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Fishback Nursery, Inc. v. PNC Bank, N.A.

United States District Court, N.D. Texas, Dallas Division

December 19, 2017



          JANE J. BOYLE, United States District Judge

         This case comes to the Court in the aftermath of a bankruptcy proceeding. The parties claim interests in the same property of now-bankrupt BNF Operations LLC (BNF). PNC asserts a lien over substantially all of BNF's assets because of loans it made to BNF, and Fishback Nurseries and Surface Nurseries (the Nurseries) assert liens over agricultural products they sold BNF. Although PNC has already received and liquidated BNF's assets, the Nurseries contend that the bankruptcy court's final order entitles them to a portion of the proceeds because their liens are senior to PNC's and enforceable. PNC claims the opposite. Now, both the Nurseries and PNC have moved for summary judgment. Finding the nurseries to lack senior, enforceable liens, the Court DENIES the Nurseries' motion and GRANTS PNC's.



         A. Factual History [1]

         The Nurseries and PNC are creditors of now-bankrupt BNF Operations LLC (BNF). The Nurseries are BNF's creditors because they sold agricultural products to BNF and took security interests in those products. Fishback Nursery shipped agricultural products to BNF in Oregon, Michigan, and Tennessee. Doc. 29-1, Stipulation, Ex. 1; Doc. 29-2, Stipulation, Ex. 2; Doc. 29-3, Stipulation, Ex. 3. Payment was originally due on these orders on their invoice dates and finally due ninety days after the invoice dates. Id. Fishback filed a Uniform Commercial Code financing statement[2] for the Oregon order with the Oregon Secretary of State on June 21, 2016. Doc. 29-1, Stipulation, Ex. 1. Fishback filed a UCC financing on the same date with the Michigan Secretary of State for the Michigan orders. Doc. 29-2, Stipulation, Ex. 2. And Fishback filed with the Tennessee Secretary of State a UCC financing statement for the Tennessee orders on June 28, 2016. Doc. 29-3, Stipulation, Ex. 3. All three financing statements listed the debtor's name as “BFN Operations, LLC abn Zelenka Farms.” Doc. 29-1, Stipulation, Ex. 1; Doc. 29-2, Stipulation, Ex. 2; Doc. 29-3, Stipulation, Ex. 3. But BFN's founding documents list its name as “BFN Operations LLC.” Doc. 35-19, App'x to PNC's Mot. Summ. J., 444-45. Fishback filed also a notice of lien with the Oregon Secretary of State for all orders on August 29, 2016. Doc. 29-9, Stipulation, Ex. 9A; Doc. 29-10, Stipulation, Ex. 9B; Doc. 29-11, Stipulation, Ex. 9C. In all, Fishback demands $1, 178, 831.44. Doc. 29-1, Stipulation, Ex. 1; Doc. 29-2, Stipulation, Ex. 2; Doc. 29-3, Stipulation, Ex. 3.

         Surface Nursery shipped goods to BNF only in Michigan. Doc. 29-4, Stipulation, Ex. 4. Surface tendered the invoices on March 3, 2016, and payment became finally due June 1, 2016. Id. Surface filed a UCC financing statement with the Michigan Secretary of State on June 28, 2016, id., and a notice of lien with the Oregon Secretary of State on July 13, 2016, Doc. 29-12, Stipulation, Ex. 10. Surface's financing statement also lists the debtor's name as “BNF Operations, LLC abn Zelenka Farms.” Doc. 29-4, Stipulation, Ex. 4. In all, Surface demands $262, 677.26. Id.

         PNC is BNF's creditor because PNC loaned BNF money and took a security interest in substantially all of BNF's assets. Doc. 29-15, Stipulation, Ex. 13.

