                                                       FILED
                                                        OCT 23 2017
 1                         ORDERED PUBLISHED
                                                    SUSAN M. SPRAUL, CLERK
 2                                                    U.S. BKCY. APP. PANEL
                                                      OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.      WW-16-1424-KuFB
                                   )
 6   PETTIT OIL COMPANY,           )      Bk. No.      3:13-bk-47285-PBS
                                   )
 7                  Debtor.        )      Adv. No.     3:14-ap-04222-PBS
     ______________________________)
 8                                 )
     IPC (USA), INC.,              )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      O P I N I O N
11                                 )
     KATHRYN A. ELLIS, Chapter 7   )
12   Trustee,                      )
                                   )
13                  Appellee.      )
     ______________________________)
14
15               Argued and Submitted on September 28, 2017
                           at Seattle, Washington
16
                            Filed - October 23, 2017
17
               Appeal from the United States Bankruptcy Court
18                 for the Western District of Washington
19        Honorable Paul B. Snyder, Bankruptcy Judge, Presiding
                   ___________________________________
20
     Appearances:     Edwin K. Sato of Bucknell Stehlik Sato & Orth,
21                    LLP, argued for appellant, IPC (USA), Inc.;
                      Andrew H. Morton of Foster Pepper PLLC argued for
22                    appellee, Kathryn A. Ellis, Chapter 7 Trustee.
                      ___________________________________
23
24   Before:   KURTZ, FARIS, and BRAND, Bankruptcy Judges.
25
26
27
28
 1   KURTZ, Bankruptcy Judge:
 2
 3        Kathryn A. Ellis, chapter 71 trustee (Trustee), filed an
 4   adversary complaint against appellant, IPC (USA), Inc. (IPC),
 5   seeking to avoid under § 544(a)(1), IPC’s unperfected security
 6   interest in consigned fuel inventory, accounts receivable (A/R),
 7   and cash (Cash) all of which were in the possession of the
 8   debtor, Pettit Oil Company (Debtor), on the petition date.
 9        The bankruptcy court granted partial summary judgment in
10   favor of Trustee, ruling that the agreement between IPC and
11   Debtor was a “true” consignment under Revised Article 9
12   (Article 9) of the Uniform Commercial Code (U.C.C.)
13   § 9-102(a)(20).   Under U.C.C. § 9-319(a), for purposes of
14   determining the rights of Debtor’s creditors while the fuel
15   inventory was in its possession, Debtor is deemed to hold rights
16   and title to the goods identical to those the consignor, IPC,
17   had or had power to transfer.   In contrast, under U.C.C.
18   § 9-103(d), IPC is deemed to hold only a purchase-money security
19   interest in the consigned goods as against creditors of Debtor-
20   consignee.   It is undisputed that IPC did not perfect its
21   interest in the consigned fuel.   Applying these statutes, the
22   bankruptcy court found that IPC’s interest in the fuel inventory
23   was subordinate to the rights of Trustee as a judicial lien
24   creditor.
25        Subsequently, the court granted partial summary judgment in
26
27
          1
            Unless otherwise indicated, all chapter and section
28   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                     -2-
 1   favor of Trustee, ruling that IPC’s interests in the A/R and
 2   Cash generated from the sale of the consigned fuel and held by
 3   Debtor on the petition date was also subordinate to the rights
 4   of Trustee because IPC had not complied with the U.C.C.’s
 5   perfection rules for priority in accounts receivable or cash.
 6        In a final ruling, the bankruptcy court granted summary
 7   judgment in favor of Trustee awarding damages in the amount of
 8   $5,493,498.69 on her claims against IPC, consisting of:
 9   $1,161,754.00 for the fuel inventory, $3,895,961.69 for the A/R,
10   and $435,783.00 Cash that was in Debtor’s bank account on the
11   petition date.
12        IPC argues on appeal that the bankruptcy court erred by
13   including the value of the A/R and Cash in the judgment.     IPC
14   contends that under U.C.C. § 9-319, Trustee could reach only the
15   “goods” - the fuel inventory - in the possession of Debtor on
16   the petition date because the U.C.C. definition of “goods” does
17   not include A/R and Cash.   In short, U.C.C. § 9-319 should not
18   be applied beyond its scope.     Relying on the underlying
19   consignment agreement between the parties, IPC contends that it
20   is the only party with an interest in the A/R and Cash.
21        For the reasons explained below, we find no support for
22   IPC’s proposition in Article 9 or elsewhere.     Accordingly, we
23   AFFIRM.
24                               I.    FACTS
25   A.   The Consignment Agreement Between IPC and Debtor
26        Debtor was a distributor of bulk oil, gas, diesel and
27   lubricant products and sold fuel products at self-fueling sites
28

