Lincoln County Radiology, LLC et al v. Silver Bird, LLC et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Lincoln County Radiology, LLC, et al. v. Silver Bird, LLC, et al.
05-01089
Memorandum Opinion re: [11-1] Motion For Partial Summary Judgment Against
Plaintiffs by Silver Bird, LLC .
Received on: 2005-10-14 13:26:30.000
2005-10-14 00:00:00.000
2005-10-22 00:00:00.000
James Burke
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1A factor is “one who buys accounts receivable at a
discount.” Black’s Law Dictionary 612 (7th ed. 1999).
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
Silver Bird, LLC,
Debtor. No. 11-05-10618 SA
LINCOLN COUNTY RADIOLOGY, LLC.
et al.
Plaintiffs,
v. Adv. No. 05-1089 S
SILVER BIRD, LLC,
et al.
Defendants.
MEMORANDUM OPINION ON SILVER BIRD’S
MOTION FOR PARTIAL SUMMARY JUDGMENT
This matter is before the Court on Silver Bird’s Motion
for Partial Summary Judgment (doc. 11), Plaintiffs’ Response
(doc. 13) and Silver Bird’s Reply (doc. 14). Silver Bird
appears through its attorney Moore & Berkson, P.C. Plaintiffs
appear through their attorney Puccini & Meagle, P.C. This is
a core proceeding. 28 U.S.C. § 157(b)(2)(A) and (K).
In this adversary proceeding, plaintiffs are factors1 of
the Debtor, having “purchased” accounts receivable from the
Debtor at a discount. They seek a declaration of their rights
to various receivables and proceeds in the hands of the Debtor
or Bank 1st, Debtor’s lender. Debtor’s summary judgment motion
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Page -2-
seeks to defeat Plaintiffs’ rights in the receivables by
avoiding the “purchases” as unperfected transfers of property.
Federal Rule of Civil Procedure 56(c) provides, in part,
“The judgment sought shall be rendered forthwith if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of
law.” Therefore, if the Court finds that a material fact is
in dispute, summary judgment should be denied. In this case,
the facts are not in dispute.
Silver Bird and Plaintiff Lincoln County Radiology, LLC
(“LCR”) entered into an agreement (“Factoring Arrangement”)
whereby Silver Bird would offer certain of its accounts
receivable to LCR, who would take assignment of the accounts
for 98% of the face amount of the account, and under which
Silver Bird promised to repurchase any account which was not
collected within forty-five days of the date of the invoice
for the full amount of the account. Smith is the business
manager of LCR and also individually purchased an account
receivable on December 16, 2004. The documentation for the
Factoring Arrangement is attached to the complaint as various
exhibits. Silver Bird did assign certain accounts to
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2Although they do not cite the record for this fact, the
Court will assume it is true for the purpose of this decision.
Page -3-
Plaintiffs, for which they paid pursuant to the Factoring
Agreement. When Silver Bird filed its bankruptcy petition on
January 31, 2005, there were outstanding factored accounts
that had not yet been collected or paid over to Plaintiffs.
Neither of the Plaintiffs filed a financing statement in the
office of the New Mexico Secretary of State regarding the
Factoring Arrangement or the assigned accounts, or regarding
any transaction with Silver Bird. During the Factoring
Arrangement, Silver Bird collected the accounts that were
assigned to Plaintiffs, either directly or through a “lockbox”
arrangement at Bank 1st, and Plaintiffs had no control over the
accounts. In their response to Silver Bird’s summary judgment
motion Plaintiffs claim that upon purchase of the receivables
they were given the physical account statements stamped
“factored”2. From June 2, 2004 through December 31, 2004,
Plaintiff LCR purchased a total of $387,946.71 and Smith
purchased $14,332.19 of Silver Bird’s accounts. On the
petition date, Silver Bird had approximately $48,000 is
accounts receivable. In calendar year 2004 Silver Bird had
total sales of approximately $1,100,000.
Conclusions of Law
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3References to Article 9 of the Uniform Commercial Code
are to N.M. Stat. Ann. 55-9-101 et seq. (1978).
