IN RE:
ASHLAND STEEL LIQUIDATING COMPANY,
f/k/a KENTUCKY ELECTRIC STEEL, INC.
DEBTOR CASE NO. 03-10078

Introduction

National City Bank of Kentucky (the "Lender") is before the court on the Motion to Determine Rights of National City Bank of Kentucky to Scrap Material Proceeds that it filed in the above-styled case on January 30, 2004 (the "Motion"). On June 1, 2004 American Compressed Steel Corporation ("ACS") filed a response and supporting memorandum and, on June 15, 2004, the Lender filed a reply. Having considered the Motion, ACS's response and memorandum, and the Lender's reply, the court concludes that the Motion should be sustained.

Factual and Procedural Background

ACS sold certain scrap material to Kentucky Electric Steel, Inc., now known as Ashland Steel Liquidating Company (the "Debtor"), and delivered it to the Debtor by rail car in November and December 2002. Twelve of the carloads in question were delivered "F.O.B. destination" and the other five were delivered "F.O.B. point of shipment." ACS's invoices indicate that the goods were to be shipped to "Kentucky Electric Steel, Coalton, KY." The parties have stipulated that the Debtor acquired title to the latter five carloads of goods when they were delivered to the carrier, CSX Transportation, Inc. ("CSX"). The court has, therefore, ordered that the Lender is entitled to the proceeds of those goods, which the parties have agreed consist of 5/17 of the total sale proceeds.

The Debtor initiated a temporary cessation of operations on December 16, 2002, and made the cessation permanent on January 16, 2003. ACS became concerned about the Debtor's solvency, and directed CSX to halt delivery of any goods that were still in transit. On February 5, 2003 the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. At some point either before or after the filing, CSX removed the rail cars containing the scrap material from a sidetrack adjacent to the Debtor's facility to a location about ten miles away. The sidetrack was owned by CSX, but CSX (without ACS's knowledge) had granted the Debtor a lease of or license to use the track.

On June 1, 2003 the court entered an order authorizing the Debtor to sell the goods with the parties' interests transferred to the sale proceeds, which were to be held in the Debtor's attorney's escrow account pending further order of the court. On November 21, 2003 the court entered an order dismissing the Debtor's Chapter 11 case, the order including a finding that the Lender "has a valid, properly perfected lien on substantially all of the Debtor's assets, including, but not limited to the Debtor's remaining cash, restricted cash and deposit accounts, accounts receivable, prepaid expenses, deposits, tax refunds, insurance policies, insurance rebates, and certain contingent, unliquidated assets relating to various claims or causes of action." The order disclaimed any continuing jurisdiction except for the resolution of the dispute presented by the Motion.

Legal Discussion

Through stipulations and an agreed order, the parties have narrowed the issue to their relative rights in the proceeds of the twelve carloads of goods sold "F.O.B. destination." ACS does not dispute the Lender's blanket security interest and no longer claims a right to reclaim the goods. Rather, the sole issue before the court is whether the Lender's security interest attached to the goods: if so, the Lender is entitled to the sale proceeds; if not, ACS is entitled to the proceeds.

Article 9 of the Uniform Commercial Code as enacted in Kentucky provides that "[a] security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral," and the only prerequisite to enforceability that is in issue here is whether "[t]he debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party." K.R.S. § 355.9-203(1), (2)(b). "Although title is not the precise equivalent of 'rights in the collateral,' title is indicative of certain rights that the debtor has to dispose of the goods." Hong Kong & Shanghai Banking Corp. v. HFH USA Corp., 805 F. Supp. 133, 142 (W.D.N.Y. 1992) (citing Montco, Inc. v. Glatzer (In re Emergency Beacon Corp.), 665 F.2d 36, 40 (2d Cir. 1981) (whether debtor had rights in collateral turns on when title passed)); see, e.g., Whittaker v. Ford Motor Credit Co. (In re Edney), 47 F.3d 1168 (Table), 1995 WL 16883, at *3-*4 (6th Cir. 1995) (under Ohio UCC, debtor could not pass security interest until she acquired ownership); Crocker Nat'l Bank v. Ideco Div. of Dresser Indus., Inc., 660 F. Supp. 186, 191 (S.D. Tex. 1987), aff'd in pertinent part, 839 F.2d 1104, 1108-09 (5th Cir. 1988); Associated Indus. v. Keystone Gen., Inc. (In re Keystone Gen., Inc.), 135 B.R. 275, 278-79 (Bankr. S.D. Ohio 1991); Am. State Bank v. Ladwig & Ladwig, Inc., 646 N.S.2d 241, 245 (Minn. Ct. App. 2002); Coop. Fin. Ass'n v. B & J Cattle Co., 937 P.2d 915, 920 (Colo. Ct. App. 1997); Signal Capital Corp. v. Lake Shore Nat'l Bank, 652 N.E.2d 1364, 1368 (Ill. Ct. App. 1995). ⁽¹⁾ Under Section 2-401 of the UCC, "title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods." K.R.S. § 355.2-401(2). In particular, "if the contract requires delivery at destination, title passes on tender there." Id. § 355.2-401(2)(b). Accordingly, the Debtor had "rights in the collateral" if the goods were tendered at their destination. See id. § 355.2-319(1)(b).

The parties have cited no authorities addressing whether a seller tenders the physical delivery of goods at the destination under the facts presented here, and the court has not been able to identify any. Section 2-503 of the UCC provides that "[t]ender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery." K.R.S. § 355.2-503(1). It appears that the goods in question in this case were "tendered" to the Debtor, the only question being whether they were tendered at the destination.

Had the goods been placed on the property owned by the Debtor, there would be no question that title would have transferred. However, the goods were placed on property "adjacent to" the Debtor's facility, which CSX leased or licensed to the Debtor. It is unclear how close the sidetrack was to the Debtor's property, but the Sidetrack Agreement Operating Supplement between CSX and the Debtor granted the Debtor the right to use additional track leading from the main line to the sidetrack so it appears that the parties' stipulation used the word "adjacent" in the sense of the sidetrack "abutting" or "touching" the Debtor's property, see Webster's Third New International Dictionary 26 (1961), or at least very close to the property. ACS's own invoices state that delivery was to be made to "Kentucky Electric Steel, Coalton, KY," and delivery was made to property in Coalton to which the Debtor had a legal right of access. See Hong Kong & Shanghai Banking Corp. v. HFH USA Corp., 805 F. Supp. at 143 (title passed to buyer upon delivery of goods to free trade zone due to buyer's control of goods); Black's Law Dictionary 515 (rev. 4th ed. 1968) (defining "delivery" as "[t]he act by which the res or substance thereof is placed within the actual or construction possession or control of another"). Contrary to ACS's position, it is irrelevant that the Debtor may not have accepted the goods; the passing of title does not require acceptance, but only the tender of delivery.

For the foregoing reasons, the court finds that the goods were tendered to the Debtor at the intended destination so that, upon the arrival of the rail cars on the sidetrack, ACS had "complete[d its] performance with reference to the physical delivery of the goods." K.R.S. § 355.2-401(2). It follows that title passed, and the Lender's security interest attached, at that time. Accordingly, the Lender holds a valid, properly perfected security interest in the goods and is, therefore, entitled to the proceeds of their sale.

Conclusion

For the foregoing reasons, the court will enter a separate order sustaining the Motion.

Copies to:

Gregory R. Schaaf, Esq.

William T. Hayden, Esq.

1. The Lender does not contend that the Debtor received some interest in the goods less than title that would be sufficient to cause its security interest to attach.