                                      -3-
 1   known as “cardlock sites.”2
 2         On September 1, 2013, IPC entered into a Consignment and
 3   Service Agreement (CSA) with Debtor.    Under the CSA, IPC
 4   provided fuel to various cardlock sites owned or leased by
 5   Debtor.   IPC retained title to the fuel until the fuel was sold
 6   to end user customers.   Debtor was obligated to maintain the
 7   financial records for the consignment transactions, including
 8   booking and accounting for receivables and administering,
 9   invoicing, collecting, and remitting payments to IPC for the
10   full cost of all consigned fuel sold by Debtor.    In
11   consideration, IPC agreed to pay Debtor a monthly commission.
12         Debtor was also required to instruct its customers to make
13   payments directly to IPC’s lockbox account at Union Bank in San
14   Francisco.   However, upon implementation of the CSA, many
15   cardlock customers continued to send payments for IPC fuel
16   purchased at Debtor’s cardlock sites to Debtor’s account, a
17   lockbox with Debtor’s lender, KeyBank National Association
18   (KeyBank).   The CSA provided that if Debtor’s customers sent
19   payments to Debtor instead of IPC, Debtor was to promptly
20   forward those payments to IPC.    California law governed the
21   interpretation of the CSA.
22         It is undisputed that IPC never filed a financing statement
23   or otherwise perfected its interests in the consigned fuel, the
24   A/R, or Cash.
25   ///
26
           2
27          Many of the facts are set forth in the bankruptcy court’s
     memorandum decision, Ellis v. IPC (USA), Inc. (In re Pettit Oil
28   Co.), 2016 WL 3049607 (Bankr. W.D. Wash. May 19, 2015).

                                      -4-
 1   B.   Bankruptcy Events
 2        Debtor filed a chapter 11 petition in November 2013
 3   (Petition Date).   At the time of filing, there was an
 4   unquantified amount of IPC fuel remaining in the tanks at
 5   Debtor’s cardlock sites.   In addition, there were unpaid
 6   accounts receivable for IPC fuel that had been sold and invoiced
 7   to Debtor’s customers, accounts receivable outstanding for sales
 8   of IPC fuel that had been sold but not yet invoiced to Debtor’s
 9   customers, and cash in Debtor’s KeyBank lockbox for sold and
10   invoiced IPC fuel that customers had mistakenly sent to Debtor
11   instead of to IPC’s lockbox.   Debtor ceased operations, and its
12   case converted to chapter 7 in January 2014.   Ellis was
13   appointed the chapter 7 trustee.
14        Trustee filed an adversary proceeding against IPC,3
15   alleging five causes of action, two of which are relevant here.
16   In her first cause of action, Trustee sought a declaration that
17   the CSA was a “true” consignment as defined in U.C.C.
18   § 9-102(a)(20) and that, as of the Petition Date, IPC held no
19   more than an unperfected security interest in the consigned fuel
20   inventory, A/R, and Cash which was in Debtor’s possession on the
21   Petition Date.   In her second cause of action, Trustee alleged
22   that as a hypothetical judgment lien creditor under § 544(a)(1),
23   she could avoid IPC’s unperfected security interest and recover
24
25        3
            Trustee also named KeyBank and Pettit Properties, Inc.
26   (PPI) as defendants. KeyBank answered the complaint and filed a
     cross-claim against IPC and PPI. IPC answered the complaint and
27   filed a counterclaim against Trustee and cross-claims against
     KeyBank and PPI. These cross-claims were resolved in separate
28   proceedings.

