UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
ALLEN LUCAS OF FLORENCE, INC.
DEBTOR CASE NO. 95-20301
HUNTINGTON NATIONAL BANK,
WEST VIRGINIA PLAINTIFF
VS. ADV. NO. 95-2056
ALLEN LUCAS OF FLORENCE, INC.;
NISSAN MOTOR ACCEPTANCE CORPORATION DEFENDANTS
This matter is before the Court on the plaintiff's Motion for Summary Judgment filed herein on January 26, 1996. The plaintiff contends that there is no genuine issue as to any material fact alleged in its Complaint, and that it is entitled to judgment as a matter of law. The debtor filed its Response to Motion for Summary Judgment on February 9, 1996, and defendant Nissan Motor Acceptance Corporation ("NMAC") filed its Response to Plaintiff's Motion for Summary Judgment and Motion for Summary Judgment on February 12, 1996. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(K).
The plaintiff initiated this matter by the filing of its Complaint on October 11, 1995. It filed an Amended Complaint on October 20, 1995. The debtor filed a Motion to Dismiss Amended Complaint on November 5, 1995. NMAC filed its Answer to Complaint and Amended Complaint on November 6, 1995. At a hearing conducted on December 5, 1995, the debtor's Motion to Dismiss Amended Complaint was overruled, and the debtor filed its Answer to Complaint and Amended Complaint on December 7, 1995. The plaintiff filed its Answer to Counterclaim on December 29, 1995, and an Order overruling the Motion to Dismiss was entered on the same date. The plaintiff then filed its Motion for Summary Judgment as set out above.
The record in this case reveals that the debtor filed a Chapter 11 petition in this Court on March 23, 1995. The debtor operated a Nissan dealership in Florence, Kentucky, pursuant to a Nissan Dealer Sales and Service Agreement ("franchise agreement") with the Nissan Motor Corporation ("Nissan"). On May 30, 1995, the debtor filed a Motion to Sell Auto Dealership Free and Clear of Liens, Claims, and Encumbrances ("Motion to Sell") pursuant to an Asset Purchase Agreement dated May 12, 1995, and entered into between the debtor and Bradley E. Lehman ("Lehman").
Lehman subsequently assigned his interest in the Asset Purchase Agreement to Patrick DeCastro ("DeCastro"). As set out in the Report of Sale filed by the debtor, DeCastro purchased the dealership, including the franchise, new car inventory, parts inventory and other tangible assets. Of the total purchase price of $1,574,711.84, $430,000.00 was placed in an escrow account awaiting further orders of this Court. This amount represents the sum of $80,000.00 for the debtor's equipment and $350,000.00 for all other assets (called "Blue Sky" by debtor).
After the closing the debtor retained title to all accounts, any sums due by virtue of its suit against Nissan for damages, and any potential recovery against a former employee and/or the employee's insurer for the employee's pre-petition theft. The plaintiff claims a perfected security interest in all these assets. However, as to the $80,000.00 attributable to equipment, after a hearing conducted on February 12, 1996, the debtor acknowledged that it has no claim therein, and the plaintiff has withdrawn its Motion for Summary Judgment with respect to the lien priority as between itself and NMAC. This aspect of the matter is therefore not before the Court at this time.
In addition, the debtor has admitted in its Response that the accounts receivable, the cause of action against Nissan, and the embezzlement claim are covered by the security interest of one or both of the two secured parties, i.e., the plaintiff and NMAC. The issues remaining before the Court for resolution are, therefore, whether the plaintiff's security interest extends to the $350,000.00 in "Blue Sky" proceeds generated by the sale, and whether the plaintiff has a prior perfected security interest in all remaining collateral of the debtor by virtue of the Subordination Agreement executed in its favor by NMAC.
The plaintiff maintains that its security interest extends to the $350,000.00 in "Blue Sky" proceeds, arguing that "Blue Sky" either represents the purchase price of the goodwill of the debtor's business, and/or the purchase price of the assignment of the franchise agreement, and/or all other assets, or a combination of all these. Under any theory, the plaintiff argues, "Blue Sky" falls within the definition of general intangibles, a "catch-all" category.
Further, the plaintiff points out, the debtor has used the same definitions in various pleadings that it has previously filed in its case. In fact, the Motion to Sell contains the following language at'C.2.(c):
To the purchase price, in accordance with the terms and subject to the conditions of the Asset Purchase Agreement, Buyer agrees to pay the Debtor-in-Possession a total purchase price equal to the sum of the following amounts which will be paid at closing: .... [a]n amount not to exceed $510,000.00 for those assets listed on Exhibit "B" and for all other assets including the assignment of the lease, assignment of the franchise agreement and goodwill which are the subject of this sale;
Language referring to the price to be paid for "assets including the assignment of the franchise agreement and goodwill" is repeated in the Order Sustaining Motion to Sell Auto Dealership Free and Clear of Liens, Claims and Encumbrances entered herein on July 3, 1995.
