UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
COVINGTON DIVISION
IN RE:
T.A.C., INC.,
d/b/a The Auto Center CASE NO. 95-20815
THE HUNTINGTON NATIONAL BANK PLAINTIFF
VS. ADV. NO. 96-2011
THE FIFTH THIRD BANK OF
NORTHERN KENTUCKY, INC. and
CHARLES L.J. FREIHOFER, TRUSTEE DEFENDANTS
MEMORANDUM OPINION
This matter is before the Court on cross Motions for Summary Judgment filed herein by the plaintiff and by defendant The Fifth Third Bank of Northern Kentucky, Inc. (
AFifth Third@). Fifth Third also filed a Response to the plaintiff=s Motion. This matter was submitted for decision pursuant to an Agreed Order of Submission entered herein on November 8, 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 February 27, 1996. Fifth Third filed its Answer on March 21, 1996, and the Trustee filed his Answer on March 25, 1996. Following a pretrial conference, the trial of this matter was set for October 23, 1996. Fifth Third filed its Motion for Summary Judgment on August 19, 1996. The plaintiff filed its Response to Motion for Summary Judgment of Defendant, Fifth Third Bank of Northern Kentucky and Cross-Motion for Summary Judgment on September 3, 1996. Fifth Third filed its Response to Motion for Summary Judgment of Plaintiff on September 11, 1996. These motions were heard on September 27, 1996, and on October 4, 1996, the Court entered an Order canceling the trial, requiring the parties to submit joint stipulations and an order of submission. The parties filed their Joint Stipulation of Facts on October 25, 1996. It represented as follows:
A
1. Debtor, TAC, Inc., dba The Auto Center (hereinafter referred to as "Debtor"), operated an automobile repair shop at 7525 Industrial Road, Florence, Boone County, Kentucky. In the course of operating and conducting said business, the Debtor accumulated numerous pieces of equipment, inventory, and other tangible property. The Debtor is a Kentucky corporation, formed on June 11, 1991, and has been located at 7525 Industrial Road, Florence, Boone County, Kentucky, since its inception.2. The Debtor never owned the real estate at 7525 Industrial Road, Florence, Boone County, Kentucky. Said real estate was owned by Vernon C. Walters until September 1, 1993, when it was sold to TAC Realty Holding, Inc., a Kentucky corporation, (hereinafter referred to as "Landlord"). The only asset owned by the Landlord was the real estate located at 7525 Industrial Road, Florence, Boone County, Kentucky. The Debtor entered into a 15-year real estate lease effective September 1, 1993, with Landlord for the real estate located at 7525 Industrial Road, Florence, Boone County, Kentucky. A copy of said real estate lease is attached hereto as Exhibit "A". The Debtor defaulted on its lease payment due landlord in early 1995.
3. The sole shareholder of both the Debtor and Landlord is Gary Walters.
4. In operating its business, the Debtor had a banking
relationship with the Defendant, The Fifth Third Bank of Northern
Kentucky, Inc. and Plaintiff, The Huntington National Bank.
5. The Debtor over the course of operating its business, had borrowed funds from the Defendant, The Fifth Third Bank of Northern Kentucky, Inc. As collateral for said loans, the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., obtained security interests in the Debtor's inventory, equipment, and other tangible properties. Said security interests were perfected by the filing of Financing Statements with the Boone County Clerk's Office on March 8, 1993, and March 3, 1992. A copy of said Financing Statements are attached hereto as Exhibits "B" and "C" and are incorporated herein by reference.
6. On April 12, 1994, the Debtor became indebted to the Plaintiff and the Plaintiff, to secure the loan made to the Debtor, obtained a security interest in the Debtor's equipment, inventory and other tangible property. Said security interest was perfected by the filing of a Financing Statement with the Boone County Clerk's records at Burlington, Kentucky on April 13, 1994. A copy of said Financing Statement is attached hereto as Exhibit "D" and is incorporated herein by reference.
