Rio Valley Motors Company L.L.C.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
RIO VALLEY MOTORS COMPANY, LLC
Debtor. No. 11-06-11866 SS
MEMORANDUM OPINION ON AUTO-OWNERS
INSURANCE COMPANY AND WINSLOW FORD’S
APPLICATION FOR PAYMENT OF ADMINISTRATIVE EXPENSE
This matter is before the Court on the Motion of Auto-Owners
Insurance Company (“AOIC”) and Winslow Ford (“Winslow”)
(together “Movants”) for Payment of Administrative Expense
Pursuant to Court Order Granting Claim (“Motion”). Doc 290. The
Court rules that Movants had no lien on the vehicle, the delivery
of which eventuated in the filing of the Motion, and that the
administrative claim aspect of the Motion is not ripe for ruling
because the required notice of the Motion was not given.
BACKGROUND
Debtor, a car dealership in northern New Mexico, filed its
Chapter 11 case on October 13, 2006. On the petition date,
Debtor was in the midst of trading an item of inventory with
another dealer, Winslow. The trade required each party to send
to the other party the vehicle requested by the other party along
with a check in payment for the vehicle that the sending party
was receiving. After the bankruptcy was filed, Debtor ended up	1
For more details, see the Court’s Findings of Fact and	1
Conclusions of Law, doc. 288 (March 24, 2008). Such trades are a
common industry practice, although they are more usually
accomplished by making adjustments to the floor financing at the
respective dealerships. Id. at 1-2.
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with a Ford F-250 Super Duty and a check from Winslow; however,
Winslow ended up with a vehicle but no check. Debtor promptly
sold the Ford F-250 to a customer for a profit. Winslow received
neither the sale proceeds nor any other payment from Debtor.
Instead, Winslow was paid by its insurance company Auto-Owners
Insurance Company (“AOIC”), which filed a “Motion to File
Administrative Claim” in May, 2007. Doc 164.
Following the evidentiary hearing on that motion, the Court
found that Winslow knew of the bankruptcy filing shortly after it
took place. In fact, the bankruptcy filing was advanced as the
reason that the payment could not be made. See Doc 303, p.1; doc
164, p.3. However, neither AOIC nor the Debtor proved to the
Court on what date the transaction occurred. Nevertheless, the
Court ruled that if the transaction were post-petition AOIC had
an administrative priority under Section 503(b)(1)(A); but if the
transaction were pre-petition AOIC had an administrative priority
under Section 503(b)(9). Doc 288. Because AOIC had not actually
filed an administrative claim, the Court ordered it to file one
within 15 days. Doc 289. AOIC and Winslow filed the
administrative claim in the amount of $43,270.64. Doc 290.
Objections were filed by Valley National Bank (“VNB”)(doc
293), Ford Motor Credit Company (“FMCC”)(doc 294) and the Debtor-
in-Possession (doc 295). Movants filed a reply to the objections
(doc 297). At the preliminary hearing on the Motion the Court
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asked for briefs on the following four issues: 1) Whether Winslow
had a lien on the Ford F-250 Super Duty which is sold to Rio
Valley, and if so, did the lien remain in existence when Winslow
transferred the vehicle to Rio Valley; 2) Whether Winslow’s
procedural due process rights were violated because it never
received direct notice of a November 3, 2006 hearing, which
ultimately resulted in VNB and FMCC obtaining administrative
priority claims pursuant to Section 507(b) that had “priority
over all other costs and expenses of the kind specified in, or
ordered pursuant to, Sections 503(b) or 507(a)” of the Bankruptcy
Code; 3) What is the effect of Section 507(b), and is the Order
resulting from the November 3, 2006 hearing binding; and 4) Did
any diminution in value occur in VNB’s or FMCC’s interest in
Debtor’s collateral, and if so, is it even relevant to the
Motion. The parties each filed their briefs, Movants filed a
reply brief, and the matter is ready for ruling. This is a core
proceeding. 28 U.S.C. § 157(b)(2)(A) and (K).
VNB has two objections to payment: 1) procedurally, no
notice of the Motion was sent to the creditor matrix as required
by Bankruptcy Rule 2002, and 2) substantively, all cash is cash
collateral which the Debtor is forbidden to use. FMCC has two
objections to payment: 1) FMCC and VNB have a lien on all of
Debtor’s assets, and 2) FMCC and VNB have an administrative claim
with priority over all other Section 503(b) and 507(a) claims.
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Debtor joins VNB’s and FMCC’s objections, but also cites its
inability to use cash collateral to pay the claim, and argues
that the super priority administrative claims of FMCC and VNB
have not yet been determined.2
DISCUSSION
1. Movants had no lien.
A “security interest” is an interest in personal property or
fixtures that secures payment or performance of an obligation.
Section 55-1-201(35) N.M. Stat. Ann. A “security agreement” is
an agreement that creates or provides for a security interest.
Section 55-9-102(72) N.M. Stat. Ann. Section 55-9-203(b) N.M.