         On June 17, 2016, BNF filed for bankruptcy in the Northern District of Texas. Doc. 29, Stipulation, ¶ 7. During the bankruptcy proceedings and with the bankruptcy court's approval, PNC provided debtor-in-possession (DIP) financing to BNF so that BNF could stay in business during the bankruptcy proceedings. Id. at ¶¶ 43-44. The DIP financing was in addition to the prepetition loans PNC made to BNF. The bankruptcy court ordered that PNC's prepetition loan to BNF would be considered part of the DIP financing and ordered that PNC's DIP Lien

shall be a first priority senior and priming lien on the DIP collateral (including the pre-petition collateral), subject and junior only to . . . valid, enforceable, properly perfected, and unavoidable pre-petition liens that are senior to the liens granted to Pre-Petition Lenders, Pre-Petition Agent, and Term Loan Agent pursuant to the Pre-Petition Credit Agreement and other Pre-Petition Loan Documents.

Doc. 29-16, Stipulation, Ex. 14.

         B. Procedural History

         Seeking to capitalize on the above order of the bankruptcy court, the Nurseries filed this lawsuit on November 21, 2016, Doc. 1, Compl., and an amended complaint on February 6, 2017, Doc. 16, Am. Compl. The Nurseries seek a declaratory judgment that they have “valid, enforceable, properly-perfected, unavoidable prepetition liens” senior to PNC's DIP lien, and the Nurseries ask the Court to order PNC to turn over money to satisfy their allegedly senior lien. Id. at ¶¶ 14-19. PNC counterclaims for a declaratory judgment that the Nurseries lack senior and enforceable liens. Doc. 18, Answer & Countercl., ¶¶ 25-34. On August 28, 2017, both the Nurseries and PNC filed motions for summary judgment, which the Court will now resolve. Doc. 30, Nurseries' Mot. Summ J.; Doc. 33, PNC's Mot. Summ. J.


         Courts must grant summary judgment “if the movant shows that 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). Here, no facts are in dispute.

         III. ANALYSIS

         The only issue in this case is whether, as a matter of law, the Nurseries have valid, enforceable, properly perfected, and unavoidable pre-petition liens senior to the Banks' DIP lien. The parties agree on the facts but not the law. Whereas the Nurseries argue that Oregon law determines who has the senior lien, the Banks contend Michigan and Tennessee law apply to property BNF received in those states. The parties disagree also on whether the Nurseries have senior liens under Oregon law.[3] The Court will first resolve the choice-of-law issue, explaining that this lien dispute is governed by the laws of the states in which BNF received products from the Nurseries. Second, the Court will apply the appropriate states' laws to determine whether the Nurseries have enforceable, senior liens.

         A. Choice of Law

          The Court will first determine what states' laws govern this lien dispute. Relevant to the choice-of-law question is why the Court has subject matter jurisdiction over this case. The Nurseries pleaded diversity jurisdiction in their Amended Complaint. Doc. 16, Am. Compl., ¶ 5. If the Court is sitting in diversity, Texas law determines what choice-of-law principles apply. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). But although the Nurseries have pleaded diversity jurisdiction, they have not pleaded facts supporting diversity jurisdiction. Whether the Court has diversity jurisdiction, though, it certainly has jurisdiction under 28 U.S.C. § 1334(b) because this case is “related to” a bankruptcy proceeding. See 28 U.S.C. § 1334(b) (“[T]he district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under [the Bankruptcy Code], or arising in or related to cases under [the Bankruptcy Code].”). Indeed, the Nurseries's claim hinges on the final order of a bankruptcy court.

         What choice-of-law principles govern in bankruptcy cases is an open question. Although the bankruptcy laws rely on state law for definitions of many rights important in bankruptcy proceedings, the Bankruptcy Code provides no method for resolving conflicts of state law. In Re SMEC, Inc., 160 B.R. 86, 89 (M.D. Tenn. 1993). The Fifth Circuit has not determined whether courts exercising bankruptcy jurisdiction should apply federal choice-of-law principles or those of the forum state. In Re Mirant Corp., 675 F.3d 530, 536 (5th cir. 2012); In Re Brown, 521 B.R. 205, 228 (Bankr. S.D. Tex 2014). And other circuits have split on the issue.

