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INTERBUSINESS BANK, N.A. v. FIRST NAT'L BANK OF MIFFLINTOWN

April 23, 2004.

INTERBUSINESS BANK, N.A., Plaintiff
v.
FIRST NATIONAL BANK OF MIFFLINTOWN, Defendant v. ALLIED CAPITAL CORPORATION, et al., Third-Party Defendants



The opinion of the court was delivered by: CHRISTOPHER CONNER, District Judge

MEMORANDUM

Presently before the court in this Uniform Commercial Code ("U.C.C.") case are several dispositive motions in which the parties seek recognition of their respective security interests in certain collateral of a common debtor as superior to others. Plaintiff, InterBusiness Bank, N.A. ("InterBusiness"), contends that defendant, First National Bank of Mifflintown ("First National"), lacked a valid interest in the "inventory" and "accounts receivable" of the debtor and yet collected and liquidated those assets in derogation of plaintiff's superior interest. Defendant disagrees, asserting that assignments from third-party defendants, Allied Capital Corporation and its subsidiary and successor corporations (collectively "Allied Capital"), were effective to give it a priority interest in the collateral. Defendant further argues that plaintiff does not possess a security interest in the collateral because (1) the documents defining plaintiff's interest refer only to "goods" and "accounts," not "inventory" and "accounts receivable," and (2) any interest that plaintiff had in the collateral was extinguished when plaintiff obtained satisfaction of the underlying debt in state court execution proceedings relating to a separate mortgage agreement between plaintiff and the debtor.

The questions presented in the motions are (1) whether parties may obtain priority security interests through assignment, (2) whether generic references in a financing statement to "goods" and "accounts" are effective to cover an interest in "inventory" and "accounts receivable" of the debtor, and (3) whether a security interest in collateral is deemed extinguished by operation of Pennsylvania law when the secured party purchases the real property of the debtor during execution proceedings on the underlying debt. For the reasons that follow, these questions must all be answered in the affirmative. Finding that the complaint states a valid claim for relief and that material questions of fact remain, the court will deny the cross-motions for summary judgment (Docs. 13, 20) and the motion to dismiss (Doc. 10). I. Statement of Facts*fn1

  At the heart of this controversy are two loans made by Allied Capital, a financing corporation, to Annlick Farm Supply, Inc. ("Annlick Farm Supply"), a business in central Pennsylvania. The first of these loans, in the amount of one million dollars ($1,000,000), was made in December 2000 pursuant to a loan agreement between the parties. (Doc. 1 ¶¶ 4-8; Doc. 1, Ex. A; Doc. 15 ¶ 1-10; Doc. 21 ¶¶ 1-2; Doc. 22 ff 1-10; Doc. 32 ¶¶ 1-2). As collateral, Allied Capital accepted a mortgage on real property owned by Annlick Farm Supply and an interest in its accounts, inventory, equipment, and other property. This interest was memorialized by a mortgage agreement and a security agreement, both of which were executed by the parties on December 22, 2000. (Doc. 1 ¶ 5; Doc. 1, Ex. B; Doc. 15 ¶¶ 1-10; Doc. 21 ¶ 3; Doc. 22 ¶¶ 1-10; Doc. 32 ¶ 3; Doc. 34, Ex. A ¶¶ 4-6). Allied Capital also filed a financing statement, identifying the collateral in which it claimed a security interest:
1. The collateral includes (but is not limited to) all property, tangible and intangible, now owned or hereafter acquired by Debtor including, without limitation, machinery, equipment, tools, furniture, fixtures and rents: 4. All goods, furniture, fixtures, building and other materials, tools, supplies, and other tangible personal property of every nature now owned or hereafter acquired by Debtor and used, intended for use, or usable in the construction, development, or operation of the Property, whether located on the Property or elsewhere, together with all accessions thereto, replacements and substitutions therefor and proceeds thereof;
5. The right to use the trademark or trade name of Debtor and symbols or logos used in connection therewith, or any modifications or variations thereof, in connection with the operation of the improvements existing or to be constructed on the Property, together with all accounts, all contracts and contract rights and all plans, specifications, licenses, permits and other general intangibles (whether now owned or hereafter acquired, and including proceeds thereof) relating to or arising from Debtor's ownership, construction, use, operation, leasing or sale of all or any part of the Property. . . .
(Doc. 1, Ex. B). The statement was filed with state and local government offices in January and February 2001. (Doc. 1 ¶ 5; Doc. 15 ¶¶ 1-10; Doc. 21 ¶¶ 4-6; Doc. 22 ¶¶ 1-10; Doc. 32 ¶¶ 4-6).
  Soon after making the first loan, Allied Capital made a second loan to Annlick Farm Supply in the amount of $1,250,000.*fn2 The parties executed another security agreement, giving Allied Capital an interest in the inventory and accounts of the business as collateral for the second loan. (Doc. 1 ¶¶ 9-10; Doc. 15 ¶¶ 11-12; Doc. 21 ¶¶ 9-12; Doc. 22 ¶¶ 11-12; Doc. 32 ¶¶ 9-12). Soon thereafter, Allied Capital filed a second financing statement identifying the collateral claimed under the second security agreement: All tangible and intangible property of the Debtor, whether now owned or hereafter acquired, wherever located, including, but not limited to, the Debtor's interest now owned and hereafter acquired in the following types or items of property:
(ii) all inventory of every nature, kind and description. . . .
(iii) all accounts, accounts receivable, [and] contract rights . . . arising out of the sale, lease or consignment of goods, or the rendition of services by the Debtor. . . .
(Doc. 1, Ex. E). This second financing statement was filed with state and local government offices in January and February 2001, after Allied Capital had filed the financing statement relating to the first loan agreement. (Doc. 1, Ex. E; Doc. 15 ¶¶ 5, 7, 9, 12-13; Doc. 22 ¶¶ 4, 11; Doc. 22 ¶¶ 5, 7, 9, 12-13; Doc. 32 ¶¶ 4, 11).

