1st Source Bank v. Wilson Bank & Trust

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0326p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________

X
-
1ST SOURCE BANK,
-
Plaintiff-Appellant,
-
-
No. 13-5088
v.
,
>
-
-
WILSON BANK & TRUST; TRANSCAPITAL &

Defendants-Appellees. N-
LEASING, INC.; PINNACLE BANK,

Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 3:11-cv-00410—Todd J. Campbell, District Judge.
Decided and Filed: November 7, 2013
Before: KEITH and SUTTON, Circuit Judges; BLACK, District Judge*

_________________

COUNSEL
ON BRIEF: Wilson C. Von Kessler II, MARKEL & MAJOR, Chattanooga, Tennessee,
for Appellant. T. Price Thompson III, David B. Foutch, ROCHELLE, MCCULLOCH
& AULDS, PLLC, Lebanon, Tennessee, for Appellee Wilson. Roy C. DeSha, Jr.,
DESHA/WATSON, PLLC, Nashville, Tennessee, for Appellee TransCapital. Scott C.
Williams, RUDY, WOOD, WINSTEAD, WILLIAMS & HARDIN, PLLC, Nashville,
Tennessee, for Appellee Pinnacle.
_________________

OPINION
_________________

DAMON J. KEITH, Circuit Judge. This appeal presents a single question of first
impression under Tennessee law: whether the term “proceeds” as used in a company’s

*
The Honorable Timothy S. Black, United States District Judge for the Southern District of Ohio,
sitting by designation.

1
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 2

financing statement includes its accounts receivable. The district court found that it does
not. For the reasons set forth below, we AFFIRM.

I. BACKGROUND

The uncontroverted facts in this case are as follows. Beginning in late 2004, 1st
Source Bank (“1st Source”) entered into a series of secured transactions with K & K
Trucking and J.E.A. Leasing (collectively “Debtors”) for the sale or lease of certain
tractors and trailers. The parties executed security agreements that granted 1st Source
a security interest in, inter alia, Debtors’ tractors and/or trailers, accounts, and in the
proceeds from the agreed-upon collateral. In connection with these security agreements,
1st Source filed financing statements pursuant to Tennessee law. The relevant financing
statements identified the collateral, in relevant part, as the specified tractors/and or
trailers, and “all proceeds thereof, including rental and/or lease receipts.” Notably,
however, 1st Source’s financing statements did not include the terms “accounts,”
“accounts receivable,” or any other similar language in the description of the collateral.

Around the same time period—but after 1st Source filed its financing
statements—Defendants Wilson Bank & Trust, Pinnacle Bank, and TransCapital &
Leasing, Inc. also entered into certain secured transactions with Debtors. Defendants
properly filed their financing statements with the State, which specifically provided that
each of the Defendants had a security interest in “all accounts receivable now
outstanding or hereafter arising.”

In late 2009, Debtors defaulted on their loans. While 1st Source undertook
repossession of the collateral securing the agreements, Defendants took possession of
the collateral in which they had a first priority security interest, namely Debtors’
accounts receivable. 1st Source contends that it possessed a perfected security
interest—and thus had first priority—in Debtors’ accounts, arguing that the term “and
all proceeds thereof” in its financing statements includes Debtors’ accounts receivable.
The district court granted Defendants’ motions for summary judgment, finding that 1st
Source’s financing statements were not sufficient to put Defendants on notice that 1st
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 3

Source claimed a security interest in Debtors’ accounts receivable, and holding as a
matter of Tennessee law that the term “proceeds,” as used in a company’s financing
statement, does not include its accounts receivable.

II. STANDARD OF REVIEW

We review de novo the district court’s decision to grant Defendants’ motion for
summary judgment. Layne v. Bank One, Ky., N.A., 395 F.3d 271, 275 (6th Cir. 2005).
In deciding a motion for summary judgment, this court views the factual evidence and
draws all reasonable inferences in favor of the non-moving party. In re AutoStyle
Plastics, Inc., 269 F.3d 726, 735 (6th Cir. 2001). To prevail, the movant must show
“there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a).

III. ANALYSIS

The priority of the security interests in dispute in this case is governed by
Chapter 9 of Tennessee’s Commercial Code (“Chapter 9”). Tenn. Code Ann. §§ 47-9-
101 to 47-9-710. That 1st Source took the proper steps necessary for its security interest
to attach to Debtors’ accounts is undisputed. Attachment occurs at the instant of creation
of an enforceable security interest. See id. at § 47–9–203. Rather, the dispute in this case
turns on whether or not 1st Source properly perfected its security interest in Debtors’
accounts.

