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Textbook Cengage Advantage Books: Business Law: Text & Cases - Commercial Law for Accountants 13th Edition

Authors Roger LeRoy Miller

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Page 1

Slip Copy, 2011 WL 350297 (Bkrtcy.D.Del.)

(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

Bkrtcy.D.Del.,2011.

In re Aleris Intern., Inc.

Slip Copy, 2011 WL 350297 (Bkrtcy.D.Del.)

United States Bankruptcy Court,

D. Delaware.

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Slip Copy, 2011 WL 350297 (Bkrtcy.D.Del.)

(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

Based on the evidence before the Court, the parties executed no other agreements with respect to the Equip-

ment. According to Holt, Aleris has used the Equipment at Aleris's facility in Morgantown, Kentucky without remit-

ting any payments to Holt as required by the Sales Agreement.

On February 12, 2009 (the “Petition Date”), Aleris, along with certain of its affiliates, voluntarily commenced

its chapter 11 case in the United States Bankruptcy Court for the District of Delaware. On June 25, 2009, Holt filed

the Motion seeking relief from the automatic stay to permit it to take immediate possession of the Equipment. On

April 29, 2010, Holt filed a limited objection to the Debtors' First Amended Joint Plan of Reorganization (the

“Plan”), pursuant to which it objected to any impairment of its rights in and to the Equipment under the Plan, there-

by preserving its rights, if any, to the Equipment. On May 10, 2010, the Debtor stated in its omnibus reply to filed

objections to Plan confirmation that it had communicated to Holt's counsel that the Debtor would honor whatever

execution of the Sales Agreement. The parties do not agree, however, on the legal consequences of this sequence of

events.

Holt contends that it, and not Aleris, owns the Equipment, and that it seeks relief from the automatic stay simply

“[o]ut of an abundance of caution ... to take possession of its own property.” Motion ¶ 6. In support of its ownership

claim, Holt relies on the Title Provision in the Sales Agreement. Holt asserts that pursuant to this provision, Holt has

ments or relinquish possession to Holt.

The Debtor objects to the Motion on the grounds that Holt holds neither title to the Equipment nor any valid in-

terest in the Equipment entitling it to relief from stay. First, the Debtor contends that Holt has failed to assert a valid

ownership claim because title to the Equipment has already vested in Aleris notwithstanding the Title Provision in

the Sales Agreement. Second, the Debtor asserts that Holt does not have a valid security interest in the Equipment

argued, and it is ripe for decision.

III. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Venue is prop-

er in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Consideration of this matter constitutes a “core proceed-

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Slip Copy, 2011 WL 350297 (Bkrtcy.D.Del.)

(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

IV. DISCUSSION

To prevail on the Motion, Holt may rely on one of two alternative legal theories: (1) Holt holds title to the

Equipment; or (2) Holt holds a valid security interest in the Equipment. If Holt holds title to the Equipment, then it

Equipment are determined primarily by U.C.C. § 2–401, and both parties cite to this provision in support of their

respective positions. As such, it is appropriate for the Court to begin with the text of the statute. As adopted in Ken-

tucky, U.C.C. § 2–401 states, in relevant part:

(1) Title to goods cannot pass under a contract for sale prior to their identification to the contract, and unless oth-

erwise explicitly agreed the buyer acquires by their identification a special property as limited by this chapter.

and even though a document of title is to be delivered at a different time or place;....

(3) Unless otherwise explicitly agreed where delivery is to be made without moving the goods,

(a) if the seller is to deliver a document of title, title passes at the time when and the place where he delivers

such documents; or

(b) if the goods are at the time of contracting already identified and no documents are to be delivered, title pass-

deemed only a reservation of a security interest in such goods. Third, § 2–401(3) provides that if no delivery is re-

quired, title to identified goods passes at the time and place at which the contract is executed.

1. Holt's Retention of Title to the Equipment

Holt argues that pursuant to U.C.C. § 2–401 and the Title Provision in the Sales Agreement, Holt retained title

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(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

[b]ecause § 2–401(1) deals with express agreements regarding passage of title as a general rule, § 2–401(2) and §

2–401(3) can only be viewed as dealing with certain common fact patterns in which the parties did not make ex-

press agreement regarding passage of title, and where, for example ... (as here) the goods are already in possession

of the buyer.

