IN RE: SOUTHERN ILLINOIS MINING COMPANY, INC. DEBTOR CASE NO. 93-5-0148

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

SOUTHERN ILLINOIS MINING

COMPANY, INC.

DEBTOR CASE NO. 93-5-0148

SOUTHERN ILLINOIS MINING

COMPANY, INC. PLAINTIFF

V. ADV. NO. 94-5030

METROPOLIS READY-MIX, INC.,

d/b/a Kotter Ready-Mix Company DEFENDANT

MEMORANDUM OPINION

This matter is before the court on cross-motions for summary judgment of the plaintiff, debtor in possession, Southern Illinois Mining Company, Inc. ("Southern"), and the defendant, Metropolis Ready-Mix, Inc., d/b/a Kotter Ready-Mix Company ("Metropolis"). The parties seek a determination of the priority of their liens in the proceeds of an account receivable remitted to the debtor in possession by the account debtor, Tennessee Valley Authority ("TVA").

The debtor in possession also seeks a determination that the transfer of property of the debtor to Metropolis pursuant to the terms of a state court judgment is avoidable as preferential.

 

FINDINGS OF FACT:

On February 1, 1993 Southern Illinois Mining Company, Inc. filed a petition for relief under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Kentucky, and became a debtor in possession.

When bankruptcy intervened TVA owed the debtor $1,501,912.49 for coal delivered to TVA. By order entered on February 5, 1993 this court directed that these monies be turned over for deposit in the debtor in possession's account subject to further orders of the court. The order stated, "[T]he liens, if any, and the claims of all claimants to said funds shall be transferred and attach to said funds."

Metropolis asserts an equitable lien on Southern's right to receive the payment from TVA to the extent of sums owed to Metropolis by Southern. Southern counters that Metropolis' equitable lien is inferior to the judicial lien accorded to the debtor in possession by 11 U.S.C. 544(a) or in any event is avoidable as a preferential transfer of property of the debtor.

On July 19, 1991 Southern and Metropolis entered into two agreements whereby Metropolis was to transport coal produced by Southern for sale to TVA. Metropolis agreed to haul the coal from Southern's mine facilities to Metropolis' dock at Metropolis, Illinois. Metropolis was to be paid $3.60 per ton for hauling coal from Southern's Classic Coal Mine in Pittsburgh, Illinois and $4.10 per ton for hauling coal from Southern's Russell Mineral Plant in West Frankfort, Illinois. At Metropolis' dock the coal was to be loaded on barges provided by Southern. Metropolis was to be paid an additional $.80 per ton for loading the coal onto barges for transport down the Ohio River to a TVA power plant. Minimum tonnage was guaranteed in these "exclusive" contracts, which were effective retroactively from the date on which Metropolis commenced "transporting" and "hauling" coal under the agreements. The Classic Coal Mine contract was effective retroactively to June 24, 1991 and was to remain in effect until March 31, 1992; the Russell Mineral Plant contract was effective retroactively to July 1, 1991 and was to remain in effect until June 10, 1992.

Southern purchased and paid for the installation at the dock on Metropolis' property additional equipment consisting of a coal feeder and belt scale required for the operation. The cost of this equipment was to be offset at the rate of 10 cents per ton against amounts Southern owed to Metropolis for transporting coal. Counsel for Metropolis asserts that all work under the contracts was performed on or prior to May 30, 1992. See Memorandum of Metropolis filed 5/6/94, p. 3.

On June 5, 1992, prior to bankruptcy, Metropolis sued Southern for monies due under and for breach of the coal transport contracts. On December 9, 1992 the Circuit Court for the First Judicial Circuit of Illinois, Massac County, Illinois, entered a Judgment on the Pleadings in favor of Metropolis against Southern finding that Southern was in default in payment under the terms of the agreements.

Metropolis was awarded ownership of the components of the additional equipment installed on its property. Southern was found to have abandoned its interest in this equipment on or about May 15, 1992. It was determined that Metropolis was in lawful possession of the equipment and that it belonged to Metropolis. The court found that Southern had forfeited any right to remove such equipment and fixtures from Metropolis' premises, Southern being deemed to have lost any interest in the same by reason of its abandonment thereof.