In order to perfect a security interest, the secured creditor must file a financing
statement that describes the collateral to be covered by the financing statement. Id. at
§ 47-9-502(a)(3). Pursuant to Chapter 9, a perfected security interest prevails over an
unperfected security interest, even where the unperfected interest was obtained later in
time. Id. at § 47-9-322.
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 4

A) 1st Source’s Financing Statements were not Sufficient to put Defendants
on Notice that 1st Source Claimed a Security Interest in Debtors’
Accounts.

The purpose of notice in a financing statement is to indicate to third parties “that
a person may have a security interest in the collateral indicated.” Id. at § 47-9-502
Official Comment 2. Although “minor mistakes . . . on financing statements are not
fatal,” a financing statement must be “sufficiently accurate such that third parties are put
on notice.” In re Snelson, 330 B.R. 643, 652 (Bankr. E.D. Tenn. 2005) (internal
quotation marks omitted); see also Metro Const. Co., LLC v. Sim Attractions, LLC, 2009
WL 1605558, at *8 (Tenn. Ct. App. June 9, 2009) (“A financing statement failing to
convey the information which a reasonably diligent third person requires to identify
potential competing security interests in the debtor’s assets is ‘seriously misleading.’”);
Lehigh Press, Inc. v. Nat'l Bank of Georgia, 193 Ga. App. 888, 891, 389 S.E.2d 376, 378
(1989) (“[The] failure to identify account as a type of collateral intended to be covered
by the financing statement does not place third parties on notice that a security interest
was taken in accounts receivable.”).

As the Ninth Circuit has explained, only collateral that is adequately described
in the financing statement will be perfected—even where the security agreement confers
a security interest in other collateral.

A financing statement, if more limited in scope than the security
agreement which it perfects, limits the collateral in which the creditor has
a perfected interest to that description as against third party creditors
and a trustee in bankruptcy. The purpose of a financing statement is to
give notice of the type of collateral that may be subject to a security
interest and that purpose is subverted if a third party cannot reasonably
ascertain from the financing statement the type of collateral as
distinguished from the particular items of collateral which may be subject
to a particular security interest.

Nw. Acceptance Corp. v. Lynnwood Equip., Inc., 841 F.2d 918, 921 (9th Cir. 1988)
(emphasis in original).
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 5

Here, 1st Source’s financing statements identified specific pieces of equipment
and several types of collateral, “together with all present and future attachments,
accessories, replacement parts, repairs, additions and exchanges thereto and therefore,
documents and certificates of title, ownership or origin, with respect to the equipment,
and all proceeds thereof, including rental and/or lease receipts.” However, the
description of collateral in Plaintiff’s financing statements did not list “accounts” or
“accounts receivable.” Pursuant to the maxim, expressio unius est exclusio alterius, to
which our courts adhere, see State v. Hawkins, 811 S.W.2d 79, 82 (Tenn. 1991) (“the
mention of one subject in a statute means the exclusion of other subjects that are not
mentioned”), the limiting language in 1st Source’s financing statements identified the
only items that were subject to the security interest. Defendants had no reason to know
or expect that 1st Source also claimed a security interest in Debtor’s accounts receivable.

B) Income Generated from the use of Collateral does not Constitute
“Proceeds” as Defined under Chapter 9.

1st Source attempts to cure its omission of the term “accounts” or “accounts
receivable” from its financing statement by arguing that the phrase “all proceeds thereof”
in its financing statements includes Debtors’ accounts receivable. We disagree.

A foundational rule of statutory construction is to give effect to the intent of the
Legislature by giving words their “natural and ordinary” meaning. In re Estate of Trigg,
368 S.W.3d 483, 490 (Tenn. 2012). Where two statutory provisions potentially conflict,
“a specific statutory provision controls over a more general statutory provision.” State
v. Cauthern, 967 S.W.2d 726, 735 (Tenn. 1998); see also In re American Cartage, Inc.,
2009 WL 4780972, at *5-6 (Bankr. D. Mass. Dec. 11, 2009) (holding that the more
specific definition of a type of collateral under the UCC will govern over “the more
general description of proceeds”).