Id. at 26–27.FN2

FN2. See also New England Yacht Sales, Inc. v. Comm'r, 504 A.2d 506, 509 (Conn.1986) (explaining that §

2–401(1) contains “baseline” principles, while subsections (2) and (3) provide “objective tests” to be ap-

plied in the absence of a § 2–401(1) agreement).

Thus, although parties may explicitly agree in the contract how and when title to sold goods passes from the

seller to the buyer, parties may not avoid all of the default rules set forth in these provisions because any modifica-

tion is nonetheless “[s]ubject to these provisions and to the provisions of the article on secured transactions (Article

(Bankr.E.D.Tenn.1982).

While Holt concedes that § 2–401(1) and (2) limit the parties' ability to contractually determine the passage of

title, Holt contends that § 2–401(3) independently allows parties to agree—without limitation and notwithstanding

the other provisions in § 2–401—on the terms on which title would pass from the seller to the buyer. During oral

argument, Holt defended its position by calling the Court's attention to the fact that § 2–401(1) mentions the effect

than a reservation of a security interest in the delivered goods. FN5 Thus, to the extent that Holt effectively reserved

title to the Equipment pending the fulfillment of the conditions articulated in the Title Provision, the effect of the

Title Provision was simply a reservation of a security interest, not a reservation of title, because at the moment the

Sales Agreement was executed, the Equipment had already been delivered to and was in the possession of Aleris.FN6

FN4. In re J. Adrian Sons, 205 B.R. at 26–27 (“The ‘Unless' clauses which introduce them demonstrate the

tions 2–401(2) and (3) deal with certain fact patterns in the absence of such an agreement.”); Conn. Bank &

Trust Co. v. Schindelman (In re Bosson), 432 F.Supp. 1013, 1020 n. 24 (D.Conn.1977) (“Although § 2–

401(2) begins with the phrase ‘[unless] otherwise explicitly agreed,’ the prior subsection places limits on

the parties' contractual freedom. Specifically, § 2–401(1) negates any attempt to forestall passage of title

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(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

beyond the moment of final delivery.”).

FN5. See, e.g., Derryberry v. FCA Leasing Corp. (In re DeVita Fruit Co.), 473 F.2d 585, 586–88 (6th

Cir.1973); Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880, 882, 886–87 (N.D.Ill.2002);

Conn. Bank & Trust, 432 F.Supp. at 1021; Stewart v. Barry Cnty. Livestock Auction, Inc. (In re Stewart),

274 B.R. 503, 510–11 (Bankr.W.D. Ark 2002), aff'd, 282 B.R. 871 (B.A.P. 8th Cir.2002); Meade v. Rich-

ardson Fuel, Inc., 166 S.W.3d 55, 56, 58 (Ky.Ct.App.2005).

(D.Conn.1977).

2. Passage of Title to the Equipment

Holt argues that title to the Equipment has not passed to Aleris. However, U.C.C. § 2–401(3)(b) provides that

where a sales transaction requires no delivery of either the sold goods or any documentation pertaining to such

ready in possession of such goods, and where the parties have contemplated no further action on the part of the sell-

er, the buyer acquires title to such goods at the moment the sales contract is executed. See, e.g., In re Gull Air, Inc.,

73 B.R. 820, 825 (Bankr.D.Mass.1987); Malloy v. Brazeal (In re Callahan), No. 07–10070–R, Adv. No. 07–1021–

R, 2007 WL 3018946, at *6 (Bankr.N.D.Okla. Oct. 11, 2007). Under facts similar to those in the case at bar, a bank-

ruptcy court in Massachusetts found that a buyer who had been in possession of an aircraft pursuant to a lease

ment did not contemplate delivery of the Equipment by Holt, pursuant to § 2–401(3)(b), title to the Equipment

passed to Aleris on January 12, 2009, the date on which the Sales Agreement was executed.

Accordingly, the Court finds that, pursuant to the provisions in U.C.C. § 2–401, Aleris acquired title to the

Equipment, at the latest, on the date the Sales Agreement was executed. Through the operation of the Title Provi-

sion, Holt retained merely an Article 2 security interest in the Equipment.