                                    -5-
 1   from IPC the value of the consigned fuel inventory, A/R, and
 2   Cash under § 550 for the benefit of the estate.    Trustee later
 3   amended her second cause of action to allege that she had
 4   avoidance powers under § 549 with respect to postpetition
 5   payments made by Debtor to IPC relating to fuel sales.
 6        Trustee moved for partial summary judgment on her first and
 7   second causes of action.    After a hearing, the bankruptcy court
 8   issued a memorandum decision and entered an order granting
 9   partial summary judgment to Trustee.    The court noted that IPC
10   had conceded that all the elements under U.C.C. § 9-102(a)(20)
11   for showing a “true” consignment were met, and found that the
12   elements were indeed met.    The bankruptcy court thus concluded
13   that Article 9 governed Trustee’s rights as a judicial lien
14   creditor.   U.C.C. § 9-109(a)(4).
15        Article 9 treats a consignor such as IPC the same as a
16   secured party holding a purchase-money security interest (PMSI)
17   in the consigned goods.    U.C.C. § 9-103(d).   Since IPC did not
18   perfect its security interest in the consigned fuel, the
19   bankruptcy court granted Trustee summary judgment on her first
20   cause of action, declaring that the CSA was a “true” consignment
21   subject to the provisions of U.C.C. § 9-319(a).
22        As to Trustee’s second cause of action, IPC contested that
23   Trustee could acquire a judicial lien on the A/R and Cash which
24   were generated from the prepetition sales of the consigned fuel
25   and in Debtor’s possession on the Petition Date.    IPC argued
26   that it was entitled to the Cash because the CSA required
27   payments to be sent directly to IPC.    IPC further asserted that
28   Debtor held the A/R and Cash in a constructive trust for IPC and

                                     -6-
 1   thus they were not subject to attachment by Trustee under
 2   § 544(a)(1).
 3        The bankruptcy court ruled that a constructive trust would
 4   not be imposed, and IPC does not contest that ruling in this
 5   appeal.    The court granted Trustee’s motion, in part, finding
 6   that, under § 544(a)(1), Trustee had a senior security interest
 7   in the fuel inventory in existence on the Petition Date and also
 8   in any proceeds arising from further sales of those goods.
 9   U.C.C. §§ 9-315(a)(2); 9-319(a).       The court denied Trustee’s
10   summary judgment motion without prejudice on the issue whether
11   Trustee held a superior interest in the A/R and Cash held by
12   Debtor on the Petition Date because the parties had not briefed
13   choice-of-law issues which were relevant to the outcome.
14        At a subsequent hearing, the bankruptcy court noted that
15   California law governed the interpretation of the CSA and
16   Washington (location of Debtor) and Ohio law (location of
17   KeyBank) governed the perfection and priority rights at issue.
18   The court observed that California, Washington, and Ohio had
19   adopted essentially identical versions of the relevant U.C.C.
20   provisions.    Therefore, to simplify matters, the court made
21   reference to the U.C.C. rather than citing to the applicable
22   state statutes.4    The bankruptcy court read its oral ruling into
23   the record and entered an order finding that Trustee as a
24   hypothetical judgment lien creditor had a senior interest to IPC
25   in the A/R and Cash which were in the possession of Debtor on
26   the Petition Date.
27
28        4
              We do so as well.

