1st Source Bank v. Wilson Bank & Trust et al
Filing
128
MEMORANDUM OPINION OF THE COURT. Signed by District Judge Todd J. Campbell on 10/3/2012. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(eh)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
1ST SOURCE BANK
v.
WILSON BANK & TRUST, et al.
)
)
) NO. 3-11-0410
) JUDGE CAMPBELL
)
MEMORANDUM
Pending before the Court are Plaintiff’s Motion for Partial Summary Judgment (Docket No.
105), Defendant Wilson Bank & Trust’s Motion for Summary Judgment (Docket No. 109), and a
Joint Motion of Defendants Pinnacle National Bank and Transcapital & Leasing, Inc. for Summary
Judgment (Docket No. 115).
For the reasons stated herein, Plaintiff’s Motion for Partial Summary Judgment (Docket No.
105) is DENIED; Defendant Wilson Bank & Trust’s Motion for Summary Judgment (Docket No.
109) is GRANTED; and the Joint Motion of Defendants Pinnacle National Bank and Transcapital
& Leasing, Inc. for Summary Judgment (Docket No. 115) is GRANTED.
FACTS
Plaintiff’s Amended Complaint (Docket No. 81) seeks a declaratory judgment as to the
priorities of certain security interests in the accounts receivable of Defendants K & K Trucking and
J.E.A. Leasing. Plaintiff also alleges conversion by Defendants of certain assets of K & K Trucking
and J.E.A. Leasing.
Plaintiff alleges that it entered into a series of secured transactions with Defendants K & K
Trucking and J.E.A. Leasing. Plaintiff contends that each transaction was for the sale or lease of
tractors or trailers or loans secured therewith. With each transaction, Plaintiff filed a financing
statement pursuant to Tennessee law.
Pursuant to the relevant Security Agreements between Plaintiff and K & K Trucking,
Defendant K & K Trucking granted a security interest to Plaintiff in certain described property
(tractors and/or trailers) and all present and future insurance proceeds, instruments, documents,
accounts (including lease and rental accounts), general intangibles, chattel paper, and all leases and
temporary rental contracts, and all lease payments, rental payments and other collections arising
therefrom, and the proceeds, both cash and non-cash, of all the foregoing. See, e.g., Docket No. 13.1
The relevant financing statements filed in connection with these Security Agreements listed
the collateral as the subject tractors and/or trailers, together with all present and future attachments,
accessories, replacement parts, repairs, additions and exchanges thereto and therefor, documents and
certificates of title, ownership or origin, with respect to the equipment, and all proceeds thereof,
including rental and/or lease receipts. See, e.g., Docket No. 1-4.
During this same time period, Defendants Wilson Bank & Trust and Transcapital & Leasing,
Inc. also entered into certain security transactions with K & K Trucking and J.E.A. Leasing, Inc.
Moreover, both Defendant Pinnacle Bank and Defendant FPC Funding III loaned money to K & K
Trucking and filed financing statements listing certain K & K assets as collateral. Docket Nos. 81-19
1
Similarly, Plaintiff and J.E.A. Leasing entered into a Loan and Security Agreement
and J.E.A. Leasing granted a security interest in certain specified equipment (Docket No. 81-16,
Schedule A). Plaintiff also filed a financing statement with regard to Defendant J.E.A. Leasing
which listed the subject equipment and related property, including “proceeds of the equipment.”
Docket No. 81-17.
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and 81-20. In late 2009, K & K Trucking ceased operations and soon thereafter defaulted on its
various loans. Similarly, J.E.A. Leasing defaulted on its various obligations.
Pursuant to its rights under the various agreements with K & K Trucking and J.E.A. Leasing,
Plaintiff repossessed the collateral securing those agreements. Docket No. 120, ¶¶ 44 and 67. In
addition, Plaintiff filed an action in Smith County Chancery Court seeking a deficiency judgment
against K & K Trucking and J.E.A. Leasing. Id., ¶¶ 48 and 68. Plaintiff’s Complaint in the state
court action does not seek to recover accounts receivable and states: “The collateral which served
as security for the Defendants’ agreements with the Plaintiff has been repossessed and sold in a
commercially reasonable manner and the proceeds from the sales have been credited against the
amount due and owing to the Plaintiff by the Defendants.” Docket No. 110-1, p. 7.
An Order of Default Judgment was entered in the Smith County lawsuit in favor of Plaintiff
against K & K Trucking for $720,324.78. Id., ¶ 50. An Order of Default Judgment was entered in
the Smith County lawsuit in favor of Plaintiff against J.E.A. Leasing for 275,809.56. Id., ¶ 70.
Plaintiff argues that it is also entitled to the accounts receivable of Defendants K & K Trucking and
J.E.A. Leasing.
The parties agree that the issue to be determined herein is whether Plaintiff has a perfected
security interest in the accounts receivable of K & K Trucking and J.E.A. Leasing. Plaintiff argues
that the language “and all proceeds thereof” in its financing statements included accounts receivable
related to the use of Plaintiff’s collateral. Defendants maintain that the language “and all proceeds
thereof” is limited to any proceeds from the sale of Plaintiff’s collateral.
SUMMARY JUDGMENT
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Summary judgment is appropriate where there is no genuine issue as to any material fact and
the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Pennington v. State
Farm Mut. Automobile Ins. Co., 553 F.3d 447, 450 (6th Cir. 2009). The party bringing the summary
judgment motion has the initial burden of informing the Court of the basis for its motion and
identifying portions of the record that demonstrate the absence of a genuine dispute over material
facts. Rodgers v. Banks, 344 F.3d 587, 595 (6th Cir. 2003). The moving party may satisfy this
burden by presenting affirmative evidence that negates an element of the non-moving party’s claim
or by demonstrating an absence of evidence to support the nonmoving party’s case. Id.