7. Also on April 12, 1994, the Landlord became indebted to the Plaintiff. To secure said indebtedness, the Plaintiff obtained a mortgage on the real estate owned by the Landlord and located at 7525 Industrial Road, Florence, Boone County, Kentucky. Said Mortgage was recorded on April 13, 1994, in Mortgage Book 985, page 51 of the Boone County Clerk's Office at Burlington, Kentucky. A copy of said mortgage is attached hereto as Exhibit "E" and is incorporated herein by reference.
8. To further secure the indebtedness of the Debtor to the Plaintiff, the Landlord executed a mortgage to the Plaintiff on the real estate located at 7525 Industrial Road, Florence, Boone County, Kentucky. Said mortgage was recorded on April 13, 1994 in Mortgage Book 985, page 56 of the Boone County Clerk's records at Burlington, Kentucky. A copy of said mortgage is attached hereto and marked Exhibit "F" and is incorporated herein by reference. In addition, at the time the indebtedness was incurred by the Debtor and Landlord to the Plaintiff on April 12, 1994, the Plaintiff required the Debtor and Landlord to execute a Landlord's Waiver and Certificate. A copy of The Landlord's Waiver and Certificate is attached hereto as Exhibit "G" and incorporated herein by reference.
9. Each of the mortgages executed by Debtor in favor of Plaintiff and referred to above contain an absolute unconditional Assignment of Rent provision, pursuant to which Landlord transferred to Huntington all the rent then due, past due and to become due under its lease with Debtor.
10. On July 28, 1995, the Debtor filed a Chapter 11 Bankruptcy Petition with this Court. At the time of the filing of the Chapter 11 Bankruptcy, the Debtor was in arrears in rent to the Landlord in excess of $30,000.00.
11. On September 8, 1995, the Plaintiff filed a foreclosure
action against the Landlord seeking to enforce its lien against the real estate located at 7525 Industrial Road Florence, Kentucky.
12. On September 12, 1995, after Landlord and Debtor defaulted on their obligations due Plaintiff, counsel for the
Plaintiff sent a letter to the Landlord directing Landlord to deliver all rents and revenues generated by the real estate located at 7525 Industrial Road, Florence, Boone County, Kentucky to the Plaintiff. A copy of said letter is attached hereto as Exhibit "H" and incorporated herein by reference.
13. Also on September 12, 1995, counsel for the Plaintiff sent a letter to the Debtor, advising the Debtor to make all rental payments payable to and directly to the Plaintiff. A copy of said letter is attached hereto as Exhibit "I" and is incorporated herein by reference.
14. The Debtor continued to operate its business at the real estate located at 7525 Industrial Road, Florence, Boone County, Kentucky until November 7, 1995, at which time, this Court announced the Debtor's Chapter 11 Petition was to be converted to a Chapter 7 proceeding. With the permission of the Chapter 7 Trustee, the Debtor then surrendered possession of the real estate and all of the contents therein to the Plaintiff.
15. By Order of this Court announced on November 7, 1996, (sic) and entered on November 13, 1995, the Chapter 11 petition of the Debtor was converted to a Chapter 7 proceeding.
16. Plaintiff immediately contracted Frank McCullough & Associates, Inc. for purposes of taking inventory and appraising
the Debtor's personal property. Frank McCullough inventoried and appraised the property on November 13, 1995.