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(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

enforceable against third parties.FN7

ment as long as the seller has retained possession of the collateral. WHITE & SUMMERS, U.C.C. § 30–11

(6th ed.2010). Likewise, while the seller is in possession of the collateral, there is no need for perfection to

put third parties on notice of the security interest. Id. However, once the buyer obtains possession of the

sold collateral, the protections of U.C.C. § 9–110 disappear and a seller holding an Article 2 security inter-

est must abide by the rules of attachment and perfection under Article 9 to enforce its security interest in

security interest becomes enforceable against the debtor. Id. § 355.9–203(1).

With respect to the first requirement, the Court finds that Aleris authenticated a valid security agreement. The

Sixth Circuit Court of Appeals has held that a provision in the contract that provides for title to sold goods to remain

in the seller pending full payment by the buyer suffices as a security agreement for the purpose of attaching the

seller's security interest to the goods as required by U.C.C. § 9–203(2). Derryberry v. FCA Leasing Corp. (In re De-

satisfied.

FN8. Similarly, another bankruptcy court held that a letter confirming the terms of the contemplated sale of

equipment could serve as a security agreement if combined with other documents, although the court did

not specify to which documents it was referring. In re Phillips, 77 B.R. 648, 649–50

(Bankr.E.D.Tenn.1987). In contrast, a court can find no authenticated security agreement—and consequent-

because it had relinquished possession of the Equipment to Aleris. There is no dispute that the Equipment is valua-

ble to both parties. Thus, the second requirement has been satisfied.

Finally, with respect to the third requirement, the Court finds that Aleris had rights in the collateral when the se-

curity interest was created pursuant to U.C.C. § 9–203(2) because the Debtor was in possession of the Equip-

ment. Conn. Bank & Trust Co. v. Schindelman (In re Bosson), 432 F.Supp. 1013, 1018 (D.Conn.1977) (“The UCC

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tion that once a debtor acquires possession of an item of collateral pursuant to a sales contract or like agreement, the

debtor has acquired sufficient ‘rights' for Article IX purposes.”) (citations omitted). Thus, the third requirement has

been satisfied. Accordingly, the Court holds that the security interest retained by Holt attached to the Equipment.

UCC's purpose of affording notice to third parties of asserted interests in property is enforced.”). Perfection, which

is generally accomplished through the filing of a financing statement with the appropriate Secretary of State, places

subsequent creditors on notice of an existing encumbrance. Stowers v. Mahon (In re Samuels & Co., Inc.), 526 F.2d

1238, 1241–42 (5th Cir.1976) (en banc), cert. denied, 429 U.S. 834 (1976) (“The [Uniform Commercial] Code's

overall plan, which typically favors good faith purchasers, and which encourages notice filing of nonpossessory se-

ance of ownership” of the collateral. Meade v. Richardson Fuel, Inc., 166 S.W.3d 55, 58 (Ky.Ct.App.2005). To

overcome the presumption of the buyer's unencumbered ownership interest in the delivered goods, and to retain an

enforceable security interest in such goods, the seller must perfect its security interest to place subsequent creditors

on notice of its extant interest.FN9

FN9. An Article 2 security interest that has attached to the collateral is deemed perfected so long as the

third parties, a creditor must file a U.C.C. financing statement with the Secretary of State in Kentucky.

KY.REV.STAT. ANN. § 355.9–501; Marlow, 128 B.R. at 996–97 (“Obviously, from this language [in Article 9],

possession of the collateral or the filing of a UCC–1 financing statement is required for one in the position of this

seller to have a perfected security interest.”). Here, there is no evidence that Holt has ever filed a U.C.C. financing

statement to perfect its security interest in the Equipment. Consequently, the Court concludes that Holt has not per-

(Ark.1968). However, because Holt held an unperfected security interest in the Equipment as of the date that the

Debtor filed its bankruptcy petition, its security interest is therefore susceptible to avoidance by the Debtor under 11

U.S.C. § 544. See, e.g., In re Phillips, 77 B.R. at 650; In re Cont'l Fire Trucks, Inc., 33 B .R. 713, 716

(Bankr.D.Mass.1983).