4The question of whether a particular document is an UCC
“instrument” is a question of law. McFarland v. Brier, 850
A.2d 965, 976 (R.I. 2004). The test is what professionals
ordinarily would do to transfer an interest in the claim
evidenced by the writing. Id. Only if they would deliver the
writing with an indorsement or assignment will it be
considered an “instrument.” Id. The Court notes that
accounts receivables are normally transferred by security
agreements and filed financing statements.
Page -4-
1. The accounts receivable that are subject to this
adversary proceeding are “accounts” under the Uniform
Commercial Code (“UCC”)3. UCC 9-102(a)(2)(A)(i) provides
that an “account” means a right to payment of a monetary
obligation for property that has been or is to be sold.
The accounts in this case represent receivables of Silver
Bird for inventory that has been sold.
2. The accounts receivable that are subject to this
adversary proceeding are not “instruments” under the UCC4.
UCC 9-102(a)(47) provides that an “instrument” means a
negotiable instrument or any other writing that evidences
a right to the payment of a monetary obligation, is not
itself a security agreement or lease, and is of a type
that in ordinary course of business is transferred by
delivery with any necessary indorsement or assignment.
Accounts receivable are not in the ordinary course of
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Page -5-
business transferred by delivery with an indorsement or
assignment. Furthermore, accounts are specifically not
instruments. UCC 9-102(a)(2)(C)(i).
3. Article 9 of the UCC governs this factoring arrangement.
UCC 9-109(a)(3) (The UCC applies to a sale of accounts.)
See also UCC 9-102(a)(72)(D) (“‘Secured party’ means: ...
(D) a person to which accounts ... have been sold.”); UCC
9-102(a)(12)(B) (“‘Collateral’ ... includes: ... (B)
accounts ... that have been sold.”); UCC 9-309 cmt. 4
(“Any person who regularly takes assignments of any
debtor’s accounts or payment intangibles should file.”)
Accord Systran Fin. Serv. Corp. v. Giant Cement Holding,
Inc., 252 F. Supp.2d 500 (N.D. Ohio 2003)(In Ohio,
factoring agreement is a sale of accounts governed by
Article 9.); Brookridge Funding Corp. v. Northwestern
Human Services, 175 F.Supp.2d 355, 361 (D. Ct. 2001)(The
purchase of two account invoices was held to be a sale of
accounts to which Article 9 applied.); Concrete Equip.
Co. Inc. v. Fox (In re Vigil Bros. Construction, Inc.),
193 B.R. 513, 517 (9th Cir. BAP 1996)(“The clear rule in
Arizona is that an assignment of accounts is governed by
Article 9.”)
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4. In general, a financing statement must be filed to
perfect all security interests. UCC 9-310(a).
5. An exception to the general rule occurs when by law a
security interest perfects upon attachment. UCC 9-
310(b)(2).
6. An assignment of accounts which does not by itself or in
conjunction with other assignments to the same assignee
transfer a significant part of the assignor’s outstanding
accounts perfects upon attachment. UCC 9-309(2).
Therefore, assignment of a significant part of the
assignor’s accounts would not perfect upon attachment.
7. The Court finds that a significant part of Silver Bird’s
accounts were assigned to LCR. One third of a year’s
gross sales is significant.
8. The Court cannot find from the record if a significant
part of Silver Bird’s accounts were assigned to Smith.
In actual dollar amount, the assigned receivables were
not significant in terms of yearly sales, but from the
record, Silver Bird could have had $15,000 or $100,000 of
receivables at the time of this assignment.
9. LCR’s security interest in the accounts did not perfect
upon attachment.
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10. LCR’s security interest is subordinate to the rights of
the bankruptcy estate. See UCC 9-317(a)(2)(A) (lien
creditor) and 11 U.S.C. § 544(a).
CONCLUSION
The Court will grant summary judgment as to Lincoln
County Radiology, declaring that its interest in the accounts
receivable is subordinate to the estate’s interest.
The Court will deny summary judgment as to Smith.
Honorable James S. Starzynski
United States Bankruptcy Judge
I hereby certify that on October 14, 2005, a true and correct
copy of the foregoing was electronically transmitted, faxed,
delivered, or mailed to the listed counsel and/or parties.
Shay E Meagle
PO Box 30707
Albuquerque, NM 87190-0707
George M Moore
PO Box 216
Albuquerque, NM 87103-0216
Paul M Fish
PO Box 2168
Albuquerque, NM 87103-2168
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