Any or all of the above-stated definitions would place "Blue Sky" in the category of general intangibles, the plaintiff argues. It then goes on to demonstrate that "Blue Sky" must be a general intangible pursuant to KRS 355.9-106 because it does not fit within any other specific category carved out there. As stated by the court in In re SRJ Enterprises, Inc., 150 B.R. 933 (Bkrtcy.N.D.Ill. 1993):
Indeed, the very point of having a category of 'general intangibles' subject to encumbrance is to make available for financing purposes values not otherwise attributable to other categories of assets. To the extent that the purchaser ... paid money to acquire market share, the debtor gave up something of value, the type of miscellaneous intangible property contemplated by the residual collateral category of 'general intangible.'
At page 940.
The plaintiff's characterization of "Blue Sky" as general intangibles is in keeping with the holdings of courts in several jurisdictions confronted with the same question. Goodwill, franchise rights, and dealer sales and service agreements have all been found to fall within the category of general intangibles. See, e.g., In re Topsy's Shoppes, Inc. of Kansas, 131 B.R. 886, 888 (D.Kan. 1991) and In re Topsy's Shoppes, Inc. of Kansas, 118 B.R. 797, 800 (Bkrtcy.D.Kan. 1990); In re C.C. & Co., Inc., 86 B.R. 485, 487 (Bkrtcy.E.D.Va. 1988).
The debtor, however, not only disputes that "Blue Sky" is an intangible, but that it is any kind of personalty in which the plaintiff may claim a security interest. The debtor in fact claims that it is an "asset" which the debtor created post-petition, and which did not exist pre-petition. The debtor states in its Response that
the $350,000.00 acquired in "Blue Sky" in the sale of the Dealership, the money required for the Debtor-in-Possession to enter into, proceed, and remain in Chapter 11 was acquired and, in fact, created by the actions of the Debtor-in-Possession post-petition. The actions of the Debtor-in-Possession prevented the dismantling of the Dealership, forced the purchase of something other than real assets, and sped the sale process to a conclusion that would not have been possible outside the powers of the bankruptcy court.
This argument seems to the Court akin to an argument that in the sale of a piece of property--an automobile, for instance--the price that is paid is for the efforts of the salesperson and not for the acquisition of the car. While the debtor may have, as it argues, exerted great effort to convince the buyer of the dealership that "something other than real assets" had to be part of the sale, it was that "something other"--the goodwill and the assignment of the franchise agreement--that the buyer purchased.
Finally, the debtor provides no authority in support of its position except to cite a case which deals with post-petition new value as an exception to the absolute priority rule.
It is the opinion of this Court that the "Blue Sky" component of the sale of the dealership falls within the category of general intangibles, and that it is therefore subject to the security interest of either the plaintiff or NMAC. The plaintiff contends that by virtue of a Subordination Agreement it entered into with NMAC on March 15, 1993, NMAC has subordinated to the plaintiff any interest it may have in accounts and general intangibles. NMAC's position is that its security interest in accounts and general intangibles is not covered by the Subordination Agreement. Each party claims that the language of the Subordination Agreement supports its position.
The subject Subordination Agreement states as follows:
NMAC does hereby subordinate to Bank any security interest NMAC may have in Dealer's property consisting of parts, used vehicles and the proceeds of the foregoing including vehicles traded in on such vehicles, general intangibles, contract rights, chattel paper, accounts and assignment of accounts arising from the sale, lease, or other disposition of the foregoing. Used Nissan vehicles purchased at Nissan sanctioned auctions and financed by NMAC shall be excepted from this Subordination Agreement.
This Agreement was prepared by NMAC when the plaintiff became concerned about protecting the priority of its lien on the debtor's property. The plaintiff's security interest encompassed all of the property set out in the Agreement including general intangibles and accounts. NMAC argues that the Subordination Agreement should be read to subordinate NMAC's interest in parts, used vehicles and proceeds only and that later terms, including general intangibles, "...is merely a description of what 'proceeds' can consist of." The Court cannot accept this strained reading of the document. The language of the Subordination Agreement clearly identifies several categories of collateral on which NMAC agreed to subordinate its lien and one of those categories is general intangibles. It is therefore the opinion of this Court that the Subordination Agreement was effective to subordinate the lien of NMAC to that of the plaintiff on general intangibles including the $350,000.00 in "Blue Sky" assets.
In consideration of all of the foregoing, it is the opinion of this Court that the $350,000.00 in "Blue Sky" assets are general intangibles and that the plaintiff has the first lien on these assets. The plaintiff's Motion for Summary Judgment should be sustained. NMAC's Motion for Summary Judgment should be overruled. An order in conformity with this opinion will be entered separately.
By the Court -
Elizabeth Graham Weber, Esq.
Brian E. Chapman, Esq.
Richard D. Nelson, Esq.