The court ruled that Metropolis lawfully came into possession of 3000 tons of coal of Southern stockpiled on Metropolis' property and having a fair market value of $56,850; that Metropolis lawfully possessed statutory and common law liens in and upon such coal for the full extent of its value. In the exercise of its equitable authority the court ordered the value of the coal set off against the indebtedness owed by Southern to Metropolis.

After allowance for an offset of $56,850 for the fair market value of the coal on which Metropolis' statutory and common law liens were foreclosed, Metropolis was awarded judgment against Southern in the amount of $205,641.82, plus interest at the rate of 9% per annum from the date of entry of the judgment, and injunctive relief in the form of an assignment of the proceeds of sale of coal under the TVA contract to the extent of the amount owed on the judgment. In Paragraph 17 of its findings the court stated:

Pursuant to Count III of the Complaint, the Plaintiff [Metropolis] is further found to have an equitable lien upon the proceeds of the sale of coal from Defendant [Southern] to the Tennessee Valley Authority, to the extent of all sums owed by Defendant to Plaintiff, and a permanent injunction should be entered requiring Defendant to deposit in escrow in an account with the Clerk of this Court, from the moneys now held by Defendant and the moneys hereafter received by Defendant, pursuant to its contract with TVA, a sum of money equivalent to all moneys owed by Defendant to Plaintiff, as provided in this Judgment, together with interest thereon at the rate of nine percent (9%) per annum from the date of the entry of judgment herein with the Defendant to be enjoined from expending such funds in any other manner. That Plaintiff will suffer permanent and irreparable injury, loss and damage, namely, the loss of its security interest in and lien upon the proceeds from the sale of the coal from Defendant to the Tennessee Valley Authority, which coal was handled, hauled and loaded by Plaintiff upon Defendant's behalf, and pursuant to Plaintiff's Contracts with Defendant and Defendant's covenants with Plaintiff which Contracts and covenants ultimately permitted Defendant to perform its Contract with Tennessee Valley Authority, if such an Injunction is not now granted.

It is further found that the Defendant should be ordered to immediately execute an assignment in a form hereby approved by this Court, which form is attached to this Judgment, in favor of the Plaintiff, thereupon assigning all of Defendant's right, title and interest in and to the proceeds to which it is now or may hereafter be or become entitled from the Tennessee Valley Authority, to the extent of all sums owed by Defendant to Plaintiff. Upon Defendant's failure to execute such an assignment immediately upon the entry of judgment herein, the Sheriff of Massac County, Illinois is hereby authorized and directed to execute such assignment upon behalf of in the name of Defendant.

On December 9, 1992, the date the judgment was entered, an Assignment of Monies Due or to Become Due Under Contract was executed by the Sheriff of Massac County, Illinois, on behalf of Southern, assigning to Metropolis Southern's interest in monies due under the coal sales contract with TVA to the extent of the amount of the judgment. Under the terms of the assignment, TVA was directed immediately to make payments to Metropolis rather than to an escrow account with the clerk of the court. Counsel for the debtor in possession and counsel for the defendant herein represent that a copy of the Assignment was served on TVA. Apparently no funds were paid to Metropolis or to the clerk of the Illinois state court by TVA before bankruptcy intervened at which time monies more than sufficient to pay the judgment of Metropolis were deposited in the debtor in possession's account pursuant to order of this court.

There were prior assignments of the debtor's interest in the TVA account receivable. The claims of these assignees have been paid therefrom pursuant to orders of this court. The assignment of the debtor's remaining interest in the account to Metropolis was an assignment of a significant part of the outstanding accounts receivable of the debtor.

On January 19, 1994 the debtor in possession commenced this adversary proceeding to invalidate the equitable lien of Metropolis. By its complaint and amended complaint the debtor in possession asks the court to find that the equitable lien on assets of the debtor created by the state court judgment in favor of Metropolis and the assignment to Metropolis of the TVA account receivable by the sheriff pursuant to the judgment are inferior to the judicial lien of the debtor in possession (trustee) under 11 U.S.C. 544(a) or alternatively that the judgment and assignment effected preferential transfers of property of the debtor that are avoidable by the debtor in possession as trustee under 11 U.S.C. 547(b). Further, Southern seeks judgment for the value of the confiscated equipment and coal located on Metropolis' property and an order declaring Metropolis' secured proof of claim to be unsecured.

