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In re Filtercorp

December 14, 1998

IN RE: FILTERCORP, INC., FILTERCORP PARTNERS LIMITED PARTNERSHIP, DEBTOR. HENRY PAULMAN, APPELLANT,
v.
GATEWAY VENTURE PARTNERS III, L.P.; GATEWAY III FILTERCORP, INC.; CHARLES A. BRICKMAN; DONALD H. ESKES; FILTERCORP, INC.; FILTERCORP PARTNERS, L.P.; MERIDIAN PROPERTIES, APPELLEES.



BAP No. WW-96-01238-HiMHa Appeal from the Ninth Circuit Bankruptcy Appellate Panel Higdon, Meyers and Hagan, Judges, Presiding

Before: Dorothy W. Nelson and Alex Kozinski, Circuit Judges, and William W Schwarzer,* Senior District Judge. *Honorable William W Schwarzer, Senior United States District Judge for the Northern District of California, sitting by designation.

The opinion of the court was delivered by: Schwarzer, Senior District Judge

FOR PUBLICATION

OPINION

Argued and Submitted August 6, 1998--Seattle, Washington

Opinion by Judge Schwarzer

OPINION

We must decide whether under Washington law a security agreement that grants an interest in "inventory " or "accounts receivable," without more, presumptively includes after-acquired inventory or accounts receivable. The bankruptcy court and Bankruptcy Appellate Panel (BAP) held that to secure after-acquired property, an express after-acquired property clause is required. We reverse, holding that Washington law would presume security interests in "inventory" and "accounts receivable" to include after-acquired property, absent evidence of intent to the contrary. Applying this rule to the security agreement at issue between Henry Paulman and Filtercorp, Inc., we hold that Paulman had a security interest in after-acquired accounts receivable, but not in after-acquired inventory because the security agreement demonstrated an intent to limit the inventory collateral by referencing an attached inventory listing.

We reject Paulman's other claims, in particular that the bankruptcy court's order of sale of Filtercorp, Inc.'s assets is not moot, that the bankruptcy court erred by refusing to subordinate or avoid the claims of other creditors, and that he was improperly denied adequate opportunity for discovery.

FACTS AND PROCEDURAL HISTORY

I. PAULMAN'S LOANS TO FILTERCORP, INC.

Filtercorp, Inc. was a Washington corporation which developed and distributed carbonated pads used in the food service industry to filter cooking oils. Beginning in November 1991, the company took out a series of loans from Paulman, an individual salesman, to help fund further development and meet large orders. The loans were short term, ranging from two to three months, and memorialized by promissory notes drafted by Paulman's attorney. The final note--the subject of this litigation--was a three-month note, executed on June 30, 1992, and due September 30, 1992.

The June 1992 note provided for the following security:

This note is secured by 75,000 shares of Filter Corp. [sic] stock owned by Robin Bernard, the accounts receivable and inventory of Filter Corp. [sic ] (See UCC-1 filing and attached inventory listing.) and John Gardner personally.

The parties never executed a separate security agreement. However, Paulman perfected his security interest by filing a UCC-1 financing statement on October 5, 1992. The UCC-1 statement identified the collateral as (1) accounts receivable and (2) materials inventory. Despite the note's reference to an inventory listing, none was ever attached to the note or the financing statement.

There is no contemporaneous evidence shedding light on whether the parties intended to secure after-acquired inventory or accounts receivable with the June 1992 note. In the course of this litigation, the parties presented conflicting versions of their intent. Paulman claimed that he and Filtercorp, Inc. understood the security interest to attach to future rather than presently-held inventory and accounts receivable so as not to interfere with the company's ability to raise additional capital. Hence, he did not attach the inventory listing. In contrast, Robin Bernard, President of Filtercorp, Inc., stated that in light of the short, three-month term of the loan he did not contemplate an ongoing security interest.

Filtercorp, Inc. defaulted on the June 1992 note and Paulman initiated a suit in state court in early October 1992 to enforce it. Filtercorp defended on the ground that the note was usurious. Paulman ultimately prevailed in November 1995 and obtained judgment in the amount of $710,572.81.

II. GATEWAY LENDERS' LOANS TO FILTERCORP, INC.

In December 1992, w hile the state court litigation was pending, Filtercorp, Inc. became the general partner in a limited partnership named Filtercorp Partners Limited Partnership (Filtercorp LP), in which several limited partners invested approximately $1.7 million. Filtercorp, Inc. transferred all of its operating assets to Filtercorp LP leaving its interest in the limited partnership as its only significant asset.

In early 1995, Filtercorp LP took out a series of loans that are the basis of Paulman's effort to seek equitable subordination or avoidance of competing creditors' claims. On three separate dates, Filtercorp LP borrowed a total of approximately $355,000 from Gateway Venture Lenders III, Charles Brickman and Donald Eskes (collectively Gateway Lenders), all of whom were either limited partners of Filtercorp LP or "insiders" for other reasons. The last loans were obtained on February 24, 1995. On that date, Filtercorp LP issued promissory notes for all the amounts borrowed and backdated each note according to its respective loan date. At the same time, Filtercorp LP granted Gateway Lenders a blanket security interest in all of its assets, specifically including after-acquired property. Gateway Lenders filed a corresponding financing statement on March 1, 1995, perfecting its security interest.

III. BANKRUPTCY PROCEEDINGS

In November 1995, Paulman began efforts to collect on his judgment against Filtercorp, Inc. and Filtercorp LP (collectively, Filtercorp). In response, Filtercorp filed voluntary Chapter 11 petitions and immediately moved for approval to use cash collateral to cover expenses. The court held several cash collateral hearings, the last of which was on January 2, 1996. At that time, Filtercorp informed the court of a pending offer from Gateway Lenders to purchase all of Filtercorp's assets. Approximately one week later, Filtercorp moved to sell most of its assets free and clear of liens. Gateway Lenders' offer consisted of a credit bid of its $380,000 secured debt against all the assets subject to the security interest and $100,000 cash for the unsecured assets. At this point, the proposed sale also included a provision designed to deal with the conflicting liens between Gateway Lenders and Paulman, calling for ...


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