d/b/a Jarboe Wheel Service

DEBTOR CASE NO. 99-50177



This matter is before the Court on the Objection to Trustee's Final Report and Proposed Final Distribution, and Motion for Disbursement of Funds filed by creditor National City Bank of Kentucky ("National City") on November 8, 2000. The trustee filed her Final Report and Proposed Final Distribution on October 24, 2000. There she indicated that she was in possession of funds in the amount of $7,967.31 which had been recovered from a prepetition bank account of the debtor (at a bank other than National City), and that she proposed to distribute these funds to general unsecured creditors. National City claims those funds.

National City is a secured creditor as to some of debtor's property. By an Agreed Order entered on April 7, 1999, the trustee had previously abandoned her interest in all property in which National City had a properly perfected security interest. She further abandoned her interest in two older model trucks on which National City did not have properly perfected liens. National City paid the trustee $2,000.00 for the estate's interest in these two vehicles. The funds in dispute were generated by the debtor's prepetition sale of another vehicle. National City had a security interest in this vehicle but that interest was not properly perfected, a fact which it does not dispute.

In response to the trustee's argument that National City has no interest in these funds because it had not perfected its lien on the property which was the source of the funds, National City maintains that the source of the funds is immaterial, and that the Court must focus on the character of the property as of the filing of the bankruptcy petition herein. National City acknowledges that deposit accounts are excluded from the scope of coverage of Article 9 of the Uniform Commercial Code, the result being that the debtor did not grant National City a lien on the funds in its bank account. National City argues, however, that the debtor did grant it a lien on its rights as against the depository bank under the deposit agreement.

As National City points out, the relationship between a bank and its depositor is one of debtor and creditor; the bank is the debtor and the depositor is the creditor. Funds deposited become assets of the bank. Ferguson Enterprises, Inc. v. Main Supply, Inc., 868 S.W.2d 98, Ky.App. (1993). Further, as set out in In re Mycro-Tek, Inc., 191 B.R. 188 (Bkrtcy.D.Kan. 1996):

When a customer deposits funds in its bank account, title to the funds passes to the depository institution. The depositor has a contractual right to withdraw funds, which is an intangible chose in action. The depository institution is the depositor's debtor, bound to honor the depositor's demands within the terms of their agreement.

At 193. Interestingly, Kansas is one of four states which provides for Article 9 security interests in deposit accounts. Id. Even under this scenario, however, any security interest is taken in the contractual right to withdraw funds, not in the funds themselves. Such an intangible chose in action falls within the confines of "general intangibles."

In Matter of Newman, 993 F.2d 90 (5th Cir. 1993), the court considered the nature of general intangibles: "A general intangible is essentially a bundle of rights such as those inherent in a franchise, a chose in action, a copyright, or an annuity." At 93. The court went on to observe at fn. 5 that "[t]he term "general intangible" brings under this Article miscellaneous types of contractual rights and other personal property which are used or may become customarily used as commercial security." Courts have also identified as general intangibles such things as covenants not to compete and good will, In re Griffith, 194 B.R. 262 (Bkrtcy.E.D.Okla. 1996); capital retains, In re Van Tol, 255 B.R. 57 (10th Cir.BAP 2000); and rights to payment, In re SSE Intern. Corp., 198 B.R. 667 (Bkrtcy.W.D.Pa. 1996).

The Court's task is to analyze the respective positions of National City and the trustee at the time of filing, keeping in mind that National City could not, by virtue of its security interest in general intangibles, have any greater rights in these funds than the debtor did. Prior to and as of the date of filing of the bankruptcy petition, National City had a perfected security interest in the debtor's contractual right to withdraw funds from the subject account. It did not have a perfected security interest in the funds themselves, as set out above. As of the date of filing, title to the funds was in the bank; the funds were assets of the bank.

National City is not in a position to argue that it has (or ever had) a lien on the funds in the account as proceeds, as its lien on the collateral which produced the proceeds was not perfected. See KRS 355.9-306. See also In re Critiques, Inc., 29 B.R. 941 (Bkrtcy.D.Kan. 1983), (security interest in the original collateral must be perfected in order to claim a perfected security interest in the proceeds). National City has argued that it has a perfected security interest in, and is therefore entitled to, the funds as proceeds of the debtor's collection rights as against the bank (perhaps more correctly characterized as withdrawal rights). This argument is inapplicable here, as the there were no proceeds of the debtor's withdrawal rights against the bank (i.e., funds withdrawn) as of the date of filing; there were only funds in the account.

The trustee's rights as a judicial lien creditor pursuant to 11 U.S.C. 544 arose on the date of filing of the petition. A lien creditor includes a trustee in bankruptcy. KRS 355.9-301(3). Execution by a judgment creditor is effective to attach a bank account under Kentucky law. McMahan & Co. v. Po Folks, Inc., 206 F.3d 627 (6th Cir. 2000). As a judicial lien creditor pursuant to that statute, the trustee has the rights of a garnishee against the bank account of the debtor pursuant to KRS 425.501, et seq. As of the date of filing, therefore, the trustee's position was superior since she was a judicial lien creditor with respect to the funds and National City held only a security interest in the debtor's right to the funds as opposed to a security interest in the funds themselves. National City's interest in the funds could rise no higher than the debtor's interest in the funds.

It is therefore the opinion of this Court that National City's

Objection to Trustee's Final Report and Proposed Final Distribution, and Motion for Disbursement of Funds should be, and it hereby is, overruled. It is further ordered that pursuant to the Order entered on December 18, 2000, National City has five days from the date of entry of this Memorandum Opinion and Order to file an amended unsecured claim herein.

Entered this ____ day of February, 2001.

By the Court -


Judge William S. Howard


Copies to:

Anna C. Johnson, Esq., Trustee
Scott T. Rickman, Esq.
U.S. Trustee