United States District Court, N.D. Texas, Dallas Division
FISHBACK NURSERY, INC. and SURFACE NURSERY, INC., Plaintiffs,
PNC BANK, N.A. and CRYSTAL FINANCIAL, LLC, Defendants.
MEMORANDUM OPINION AND ORDER
J. BOYLE, United States District Judge
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
Factual History 
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 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.
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,
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.
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.
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.
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.
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. 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.
Choice of Law
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.
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
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.
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 and Klaxon's 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.
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. 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.
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 ...