition to the
Note, this Agreement secures all future advances made by Lender to Grantor regardless of
whether the advances are made a) pursuant to a commitment or b) for the same purposes.”
Docket 4-9 (2009 Security Agreement) at 1.
36

Docket 4-8 (Mem. Decision Regarding Cross-Mots. for Summ. J.) at 16–17.

37

Norville, 84 P.3d at 1001 n.3 (“In interpreting contracts, . . . unless otherwise defined, words will
be interpreted as taking their ordinary, contemporary, common meaning.”) (quotation marks and
citation omitted).
38

Martin v. Maldonado, 572 P.3d 763, 767 (Alaska 1977).

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Security Agreement. To do so would require the third party to have knowledge of the
earlier-terminated loan and the 2009 Security Agreement, and to employ the circular
interpretation used by the bankruptcy court. More to the point, it is unlikely that a potential
creditor to Omni in 2012, after the 2009 loan had been paid in full, would have concluded
that the 2009 Security Agreement would accord FNBA a continuing primary lien in the
event that FNBA advanced future sums to Omni in 2013.
FNBA cites to an Alaska statute that provides that a security agreement may
commit collateral to secure “future advances or other value.” 39 But even if the parties had
agreed in 2009 to include Omni’s “Deposit Accounts” as collateral for any future loans,
such as the 2013 Loan, any such agreement would be vitiated by the integration clause
in the 2013 Security Agreement, unless the 2009 Security Agreement is treated as a
“Related Document” in the 2013 Security Agreement. But, as a matter of law, the Court
holds that the 2009 Security Agreement was not a “Related Document[]” and therefore
does not secure the 2013 Loan.
FNBA also argues that “the 2009 Security Agreement constitutes a separate and
distinct contract, capable of independent enforcement.”40 But as discussed above, the
2013 Security Agreement provides that it, along with the “Related Documents” that this
Court has already concluded excludes the 2009 Security Agreement, “constitutes the
entire understanding and agreement of the parties as to the matters set forth in th[at]

39

Docket 14 (Appellee’s Br.) at 20–21 (quoting ALASKA STAT. § 45.29.204(c) (“A security
agreement may provide that collateral secures . . . future advances or other value, whether or not
the advances or value are given pursuant to a commitment.”)).

40

Docket 14 (Appellee’s Br.) at 21.

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Agreement.” 41 Clearly, the scope of collateral securing the 2013 Loan is a “matter[] set
forth in the [2013] Agreement.” 42 Thus, the integration clause in the 2013 Security
Agreement precludes independent enforcement of the 2009 Security Agreement with
respect to the swept assets.
ORDER
For the foregoing reasons, the judgment of the bankruptcy court is REVERSED,
and the case is REMANDED to the bankruptcy court with direction to enter summary
judgment in favor of the Trustee. The Clerk of Court is directed to enter a final judgment
accordingly.
DATED this 8th day of March, 2017 at Anchorage, Alaska.
/s/ Sharon L. Gleason
UNITED STATES DISTRICT JUDGE

41

Docket 4-9 (2013 Security Agreement) at 8.

42

Id.

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