Metropolis counters that it is relying on its equitable lien which attached before bankruptcy thereby rendering section 544(a) inapplicable. Also, according to Metropolis, because under Illinois law an equitable lien relates back to the last date Metropolis performed under the agreements, May 30, 1992, the transfers in question occurred outside the 90-day preference period specified in section 547.

The parties appear to concede there are no disputed issues of material fact.

 

CONCLUSIONS OF LAW:

Both parties cite Matter of Einoder, 55 B.R. 319 (Bankr. N.D. Ill. 1985), as supporting their respective requests for summary judgment.

Metropolis' reliance on the discussion in Matter of Einoder of equitable liens is misplaced. In the instant case, Metropolis obtained a judicial lien. The Code defines a "judicial lien" as a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. 101(36). Metropolis cannot escape the fact that but for entry of the Judgment on the Pleadings, it would not have a lien on the property in question. Characterizing the lien at issue as an "equitable lien" is unhelpful because the lien clearly falls within the definition of a judicial lien and its fate is controlled by the law applicable thereto. Although the Illinois court refers to Metropolis having an equitable lien on the account receivable from TVA, the court ordered injunctive relief and the execution of an assignment of the proceeds of the TVA contract up to the amount owed to Metropolis. It is inescapable that Metropolis' lien is a judicial lien, a lien obtained by judicial recognition of the debt owned by Southern to Metropolis.

We have here a jousting match between the judicial lien of Metropolis and the judicial lien accorded the debtor in possession (trustee) by 11 U.S.C. 544(a). Metropolis did not cause a garnishment to be issued on its judgment for levy on the debtor's account receivable from TVA. There was no summons served on TVA as garnishee defendant to which TVA was required to file an answer. Instead the sheriff was directed to execute an assignment for and in behalf of the debtor assigning the TVA account receivable to Metropolis. This was an assignment of a significant part of the debtor's income to Metropolis. Under the Uniform Commercial Code ("UCC") an assignment of a significant part of an outstanding account such as the receivable from TVA must be perfected by notice filing in order for the assignment to be valid against third parties. UCC 9-302. Because there was no garnishment of the account receivable and because the assignment in lieu of garnishment was not perfected, the assignment is inferior to the judicial lien of the trustee under 11 U.S.C. 544(a) on the account receivable from TVA. 810 ILCS 5/9-302(e).

However, the judicial lien of the trustee under section 544(a) does not prevail with respect to the equipment placed by Southern on Metropolis' property and the 3000 tons of Southern's coal stockpiled on the property. The judgment awarded Metropolis ownership of the equipment and foreclosed the common law and statutory liens of Metropolis in the coal. It can be said that Metropolis held an interest in this property perfected by possession when bankruptcy intervened. Such a perfected possessory interest was not preempted by the judicial lien acquired by the debtor in possession/trustee under 11 U.S.C. 544(a) when bankruptcy intervened.

Nevertheless, the ownership interest of Metropolis in the equipment and coal did not come into existence until ownership thereof was determined by the judgment of the state court entered on December 9, 1992 which was within 90 days of the commencement of the debtor's chapter 11 bankruptcy case on February 1, 1993. Thus, this was a transfer of property of the debtor for or on account of an antecedent debt made while the debtor is presumed to have been insolvent. Metropolis has not attempted to rebut the presumed insolvency of the debtor. The transfer enabled Metropolis to receive more than it would have received on its claim in a chapter 7 bankruptcy case. 11 U.S.C. 547(b).

This latter analysis applies as well to the assignment to Metropolis of the TVA account receivable. If the unperfected assignment is not inferior to the lien accorded the trustee by 11 U.S.C. 544(a), the assignment is nevertheless avoidable by the trustee as a preference.

Accordingly, the motion of the debtor in possession for summary judgment shall be sustained and the countermotion of

Metropolis for summary judgment shall be overruled.

Dated: Nov. 14, 1994.

By the Court --

 

_______________________________

JOE LEE,

CHIEF JUDGE

 

 

 

Copies to:

 

Solomon Lee Van Meter

W. Thomas Bunch

U. S. Trustee