Here, Chapter 9 provides a comprehensive definition of the term “proceeds”:

(A) whatever is acquired upon the sale, lease, license, exchange, or other
disposition of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 6

(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss,
nonconformity, or interference with the use of, defects or infringement
of rights in, or damage to, the collateral; or
(E) to the extent of the value of collateral and to the extent payable to the
debtor or the secured party, insurance payable by reason of the loss or
nonconformity of, defects or infringement of rights in, or damage to, the
collateral.
Tenn. Code Ann. § 47-9-102(a)(64).
1st Source contends that its right to Debtors’ accounts receivable arises pursuant
to sections (B) and (C) of the definitions of proceeds. Although the statutory definition
of the term “proceeds” appears admittedly broad, accepting Plaintiff’s interpretation of
the statute would render the term “accounts”—a category defined separately in Chapter
9—meaningless. See Tenn. Code Ann. § 47-9-102(a)(2). Because we are required “to
construe statutes, whenever possible, in a way which gives meaning to every portion of
the statute,” DeLaney v. Thompson, 982 S.W.2d 857, 860 (Tenn. 1998), we decline to
expand the definition of the general term, “proceeds,” in such a way that it would
subsume the specific term, “accounts.”

Moreover, the drafters of the UCC sought to cabin the potentially broad
definition of “proceeds” in the Commentary to the Section, explaining that “proceeds”
does not refer to “income generated from the debtor’s own use and possession of goods”
or to situations where there was “no disposition of the goods by the security lease.” PEB
Commentary No. 8 § 9-306(1); see also 9 Anderson U.C.C. § 9-306:24 (3d. ed.)
(“Money obtained by the use of the collateral does not constitute proceeds.”). As the
district court aptly summarized, in order for rights to “arise out of collateral,” they must
have been obtained as a result of some loss or dispossession of the party’s interest in that
collateral, not simply by its use.

If fruits and products from the use of collateral were treated as proceeds,
every creditor with a security interest in equipment would have a security
interest in all items produced from the equipment as well as the revenues
earned by the equipment.” The Court will not extend the meaning of
“proceeds” to such an extent.
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 7

R. 128 at 6. (quoting CLC Equip. Co. v. Brewer, 139 F.3d 543, 546 (5th Cir. 1998)).

Cases interpreting the UCC and the associated state statutes in other jurisdictions
likewise uniformly support the proposition that revenues earned through the use of
collateral are not proceeds. See, e.g., In re Gamma Ctr., Inc., 489 B.R. 688, 696 (Bankr.
N.D. Ohio 2013) (“The Bank cites no authority that supports its position, and the court
is not persuaded, that accounts receivable or funds collected thereon as the result of
using equipment collateral constitute proceeds under the UCC.”); In re Las Vegas
Monorail Co., 429 B.R. 317, 333-35 (Bankr. D. Nev. 2010) (holding that the term
“proceeds” does not include business income generated from customer fares as the fares
are not “collected on, or distributed on account of” the franchise agreement, nor do they
“aris[ing] out of the collateral”); In re Stevens, 307 B.R. 124, 131 (Bankr. E.D. Ark.
2004) (government agricultural payments do not fall under the statutory definition of
“proceeds”). Accordingly, we find that the term “proceeds,” as used in 1st Source’s
financing statements, does not include Debtors’ accounts receivable.

C) The District Court’s Erroneous Conclusion that that Trucks and Trailers
are not “Goods” under the Tennessee Commercial Code is Irrelevant to
this Case.

Finally, 1st Source asks this Court to reverse the district court’s decision because
it erroneously stated that tractors and trailers are not “goods” under the Tennessee
Commercial Code. Chapter 9 of the Code clearly defines “Goods” as “all things that are
movable when a security interest attaches.” Tenn. Code Ann. § 47-9-102(44). That
misstatement is immaterial to this case, however, because although a purchase-money
security interest (“PMSI”) in consumer goods is automatically perfected on attachment,
the tractors and trailers at issue here were used for commercial purposes. As such, the
special PMSI perfection rules are irrelevant to this case.

IV. CONCLUSION

In sum, the financing statements filed by 1st Source were insufficient to put
Defendants on notice that 1st Source claimed to have a security interest in Debtors’
accounts receivable. Accordingly, 1st Source’s unperfected security interests in
No. 13-5088 1st Source Bank v. Wilson Bank & Trust, et al. Page 8

Debtors’ accounts are subordinate to Defendants’ perfected security interests in the
accounts.

For the foregoing reasons, the judgment of the district court is AFFIRMED.