Article courtesy of Michael Robson (Greenberg Traurig)
In re Richard M. Judy Fam. Tr., 614 B.R. 685 (Bankr. W.D. Mo. 2020)
In this bankruptcy dispute in the United States Bankruptcy Court in the Western District of Missouri (the “Court”), competing creditors argued over the priority of their claims with respect to insurance proceeds dispensed to the Richard M. Judy Family Trust (the “Debtor”) following the complete casualty loss of certain equipment (the “Collateral”) owned by the Debtor. One of these creditors, First Missouri Bank (the “Bank”), argued that it held a superior interest in the insurance proceeds as their loss payee status took priority under contract law given their blanket security interest in the Collateral. Conversely, creditor FCS Financial PCA (“FCS”) argued that its purchase-money security interest (the “PMSI”) in the insurance proceeds took priority under Article 9 of the UCC (“Article 9”). The Court agreed with FCS that Article 9 was the proper venue for this dispute as Article 9 governs transactions where parties take security interests in collateral and the administration of the proceeds thereof. Accordingly, the Court held that FCS’ perfected PMSI extended to the insurance proceeds and therefore FCS was entitled to the insurance proceeds in the full amount of its secured claim.
The dispute arose when the Bank filed a proof of claim for $1,298,679.95 encompassing several unpaid loans secured by a blanket security interest in all of Debtor’s equipment. Simultaneously, FCS filed one proof of claim for $31,988.97 and another proof of claim for $24,574.66, both secured by perfected PMSI interests in two particular pieces of the Collateral, a planter and turbo tillage. FCS filed a motion for relief from the automatic stay regarding the planter and turbo tillage, arguing that both security interests were perfected within twenty days after the Debtor’s acquisition thereof. The Bank conceded that FCS had two perfected PMSI rights in the planter and the turbo tillage, but that the Debtor owned two planters and one was destroyed in a fire in 2017. After further fact finding the Court determined that the planter destroyed in the 2017 fire was the subject of the PMSI, and insurance proceeds totaling $171,959.96 were divided and paid to the Debtor and the Bank, as a loss payee, although a portion was ordered to be held by the Bank until the issues present in the case were resolved.
In addressing whether Article 9 or contract law governed, the Court determined that the plain text of each lender’s contractual arrangements with the Debtor granted them security interests in the Collateral and therefore the Court needed to determine priority. Drawing from Article 9, the Court ruled that a perfected PMSI “has priority over a conflicting security interest in the same goods, and … identifiable proceeds … if the [PMSI] is perfected when the debtor receives possession of the collateral or within 20 days thereafter.” Mo. Rev. Stat. § 400.9-324(a). Furthermore, the Court ruled that (i) the Bank had already conceded that FCS held a security interest in the Collateral and (ii) the case law cited by the Bank was unrelated to the present priority claim as it related to mortgage litigation and the Court further drew on established case law which provided that “documents containing an ‘objective manifestation’ to grant a security interest in collateral may constitute a security agreement.” Vantage Invs., Inc. v. Loc Nguyen Corp. (In re Vantage Invs. Inc.), 385 B.R. 670, 682 n.14 (Bankr. W.D. Mo. 2008). Thus, FCS’ perfected PMSI in the planter’s insurance proceeds took priority over the Bank’s perfected blanket equipment security interest on the basis that derivative insurance proceeds have been established under Article 9 as a continuation of the preexisting security interest in the original collateral. The Court then moved to have the insurance proceeds from the Collateral relating to the planter awarded to FCS and providing that FCS was allowed to file a request for post-petition interest, fees costs and expenses.