         To determine what state's law to apply in bankruptcy cases, some courts apply federal common law, asking which state has the most significant contacts to the case. Lindsay v. Beneficial Reinsurance Co., 59 F.3d 942, 948 (9th Cir. 1995); SMEC, 160 B.R. at 91. Courts applying the most-significant-contacts test rely on dicta from Vanston Bondholders Protective Committee v. Green, 329 U.S. 156 (1946). There, the Supreme Court said, “What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed, is a question which, in the absence of overruling federal law, is to be determined by reference to state law.” But the Supreme Court recognized also that

obligations . . . often have significant contacts in many states so that the question of which particular state's law should measure the obligation seldom lends itself to simple solution. In determining which contact is the most significant in a particular transaction, courts can seldom find a complete solution in the mechanical formulae of the conflicts of law. Determination requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accommodate the equities among the parties to the policies of those states.

Id. at 161-62. Again, this is just dicta; in Vanston, the Supreme Court did not actually have to make a choice of law. Courts have nonetheless taken Vanston to indicate that courts sitting in bankruptcy should apply their independent judgment when resolving conflicts of state law. See, e.g., SMEC, 160 B.R. at 89-90. One such court has reasoned that forum states lack the interest in having their laws applied in bankruptcy cases that they have in diversity cases. Id. at 90. Indeed, the location of a debtor when it files for bankruptcy may have little relation to the location of its property and dealings. Id. Because debtors could have property dispersed among the states, federal courts should apply the law(s) of the state(s) with the greatest interest in the proceeding. Id. Another argument in favor of applying federal rules is that it prevents forum shopping by removing the incentive for debtors “in the shadow of bankruptcy” to relocate so as to take advantage of a particular forum's laws in a way that would subject creditors to laws of states in which they never transacted. Id. at 90-91.

         Other courts sitting in bankruptcy apply the forum state's choice-of-law rules. See, e.g., In Re Merritt Dredging Co., 839 F.2d 203, 206 (4th Cir. 1988) (“[I]n the absence of a compelling federal interest which dictates otherwise, the Klaxon rule should prevail where a federal bankruptcy court seeks to determine the extent of a debtor's property interest.”). One such Court applying the forum state's choice-of-law rules reasoned that a uniform rule under which the forum state's rules would always apply would enhance predictability. Id. Additionally, these courts say that applying the rules of the forum state accords with Erie[4] and Klaxon's[5] admonition that the federal courts should only apply federal law to federal issues and issues in which an important federal interest is at stake. Id. Without an important federal interest at stake when determining state-law property interests, applying one set of rules in diversity cases and another in bankruptcy cases would be anomalous. Id.

         On this interesting question of what choice-of law principles to apply in bankruptcy cases, the Court concludes that it need not resolve the issue because the end result is the same. The Fifth Circuit has generally avoided the issue in cases in which federal and forum-state choice-of-law rules produce the same result, emphasizing that the Supreme Court and the Fifth Circuit “have taken care to avoid resolving this question .” Woods-Tucker Leasing Corp. of Ga. v. Hutcheson-Ingram Dev. Co., 642 F.2d 744, 748 (5th Cir. 1981); see also Fahs v. Martin, 224 F.2d 387, 399 (5th Cir. 1955) (“[W]e conclude that if we applied a federal rule or if we determined what result the courts of Florida would reach, the answer would be the same. We do not determine which road the trial court should have travelled [sic] to arrive at the common destination.”). And the Fifth Circuit has not decided a bankruptcy case in which the outcome of applying state and federal choice-of-law rules would have differed.[6] Thus, rather than determine whether to apply federal or state choice-of-law rules, the Court will instead show that the result would be the same under either.

         Under Texas law, the law of the states in which BFN received the products from the Nurseries applies. “While farm products are in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of an agricultural lien on the farm products.” Tex. Bus. & Com. Code § 9.302. Farm products include “goods, other than standing timber, with respect to which the debtor is engaged in a farming operation which are . . . crops grown, growing, or to be ...

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