                                      -7-
 1        The court later heard argument on the amount of the damages
 2   that Trustee should be awarded for the value of the consigned
 3   fuel inventory, A/R, and Cash, and took the matter under
 4   advisement.   The bankruptcy court issued a memorandum decision
 5   awarding Trustee damages in the sum of $5,493,498.69 and entered
 6   a final judgment in favor of Trustee for that amount.5       IPC
 7   timely appealed.
 8                              II.   JURISDICTION
 9        The bankruptcy court had jurisdiction over this proceeding
10   under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (E).        We have
11   jurisdiction under 28 U.S.C. § 158.
12                                 III.    ISSUE
13        Did the bankruptcy court err when it granted partial
14   summary judgment in favor of Trustee by finding that, as a
15   matter of law, under § 544 and Article 9, Trustee had a superior
16   interest to IPC as of the Petition Date in the A/R and Cash?
17                        IV.    STANDARD OF REVIEW
18        The bankruptcy court granted summary judgment on a legal
19   question of statutory interpretation under the U.C.C., and the
20   essential facts are undisputed.        We therefore review its
21   decision de novo.   Wyle v. Pac. Mar. Ass’n (In re Pac. Far East
22   Line, Inc.), 713 F.2d 476, 478 (9th Cir. 1983).
23                               V.   DISCUSSION
24        Section 544 provides in relevant part:
25        (a) The trustee shall have, as of the commencement of
          the case, and without regard to any knowledge of the
26
27
          5
            Final judgments were also entered relating to the cross-
28   claims of KeyBank and IPC.

                                          -8-
 1        trustee or of any creditor, the rights and powers of,
          or may avoid any transfer of property of the debtor or
 2        any obligation incurred by the debtor that is voidable
          by—
 3
                (1) a creditor that extends credit to the
 4              debtor at the time of the commencement of
                the case, and that obtains, at such time and
 5              with respect to such credit, a judicial lien
                on all property on which a creditor on a
 6              simple contract could have obtained such a
                judicial lien, whether or not such a
 7              creditor exists[.]
 8        “Under [§] 544(a), unperfected security interests are
 9   avoidable and can be relegated to the status of general
10   unsecured claims.”   Neilson v. Chang (In re First T.D. & Inv.,
11   Inc.), 253 F.3d 520, 525 (9th Cir. 2001); U.C.C. § 9-322(a)(2)
12   (“A perfected security interest . . . has priority over a
13   conflicting unperfected security interest . . . .”).   The
14   bankruptcy court ruled that the CSA was a “true” consignment
15   under U.C.C. § 9-102(a)(20) and therefore properly analyzed
16   Trustee’s rights as a judicial lien creditor under Article 9.
17        U.C.C § 9–319(a) applies when a creditor of the consignee
18   seeks to recover against the consigned goods.   In re Valley
19   Media, Inc., 279 B.R. 105, 123 n.30 (Bankr. D. Del. 2002).     The
20   statute provides that, “for purposes of determining the rights
21   of creditors of . . . a consignee, while the goods are in the
22   possession of the consignee, the consignee is deemed to have
23   rights and title to the goods identical to those the consignor
24   had.”   A consignor such as IPC is treated as a secured party
25   holding a PMSI in the consigned goods.   U.C.C. § 9-103(d).
26        U.C.C. §§ 9-319(a) and 9-103(d) work in tandem to determine
27   the rights of a debtor’s creditors while consigned goods are in
28   a debtor’s possession.   That is, a debtor is deemed to hold

