In In re Haw. Motorsports, No. 20-10006-BPH, 2020 Bankr. LEXIS 3428 (Bankr. D. Mont. Dec. 7, 2020), the Bankruptcy Court found that AHFC did not own the retailer’s collateral, but retained an unperfected security interest pursuant to a Wholesale Financing Agreement.
In its Motion and accompanying Brief, Honda asserts that stay relief is appropriate because Debtor is in possession of inventory and sale proceeds belonging to Honda under the terms of an express trust created by a “Wholesale Financing Agreement” (“WFA”) between Honda and Debtor. The Motion is clear that “[Honda] is not asserting that it has a perfected security interest in property of the estate.” Rather, Honda asserts that relief is appropriate because “[Honda] owns the Inventory Property and Sale Proceeds and the Debtor merely holds such property in trust for [Honda]” and that, based on the existence of the trust, “the property is not property of the bankruptcy estate” entitling Honda to stay relief under § 362(d)(1) appropriate. 6 Honda further contends, based on the alleged express trust, that Debtor has no equity in the inventory or sales proceeds, the proceeds are not necessary for an effective reorganization, and stay relief is appropriate under § 362(d)(2). In support of its contentions, Honda relies 2 ECF No. 127. 3 Id. at 6. 4 Id. at 2. 5 Id. 6 Id. at 2-3. 2 primarily on discrete and limited sections of the WFA, specifically §§ 1.17, 1.22 and 24. “Pursuant to the WFA, the Debtor holds all property that was purchased or financed, in whole or part, by [Honda] in trust for AHFC.” HSFCU’s Objection argues that Honda’s request for stay relief should be denied because the inventory and sale proceeds are not held in trust for Honda. Instead, based on additional provisions in the WFA, as well as the “Wholesale Finance Security Agreement” (“WFSA”), HSFCU explains Honda is a secured creditor with an attached, but unperfected security interest in the inventory and proceeds. Debtor granted Honda a security interest in Debtor’s assets, but Honda did not file a UCC financing Statement. 10 Accordingly, HSFCU contends that the inventory and proceeds are property of the bankruptcy estate and that stay relief is inappropriate because Honda’s lien is not perfected.11 The Objections filed by Debtor and the Trustee adopt the arguments raised in HSFCU’s Objection. The arguments presented in the Motion and Objections require the Court to determine whether Debtor’s inventory and sale proceeds are subject to the terms of the alleged express trust or whether the true nature of the parties’ relationship is that of a secured creditor and debtor within the purview of Article 9 of the Uniform Commercial Code (“UCC”). If the latter, the Court must determine if Honda has a perfected security interest in Debtor’s inventory and sale 7 ECF No. 129 at 6 (“Pursuant to the WFA, the Debtor holds all property that was purchased or financed, in whole or part, by [Honda] in trust for AHFC”).
The Bankruptcy Court found the WFSA created a Floorplan financing arrangement, not an ownership agreement, requiring that AHFC perfect its security interest.
After examining the WFA and the WFSA in conjunction with one another, the Court cannot ignore that Honda’s argument hinges on three discrete sections in the WFA. In order to adopt Honda’s argument this Court would have to ignore the remaining 151 paragraphs that comprise the parties’ agreement as set forth in the WFA and WFSA. Contrary to Honda’s assertions, the only conclusion the Court can draw from the WFA and WFSA is that Honda intended to establish a lender/borrower financing arrangement commonly referred to as a “floor plan line of credit” or “floorplan financing.” Generally, this arrangement involves a lender who extends wholesale financing to a debtor by making loans or advances to allow the debtor to finance its acquisition of inventory. To secure these advances, the lender retains a security interest in each item of inventory the debtor acquires as well as the proceeds from the sale of that inventory. Upon the sale of any piece of inventory, the debtor is typically obligated to hold the sale proceeds “in trust” for the benefit of the lender. See Keys Jeep Eagle, Inc. v. Chrysler Corp., 897 F. Supp. 1437, 1440-41 (S.D. Fla. 1995) (describing floor plan financing). Since floorplan financing arrangements involve the creation of a security interest in favor of the lender, they are governed by Article 9. The relationship between Debtor and Honda in this case has all the characteristics of a floorplan financing agreement, each of which is evidenced by the WFSA and WFA. First, Honda agreed to provide “wholesale line(s) of credit financing” to Debtor. To secure this credit line, 23 WFA at 1; Recital A in WFSA. 8 Debtor agreed to grant Honda a security interest in its Property, including the “Trust Property.” Third, Debtor agreed to “hold and keep all Property and proceeds thereof” in trust for the benefit of Honda. Each of these characteristics is undeniable, regardless of whether the reader looks at the WFA and WFSA collectively, or in isolation. Accordingly, the Court concludes that the parties’ entered into a typical secured floorplan financing arrangement that is governed by Article 9. Honda’s attempt to re-label the relationship as something it is not has no effect.
Having found a Floorplan arrangement, the Court found that AHFC failed to perfect its security interest, and denied it relief from stay.
In this case, Honda gave value in the form of “wholesale line(s) of credit financing,” Debtor had rights in the “Collateral” in which Honda took a security interest, and the parties executed the WFSA, which described the Collateral. Accordingly, Honda’s interest in Debtor’s inventory and sale proceeds, included in the definition of “Collateral,” attached for Article 9 purposes. . .Montana law requires that a financing statement must be filed with the Montana Secretary of State to perfect all security interests, subject to a few specifically enumerated exceptions. See Mont. Code Ann. § 30-9A-301(1). None of the categories of personal property comprising the “Property” referenced in the WFA and WFSA is included in the list of exceptions. Therefore, Honda was required to file a financing statement with the Montana Secretary of State to perfect its interest in Debtor’s Property, including the Trust Property, and the proceeds of their sale. Honda failed to do so. 28 Thus, it is a creditor with an attached, but unperfected security interest in Debtor’s property, which is now property of the bankruptcy estate. § 541(a)(1). . . .Based on the foregoing, Honda has failed to establish that Debtor’s inventory and sale proceeds are subject to an express trust outside the scope of Article 9. Further, Honda has failed to show that it has a perfected security interest in Debtor’s inventory and sale proceeds. Accordingly, it is not entitled to stay relief under § 362. Omega Environmental Inc. v. ValleyBank NA, 219 F.3d 984, 986 n.1 (9th Cir. 2000) (“A creditor holding an unperfected security interest is not entitled to relief from [the] automatic stay.”).