17. Since the Defendant, The Fifth Third Bank of Northern Kentucky, Inc. held a prior perfected security interest in the Debtor's equipment, inventory and tangible property by virtue of
its Financing Statement filed before the Plaintiff's Financing
Statement, the Defendant's, The Fifth Third Bank of Northern
Kentucky, Inc., counsel sent a letter to the Plaintiff's counsel on November 16, 1995, requesting the Plaintiff to purchase the
Defendant's, The Fifth Third Bank of Northern Kentucky, Inc., security interest in the Debtor's inventory equipment, etc. By way of the same letter, Defendant, The Fifth Third Bank of Northern Kentucky, Inc. informed Plaintiff's counsel that if Plaintiff was not interested in purchasing Fifth Third's interest, Fifth Third would obtain an order for relief of stay and proceed to sell the inventory and equipment. A copy of said letter is attached hereto as Exhibit
AJ@.18. In response to said letter, Plaintiff's counsel sent a letter, dated November 28, 1995, to the Defendant's, The Fifth Third Bank of Northern Kentucky, Inc., counsel advising that Plaintiff is not interested in disposing of Debtor's collateral as it is likely to receive little or nothing from the proceeds of the sale and furthermore instructing The Fifth Third Bank of Northern Kentucky, Inc. to remove all collateral and inventory from the premises immediately. Furthermore, Plaintiff was seeking rent payments from the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., in the amount of $2,000.00 per month in the event the equipment and inventory was going to be stored on the premises. A copy of said letter is attached hereto as Exhibit "K".
19. On December 1, 1995, Defendant, The Fifth Third Bank of Northern Kentucky, Inc., responded by written communication to the letter of Plaintiff's counsel dated November 28, 1995, by informing Plaintiff's counsel that Fifth Third intended to store the Debtor's personalty on the premises until it could be disposed of but that Fifth Third would not be paying Plaintiff any rent. A copy of said letter is attached as Exhibit "K-1".
20. Subsequent to the Plaintiff's counsel's letter of November 28, 1995, the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., employed an appraiser and auctioneer, Frank McCullough and Associates, Inc., to conduct an auction to sell the inventory, equipment and tangible property of the Debtor. The date selected to conduct the auction by the auctioneer was January 16, 1996.
21. In order to sell the property at the auction the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., circulated an Agreed Order to terminate the automatic stay to Plaintiff's counsel, Debtor's counsel, and the Trustee. The Agreed Order was executed by all and was entered by the Court on December 11, 1995.
22. Subsequent to the date of the Order Terminating the Stay and selection of the date to auction the Debtor's property, Plaintiff's counsel, on December 19, 1995, advised Defendant's, The Fifth Third Bank of Northern Kentucky, Inc., counsel, for the first time that it was asserting a landlord's lien by virtue of an assignment of rents from the landlord on all of the personalty of the Debtor to secure four months rent due or to become due. Plaintiff's counsel further stated that the lien was superior to any lien created while the personalty was on the leased premises whether the lien accrued before or after the creation of other liens. K.R.S. 383.070 was cited as authority. Plaintiff was claiming that the sum of $56,527.32 was the sum represented by four months rent. A copy of said letter is attached as Exhibit "L".
23. On January 11, 1996, Plaintiff's counsel sent a letter to Defendant's, The Fifth Third Bank of Northern Kentucky, Inc., counsel confirming that the Plaintiff was not challenging the sale of the personalty of the Debtor by the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., on January 16, 1996. To the contrary Plaintiff was in accord with the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., that the property needed to be disposed of. However, both the counsel for the Plaintiff and the Defendant, The Fifth Third Bank of Northern Kentucky, Inc., agreed not to raise as a defense in any adversary action brought by Plaintiff with respect to the issue of the Landlord's Lien, the fact that the Debtor's property was removed from the leased premises and The Fifth Third Bank of Northern Kentucky, Inc. agreed that if this Court held that Plaintiff had a prior perfected security interest in personalty of the Debtor that the security interest would attach to the proceeds generated by the auction on January 16, 1996. A copy of said letter is attached as Exhibit"M".
24. The auction of the Debtor's equipment, inventory and tangible property was held on January 16, 1996, at which time the net proceeds from said auction was $45,562.50. The net proceeds are currently being held by the Defendant, The Fifth Third Bank of Northern Kentucky, Inc.