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Slip Copy, 2011 WL 350297 (Bkrtcy.D.Del.)

(Cite as: 2011 WL 350297 (Bkrtcy.D.Del.))

C. Relief from Stay

Upon the commencement of a bankruptcy case, 11 U.S.C. § 362(a) provides for an automatic stay of all actions

against the debtor and the debtor's property. United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Associates, Ltd.,

484 U.S. 365, 369 (1988). This provision of the Bankruptcy Code is known as “one of the fundamental debtor pro-

tections provided by the bankruptcy laws.” Midlantic Nat. Bank v. N.J. Dep't of Envtl. Prot., 474 U.S. 494, 503

1. Whether the Equipment is Subject to the Automatic Stay

By its terms, 11 U.S.C. § 362(a) applies only to property of the estate. Thus, the automatic stay does not protect

property in which a debtor holds no interest. Property of the estate is defined in 11 U.S.C. § 541(a)(1) as “all legal or

equitable interests of the debtor in property as of the commencement of the case,” subject to several exceptions that

do not apply in this case. Holt contends that the stay does not apply to the Equipment because it maintains that Holt,

Section 362(d)(1) enables a party in interest to request relief from the automatic stay upon a showing of

“cause.” Initially, the Court must determine whether Holt has made a prima facie showing that it is entitled to the

requested relief. In re RNI Wind Down Corp. et al., 348 B.R. 286, 299 (Bankr.D.Del.2006) (finding that a prima

facie case requires a movant to show “a factual and legal right to the relief it seeks”) (quoting In re Elmira Litho,

Inc., 174 B.R. 892, 902 (Bankr.S.D.N.Y.1994)); see also In re Sonnax Indus., Inc., 907 F.2d 1280, 1285 (2d

own title, that is, prove a general or special ownership entitling him to lawful possession.”). As discussed above,

Holt does not hold title to the Equipment as a matter of law. A district court in Illinois denied a seller's request to

replevy steel for which it received no payment, reasoning that U.C.C. § 2–401(2)(a) provided the seller with only a

security interest, not an ownership interest, in the delivered steel. Usinor Industeel v. Leeco Steel Prod., Inc., 209

F.Supp.2d 880, 886–87 (N.D.Ill.2002). Here, the Court likewise concludes that Holt is not entitled to replevy the

prima facie case, whereupon the burden shifts to the debtor to disprove that cause exists for relief from the automatic

stay.”). Here, Holt has not demonstrated that it is entitled to relief from stay because its Article 2 security interest in

the Equipment, which is its only interest in the Equipment, is unperfected and thus susceptible to avoidance by the

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Debtor, which would thereafter leave Holt with only an unsecured claim.

3. Whether “Cause” Exists for Relief from Stay

Assuming arguendo that Holt may nonetheless demonstrate its entitlement to seek relief from the automatic

stay, it would still have to show that “cause” exists to warrant such relief. Although § 362(d)(1) does not define

“cause,” the Third Circuit has held that courts should consider “the totality of the circumstances in each particular

case” to determine whether “cause” for relief from stay exists. Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d

or the debtor will result from lifting the stay; (2) whether the hardship to the non-bankrupt party by the maintenance

of the stay considerably outweighs the hardship to the debtor if the stay is lifted; and (3) whether it is probable that

the creditor will prevail on the merits of its case against the debtor. In re Downey Fin. Corp., 428 B.R. 595, 609

(Bankr.D.Del.2010); In re Cont'l Airlines, 152 B.R. at 424; In re Rexene Prod. Co., 141 B.R. 574, 576

(Bankr.D.Del.1992).

Second, Holt has not shown that the hardship on Holt in the event that the stay is maintained considerably out-

weighs the hardship likely to be suffered by the Debtor if the stay is lifted or modified. Although Holt has noted that

the Equipment is depreciating in value because of the Debtor's continued use, it has not shown that its continued

dispossession would cause it greater hardship than the hardship on the Debtor in the event that the Debtor is dispos-

sessed of the Equipment.

Agreement.

V. CONCLUSION

For the foregoing reasons, the Court will deny the Motion. An appropriate Order follows.

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