  In a series of subsequent transfers, certain interests held by Allied Capital arising from the first and second loans were assigned to other corporations. All of the interests arising under the first loan, including the loan agreement, mortgage agreement, security agreement, and initial financing statement, were assigned to InterBusiness on July 30, 2001. (Doc. 1 ¶¶ 6-8; Doc. 15 ¶¶ 1-10, 17; Doc. 21 ¶¶ 7-8; Doc. 22 ¶¶ 1-10, 17; Doc. 32 ¶¶ 7-8). With respect to the second loan, Allied Capital retained its interests in the loan and security agreements, and transferred only its interest in the second financing statement. Through amendments filed with the appropriate government offices, Allied Capital's interest in this second financing statement was assigned to First National in April 2001.*fn3 (Doc. 1 ¶ 13; Doc. 15 ¶ 17; Doc. 21 ¶ 11; Doc. 22 ¶ 17; Doc. 32 ¶ 11).

  In May 2001, First National extended to Annlick Farm Supply a revolving line of credit in the amount of $500,000 (later increased by $200,000) pursuant to a loan agreement between the parties. They also executed a security agreement giving First National an interest in "all inventory and accounts" as collateral for the loan. (Doc. 1 ¶ 12; Doc. 15 ¶¶ 14-16; Doc. 21 ¶ 14; Doc. 22 ¶¶ 14-16; Doc. 32 ¶ 14).

  In July 2002, Annlick Farm Supply defaulted on its obligations under the loan agreement between it and First National. Soon thereafter, First National collected the accounts receivable of Annlick Farm Supply and liquidated its inventory, garnering approximately $450,000. (Doc. 1 ¶¶ 22-23; Doc. 4 ¶¶ 22-23; Doc. 21 ¶¶ 19-20; Doc. 32 ¶¶ 19-20).

  In October 2002, other creditors of Annlick Farm Supply commenced involuntary bankruptcy proceedings against the company. InterBusiness moved for relief from the automatic stay to allow it "to exercise its state law rights and remedies against the Collateral and Real Property" of the debtor. (Doc. 34, Ex. A at 4). The bankruptcy court granted the request, and InterBusiness obtained judgment by confession against Annlick Farm Supply in a Pennsylvania trial court for sums owing under the loan agreement between the parties. (Doc. 34, Ex. B; Doc. 40 ¶¶ 2-4). A writ of execution was issued, and the real property subject to the mortgage agreement was sold to InterBusiness on May 1, 2003. (Doc. 34, Exs. B, C; Doc. 40 ¶¶ 2-4). Following its purchase, InterBusiness did not file a petition to fix the fair market value of the property or take other action to determine the debt, if any, still owed by Annlick Farm Supply. (Doc. 34, Ex. D).

  InterBusiness filed the complaint sub judice on December 12, 2003. (Doc. 1). The complaint asserts that InterBusiness's security interest in the inventory and accounts receivable of Annlick Farm Supply is superior to that of First National, and demands remittance of the proceeds of the liquidation of those assets. (Doc. 1 at 8). First National then filed a third-party complaint against Allied Capital, including claims of fraud and misrepresentation based on Allied Capital's alleged assurances that First National would obtain a first-priority position through assignment of the second loan financing statement. (Doc. 6).