Stat. Ann. describes when a security interest is enforceable:
[A] security interest is enforceable against the debtor
and third parties with respect to the collateral only
if:
1) value has been given
2) the debtor has rights in the collateral or the power
to transfer rights in the collateral to a secured
party; and
3) one of the following conditions is met:
(A) the debtor has authenticated a security
agreement that provides a description of the
collateral...
The only document that Movants assert is a security
agreement is a Winslow invoice that lists Debtor as “purchaser”
and identifies the subject vehicle. It is signed by Rick
Trujillo.
To date, there has been no bar date set for filing	2
administrative claims.
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For an instrument to qualify as a security agreement it must
demonstrate an intent to create a security agreement. Bank of
America, N.A. v. Outboard Marine Corp. (In re Outboard Marine
Corp.), 300 B.R. 319-24 (Bankr. N.D. Ill. 2003)(The “common
thread” in all cases finding a document is a security agreement
is the “intent to create a security agreement on the face of the
instruments executed by the debtor.”) See also In re Hoyt’s,
Inc., 117 B.R. 226, 230 (Bankr. N.D. W.Va. 1990)(“In the absence
of a writing evidencing the intent of the debtor to grant a
creditor a security interest in certain property to secure a
specific obligation, the court cannot infer a security
agreement.”) The document in this case does not evidence an
intent to create a security interest. Movants have no security
agreement and no enforceable security interest. The sale of the
Ford to Debtor was an unsecured transaction. The Court therefore
does not need to address issues of lien priority.
2. Whether Movants have an administrative claim has yet to be
finally decided and therefore the assertion that Winslow is
not being afforded due process on its claim is premature.
VNB’s procedural objection that the issue of Movants’
administrative expense is not properly before the Court is well
taken. Bankruptcy Code Section 503(b) provides:
(b) After notice and a hearing, there shall be allowed
administrative expenses ... including --
(1)(A) the actual, necessary costs and expenses of
preserving the estate ...
(9) the value of any goods received by the debtor
within 20 days before the date of commencement of
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a case under this title in which the goods have
been sold to the debtor in the ordinary course of
such debtor’s business.
(Emphasis added.) The docket sheet in this case does not show
that Movants served either the earlier motion or this Motion on
the creditor body. “‘Notice’ pursuant to the Bankruptcy Rules of
intent to claim an administrative expense priority requires
notice to parties other than the debtor.” In re Bellanca
Aircraft Corp., 56 B.R. 339, 400 (Bankr. D. Minn. 1985).
Therefore, the Court’s earlier finding that AOIC had an
administrative expense under either Section 503(b)(1) or
503(b)(9) was premature. While it appears that the Movants will
eventually prevail on their administrative expense claim, all
creditors must first be given the opportunity to file their
objections to this treatment. The problem is easily addressed by
permitting AOIC to notice out the earlier motion to the creditor
body. The Court can quickly conduct a hearing on any objection.
On the other hand, if, as is likely, no further objection is
received, the Court’s finding in doc 288 that AOIC has a priority
claim will stand.
3. Whether Movants are entitled to payment on the
administrative claim depends on whether any funds are
available for payment of any administrative claims.
However, even if Movants establish entitlement to
administrative expense treatment it appears highly unlikely to
the Court that any funds will ever become available to pay
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administrative claims. Both FMCC and VNB are secured creditors
and appear not to have been paid in full. All assets have been
sold and the time periods for filing preference or other
avoidance actions has passed. Currently, there are no non-cash
collateral funds on hand. If all property is subject to senior
liens, no funds will be available to pay administrative expenses,
including those of AOIC.
To the extent that FMCC and VNB are being paid from their
collateral, the finding that Winslow had no secured claim
precludes the need for any further hearing on that issue. To the
extent that FMCC or VNB are being paid from cash collateral
funds, the Court would need to consider whether Winslow was
deprived of due process by the entry of the cash collateral
orders, and if so, whether any objection that would have been
filed by Movants could have caused the cash collateral orders to
be not entered.
CONCLUSION
The Court finds and concludes that Movants had no lien on
the vehicle after its sale to Debtor. The Court also finds that
the Motion for Payment of Administrative Expense Pursuant to
Court Order Granting Claim is not ripe for ruling because the
required notice was not given of the Motion to File
Administrative Claim (doc 164). The Court will defer ruling on
the Motion for Payment of Administrative Expense Pursuant to
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Court Order Granting Claim until after 1) Movants give notice to
all creditors and parties in interest of their Motion to File
Administrative Claim (doc 164) with a deadline for filing
objections, and 2) any objections filed are resolved. The Court
will also enter an order prohibiting Debtor or any successor
trustee from paying any Chapter 11 administrative expenses
without further order of the Court.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: June 8, 2009
Copies to:
Walter L Reardon, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Christopher J. Delara
PO Box 93880
Albuquerque, NM 87199-3880
Donald H. Cram, III
Severson & Werson
One Embarcadero Center, Suite 2600
San Francisco, CA 94111
Duane Geck
Severson & Werson
One Embarcadero Ctr, Suite 2600
San Francisco, CA 94111
James Jurgens
100 La Salle Cir Ste A
Santa Fe, NM 87505-6976
Alice Nystel Page
PO Box 608
Albuquerque, NM 87103-0608
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