In re Pettit Oil Co., No. 17-60081, 2019 WL 1104662 (9th Cir. Mar. 11, 2019)
A trustee, exercising her “strong-arm” powers as a hypothetical judicial lien creditor, had priority over a petroleum company that delivered fuel to a debtor on a consignment basis, both in consigned fuel held in debtor’s tanks and in accounts receivable and cash generated by the sale of such fuel.
The debtor, Pettit Oil Company (“Pettit”), was a bulk distributor that sold petroleum products to commercial customers. Pettit entered into a consignment agreement with IPC (USA), Inc. (“IPC”), under which IPC delivered fuel to Pettit’s stations. In return for being able to sell its fuel at Pettit’s stations, IPC paid Pettit a monthly fee.
According to the consignment agreement, ownership of the fuel remained with IPC until sold to a Pettit customer, at which time title transferred to the customer. Following each purchase, Pettit prepared an invoice and instructed the customer to remit payment to IPC directly. Despite this instruction, some customers continued to pay Pettit for their fuel purchases. The consignment agreement provided that Pettit would promptly forward such payments to IPC. When Pettit filed for bankruptcy, it possessed unsold IPC fuel and sales proceeds (both cash and accounts receivable) that had not yet been remitted to IPC. IPC never filed a financing statement or otherwise perfected its interests in the consigned fuel, the accounts receivable or the cash.
After Pettit filed for bankruptcy, the Trustee commenced an adversary proceeding seeking to recover, among other things, the value of the fuel, accounts receivable, and cash proceeds for the benefit of the bankruptcy estate. The Trustee argued that IPC’s interest in the fuel, the cash proceeds, and accounts receivable was subordinate to the Trustee’s because IPC had not filed a financing statement or otherwise perfected its interest in the property held by Pettit. The Bankruptcy Court entered summary judgment in the Trustee’s favor and the Bankruptcy Appellate Panel affirmed.
The Court of Appeals for the Ninth Circuit affirmed, holding that Section 9-319(a) of the Uniform Commercial Code, which grants a consignee “rights and title to the goods,” also grants the consignee an interest in the proceeds of those goods that were generated prior to bankruptcy. The Uniform Commercial Code treats consignments as security interests. Therefore, a consignor’s interest in goods (and the related proceeds) is a security interest for all purposes, as to which the consigner must take certain action to perfect.
11 U.S.C. § 544(a)(1) grants the bankruptcy trustee a judicial lien over all property the debtor owns as of the petition date. A creditor wishing to shield a particular asset from the reach of the trustee can do so only if the creditor can show that its interest in the asset is superior to a judicial lien, a determination governed by various non-bankruptcy statutory priority rules. Otherwise, the trustee’s judicial lien remains superior, and the trustee can “avoid” any transfers of the asset outside the bankruptcy estate. Because IPC had failed to perfect its security interests in the fuel and proceeds held by Pettit by filing a financing statement or otherwise, the bankruptcy trustee could avoid IPC’s interest in the fuel and proceeds from the sale of fuel (cash and accounts receivable).
Summary courtesy of David Simonds and Edward McNeilly of Akin Gump.