  Soon thereafter, Allied Capital filed a motion to dismiss, claiming that, under the allegations of the original complaint, InterBusiness did not have a perfected security interest in the inventory and accounts receivable of Annlick Farm Supply. (Docs. 10, 11). First National then filed a motion for summary judgment, incorporating and "amplif[ying]" the argument that InterBusiness lacked an interest in the collateral. (Doc. 14 at 3 n.1). InterBusiness responded with a cross-motion for summary judgment, claiming that it had a priority interest and was entitled to judgment as a matter of law. (Docs. 20, 25). The last of the multiple briefs and exhibits supporting and opposing the motions was filed on April 8, 2004. (Doc. 39).

 II. Standard of Review

  Concurrent resolution of cross-motions for summary judgment can present a formidable task. See 10A CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 2720 (3d ed. 1998). Federal Rule of Civil Procedure 56 mandates that the court view all facts in the light most favorable to the non-moving party, giving that party the benefit of all reasonable inferences. See FED. R. CIV. P. 56; Schnall v. Amboy Nat'l Bank, 279 F.3d 205, 209 (3d Cir. 2002). However, the Rule does not explain the proper practice when the plaintiff and the defendant are both non-moving parties. See FED. R. CIV. P. 56; 10A WRIGHT ET AL., supra, § 2720. Inferences to which a party is entitled with respect to the opponent's motion may not be granted with respect to its own. United States v. Hall, 730 F. Supp. 646, 648 (M.D. Pa. 1990). In such circumstances, Rule 56 requires two statements of the "facts" of the same case, a proposition that may counsel separate opinions on the respective motions. See Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir. 1968); Hall, 730 F. Supp. at 648; 10A WRIGHT ET AL., supra, § 2720.

  Similarly problematic is simultaneous review of motions for summary judgment and for dismissal. Federal Rules of Civil Procedure 12(b)(6) and 56 both mandate equivalent standards of review, requiring consideration of all facts in the light most favorable to the non-moving party, but they prescribe significantly different scopes of review. See 5A CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE & PROCEDURE § 1366 (2d ed. 1990). Rule 12(b)(6) strictly limits the court to the face of the pleadings, aided only by materials relied upon in the complaint or otherwise of unquestioned validity. FED. R. CIV. P. 12(b)(6); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997): Oshiver v. Levin. Fishbein. Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d Cir. 1994). In contrast, Rule 56 not only permits the court to consider extrinsic evidence, but requires the non-moving party to produce such evidence when a material element of the claim is in doubt. FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

  Fortunately, these distinctions are without difference in the present case. The basic facts of the case, as alleged in the pleadings, are substantially undisputed and have been borne out by the declarations and exhibits of the parties. Whether the complaint or the evidence is viewed in the light most favorable to plaintiff, defendant, or third-party defendants, the same conclusions generally inhere. The few evidentiary discrepancies that do exist may be noted as necessary, satisfying the dictates of Rules 12(b)(6) and 56 while permitting efficient resolution of the instant motions. See FED. R. CIV. P. 1 ("These rules . . . shall be construed and administered to secure the just, speedy, and inexpensive determination of every action."); 10A WRIGHT ET AL., supra, § 2720. III. Discussion*fn4

  Article 9 of the U.C.C., first enacted in Pennsylvania in 1953, see Act of Apr. 6, 1953, Pub.L. No. 3, 1953 Pa. Laws 1, overhauled the formalistic common law secured transactions regime, installing a simplified and functional set of terms and procedures for creating and enforcing secured interests in property. 13 PA. CONS. STAT. § 9101 cmt. (1999); 4 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 30-1 (4th ed. 1995). In return for the extension of credit or other financing arrangements, the "secured party" is entitled to take a "security interest" in the "collateral" of the "debtor." 13 PA. CONS. STAT. §§ 9102, 9203 (2002); id. §§ 9105, 9203 (19991: see also id. § 9101 cmt; 4 WHITE & SUMMERS, supra, §§ 31-1 to-3. The precise form of the transaction is relatively immaterial. Id. So long as the exchange includes the provision of credit and the release of an interest in property as security for the debt, Article 9 generally applies. Id.; see 13 PA. CONS. STAT. § 9203 (2002); id. § 9203 (1999); see also id. § 9101 cmt.

  Among the most important concepts in the U.C.C. secured transactions system are "attachment" and "perfection." 4 WHITE & SUMMERS, supra, § 31-1. By attaching certain assets of the debtor, the creditor gains a security interest in those assets that may be enforced against the debtor in the event of default. 13 PA. CONS. STAT. §§ 9203, 9601 (2002); id. §§ 9203, 9504-9505 (1999). Only through attachment may a creditor gain the right to collect and liquidate specific assets of the debtor. Id. §§ 9203, 9601 (2002); id. §§ 9203, 9504-9505 (1999); 4 WHITE & SUMMERS, supra, §§ 34-1, 34-5. Attachment generally requires execution of a "security agreement" that ...


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