25. The Defendant
=s, The Fifth Third Bank of Northern Kentucky, Inc., counsel confirmed the agreement reached with Plaintiff's counsel. A copy of Defendant's, The Fifth Third Bank Of Northern Kentucky, Inc., counsel's letter to Plaintiff's counsel dated February 1, 1996, is attached hereto as Exhibit "N" and incorporated herein by reference.26. Plaintiff's adversary action was filed with this Court on February 27, 1996.
@The issues before the Court are whether the plaintiff retains a landlord
=s lien on personal property of the debtor, and the priority of liens as between the plaintiff and Fifth Third. The plaintiff maintains that the assignment of rents from TAC Realty Holding, Inc. (ATAC Realty@), also assigned the landlord=s statutory lien for rent. Fifth Third maintains that the assignment of rents did not carry the landlord=s lien with it, and that in any event, TAC Realty=s execution of the Landlord=s Waiver and Certification waived any landlord=s lien, thereby making it unavailable for assignment to the plaintiff.Review of the Landlord
=s Certificate and Waiver indicates that it is not a general waiver, but, as the plaintiff contends, a limited one intended to protect the interest of the plaintiff. The effect of the document is that any liens that the landlord might assert are waived in favor of the plaintiff. The document does not extinguish any lien, or waive it generally. This construction does not comport with Fifth Third=s theory of the effect of the Landlord=s Waiver and Certificate, and the Court agrees with the plaintiff=s interpretation.Fifth Third
=s contention that the assignment of rents provision in favor of the plaintiff does not also assign the landlord=s statutory lien for rent is supported by citation to Hutsell v. Deposit Bank of Paris, Ky.App., 43 S.W. 469 (1897). The plaintiff disputes Fifth Third=s use of the Hutsell case as the basis for its argument. The plaintiff argues that the assignment therein was only a transfer of the rent remaining unpaid at the end of the lease, whereas in the case at bar there has been an absolute transfer of all rents, whenever due, to the plaintiff. The Hutsell court referred to the following in making its decision:[I]n Tayl. Landl. & Ten.
At page 470. This language appears to say that the assignee of rents must also have an interest in the property leased in order to have a landlord
=s lien.In a much more recent case, Anderson v. Island Creek Coal Company, 297 F.Supp. 283 (W.D.Ky. 1969), the court was considering sufficiency of the notice of transfer of a leasehold interest. The court discussed various aspects of the landlord-tenant relationship, and the effect of a transfer of the landlord
=s reversionary interest. The court stated:It is well established that after executing a lease the lessor
The plaintiffs in this action purchased a reversionary interest in the 15.93 acres described in the complaint, as they could acquire no greater title than the vendors themselves had. As transferees of the reversion, the plaintiffs are given by statute the same remedies for the recovery of rent ... as the lessor might have had.
. . . . . . . . .
The right of a lessor to receive rent may of course be assigned apart from the reversion to a third person as a chose in action.
At pages 285-286.
There is nothing in any of the documents filed in this matter to indicate that the plaintiff obtained an interest in the property itself so as to come within the definitions set out in Hutsell and Anderson, supra. Its Assignment of Rents was simply that, and as such it is a chose in action. The plaintiff took no action to perfect its Assignment of Rents until well after Fifth Third had perfected its security interest. As set out in In re American Fuel & Power Co., 151 F.2d 470 (6th Cir. 1945):
Where there is a pledge of rents, issues, and profits,
At page 481.
The Court having determined that the landlord
=s lien was not retained by the plaintiff, and that Fifth Third=s liens on the personalty of the debtor were valid, Fifth Third=s Motion for Summary Judgment should be sustained, and the plaintiff=s Motion for Summary Judgment should be overruled. An order in conformity with this opinion will be entered separately.Dated:
By the Court -
________________________________
Judge
Copies to:
Debtor
Elizabeth Graham Weber, Esq.
George Kolentse, Esq.
Charles L.J. Freihofer, Esq., Trustee