In deciding a motion for summary judgment, the Court must review all the evidence, facts
and inferences in the light most favorable to the nonmoving party. Van Gorder v. Grand Trunk
Western Railroad, Inc., 509 F.3d 265, 268 (6th Cir. 2007). The Court does not, however, weigh the
evidence, judge the credibility of witnesses, or determine the truth of the matter. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). The Court determines whether sufficient evidence
has been presented to make the issue of fact a proper jury question. Id. The mere existence of a
scintilla of evidence in support of the nonmoving party’s position will be insufficient to survive
summary judgment; rather, there must be evidence on which the jury could reasonably find for the
nonmoving party. Rodgers, 344 F.3d at 595.
DISCUSSION
The dispute in this matter is governed by Chapter 9 of Tennessee’s Commercial Code (Tenn.
Code Ann. §§ 47-9-101 to 47-9-710). Where more than one party holds a security interest in an
item, Chapter 9's priority rules determine which creditor has the first opportunity to satisfy its
interest from the collateral. A perfected security interest has priority over an unperfected security
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interest, even where the unperfected interest was obtained earlier in time. Tenn. Code Ann. § 47-9322.
To perfect a security interest, the secured creditor must file a financing statement, pursuant
to Tenn. Code Ann. §§ 47-9-310(a) and 47-9-502. The financing statement must indicate the
collateral covered thereby. Tenn. Code Ann. § 47-9-502(a)(3). A financing statement must
reasonably describe the collateral that is covered by the security interest. A collateral description
in a financing statement should be held adequate to perfect a security interest in an item of property
if the description reasonably provides prospective creditors with inquiry notice regarding the type
of property at issue. CLC Equipment Co. v. Brewer, 139 F.3d 543, 545 (5th Cir. 1998).2
As indicated above, Plaintiff takes the position that the words “and all proceeds thereof” in
its financing statements extends to all accounts receivable of the debtors. “Proceeds” is defined in
the Tennessee Commercial Code as
(A) whatever is acquired upon the sale, lease, license, exchange, or other disposition
of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
(C) rights arising out of collateral;
(D) to the extent of the value of the collateral, claims arising out of the loss, nonconformity,
or interference with the use of, defects or infringement of rights in, or damage to, the
collateral; or
(E) to the extent of the value of the collateral and to the extent payable to the debtor or the
secured party, insurance payable by reason of the loss or nonconformity of, defects or
infringement of rights in, or damage to, the collateral.
2
The parties have not directed the Court to a Tennessee case on point. Law
concerning the Uniform Commercial Code nationally, however, provides guidance for the Court’s
determination.
5
Tenn. Code Ann. § 47-9-102 (64).
It is undisputed that Plaintiff’s financing statements do not include the words “accounts
receivable” in the description of the collateral. The failure to identify accounts receivable as a type
of collateral intended to be covered by the financing statement does not place third parties on notice
that a security interest was taken in accounts receivable. See Lehigh Press, Inc. v. National Bank
of Georgia, 389 S.E.2d 376, 378 (Ga. Ct. App. 1989).
The Court finds that “accounts receivable” do not fall within the definition of “proceeds” as
used in Plaintiff’s financing statements. “Proceeds” include whatever is received upon the sale,
exchange, collection or other disposition of collateral or proceeds. CLC Equipment, 139 F.3d at 546.
Use is not a disposition of the collateral within the meaning of the definition of “proceeds.” Id. “If
fruits and products from the use of collateral were treated as proceeds, every creditor with a security
interest in equipment would have a security interest in all items produced from the equipment as
well as the revenues earned by the equipment.” Id. The Court will not extend the meaning of
“proceeds” to such an extent.3
Plaintiff further argues that certain of its security agreements represented “purchase money
security interests” for which special priority rules apply. “Purchase money collateral” is defined
as goods or software that secures a purchase money obligation incurred with respect to that
collateral. Tenn. Code Ann. § 47-9-103(a)(1). Neither the trucks nor the trailers which were
Plaintiff’s collateral here are goods or software.
3
Proceeds constitute whatever is substituted for the original collateral. In re Judkins,
41 Bankr. Rep. 369, 372 (M.D. Tenn. 1984); see also In re J & J Auto Sales, Inc., 1971 WL 17914
(E.D. Tenn. 1971).
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Given that Plaintiff’s financing statements do not include accounts receivable, any interest
Plaintiff had in those accounts was not perfected. Plaintiff does not dispute that Defendant Wilson
County Bank had a perfected security interest in the accounts receivable of K & K Trucking.
Docket No. 120, ¶¶ 26-32. Plaintiff does not dispute that Defendant TransCapital& Leasing, Inc.
had a security interest in K & K Trucking’s accounts. Docket No. 118, ¶¶ 23-24. Defendants assert
that Defendant TransCapital granted to Defendant Pinnacle National Bank a security interest in,
among other things, the accounts of TransCapital. Id., ¶¶ 33-37. Other than a dispute concerning
the proper name and/or corporate structure of TransCapital, Plaintiff does not dispute that these
transactions occurred. Id.
As noted above, a perfected security interest has priority over an unperfected security interest
even where the unperfected interest was obtained earlier in time. Tenn. Code Ann. 47-9-322(a).
Therefore, Plaintiff’s security interest in accounts receivable, if any, does not take priority over
Defendants’ interests therein.
This case is referred back to the Magistrate Judge for a status conference to determine what,
if any, issues remain.
IT IS SO ORDERED.
___________________________________
TODD J. CAMPBELL
UNITED STATES DISTRICT JUDGE
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