                                    -9-
 1   rights and title to the goods such that its creditors can attach
 2   the consigned goods as if the debtor actually had title and
 3   obtain priority over a consignor who fails to perfect its PMSI
 4   in the goods.   The purpose behind U.C.C. § 9-319(a) is to
 5   protect general creditors of the consignee from claims of
 6   consignors that have undisclosed consignment arrangements with
 7   the consignee that create secret liens on the inventory.
 8   In re Valley Media, Inc., 279 B.R. at 125.
 9        By its plain language, U.C.C. § 9-319(a) applies to the
10   consigned “goods.”   The statute does not determine priority in
11   cash or accounts receivable generated by the sale of the
12   consigned fuel.   Once the fuel inventory was sold, title
13   transferred to the buyer and the secret lien in the inventory is
14   no longer a concern to third party creditors.   After the fuel
15   was sold to third parties, Debtor was obligated to pay IPC.
16   Indeed, the CSA provides that Debtor was to promptly forward
17   payments which were mistakenly made to it.   Moreover, Debtor was
18   responsible for invoicing and collecting the amounts due for
19   fuel that it sold.   Under this arrangement, IPC was a general
20   unsecured creditor for amounts due.
21        IPC cannot simply rely on the CSA to obtain priority over a
22   judicial lien holder in the A/R and Cash.    Again, this presents
23   the problem of a secret lien vis-a-vis a debtor’s creditors.     As
24   mentioned by the bankruptcy court, when a creditor makes a
25   decision to lend funds to a consignee, its decision is
26   necessarily based on all the property in the consignee’s
27   possession.   If IPC intended to claim priority over a judicial
28   lien creditor or another secured creditor in the A/R and Cash,

                                    -10-
 1   it was required to perfect its security interests therein
 2   according to the rules set forth in Article 9.
 3        For all purposes that matter to this case, the U.C.C.
 4   treats a “true” consignment (such as IPC’s) as a secured
 5   transaction.   The definitions of Article 9’s key terms make this
 6   clear: “security interest” includes “any interest of a
 7   consignor,” U.C.C. § 1-201(b)(35); “collateral” means “the
 8   property subject to a security interest” and includes “goods
 9   that are the subject of a consignment,” U.C.C.
10   § 9-102(a)(12)(C); “secured party” means (among others) a
11   “consignor,” U.C.C. § 9-102(a)(73)(C); and “debtor” means (among
12   others) a “consignee,” U.C.C. § 9-102(a)(28)(C).     Section
13   9-103(d) eliminates any possible doubt:     “The security interest
14   of a consignor in goods that are the subject of a consignment is
15   a purchase-money security interest in inventory.”
16        IPC’s basic argument is that consignments are treated like
17   purchase-money security interests only for certain limited
18   purposes.   This is exactly backwards.    The rights of a “true”
19   consignor are the same as the rights of a secured party, unless
20   a U.C.C. section provides otherwise.
21        If IPC and Debtor had signed a security agreement rather
22   than a consignment agreement, this would be an easy case.       If
23   IPC had filed a financing statement, its security interest in
24   the fuel would be perfected under U.C.C. § 9-310(a), and its
25   security interest in the A/R and Cash that are proceeds of the
26   fuel would also have been perfected.     U.C.C. § 9-315(c).    But
27   because IPC did not file a financing statement, its interest in
28   the collateral is unperfected.    Therefore, IPC’s rights in the

                                      -11-
 1   fuel, the A/R, and the Cash would be subordinate to the rights
 2   of the Trustee, as a hypothetical lien creditor on the date of
 3   Debtor’s bankruptcy filing.   U.C.C. § 9-317(a)(2),
 4   § 9-102(a)(52)(C).
 5        IPC contends, however, that the result is dramatically
 6   different because IPC and Debtor signed a consignment agreement
 7   rather than a security agreement.      In support of this
 8   contention, IPC relies on U.C.C. § 9-319(a), placing overriding
 9   importance on the fact that the statute mentions consigned
10   “goods,” but is silent concerning the proceeds of those goods.
11   IPC concedes (as it must) that its interest in the “goods”–the
12   fuel–is subordinate to the Trustee’s rights.      But it claims that
13   its rights in the fuel’s proceeds–the A/R and Cash–is superior
14   to Trustee’s rights, because U.C.C. § 9-319 mentions only
15   “goods.”   To accept IPC’s argument, we would have to believe
16   that, by omitting the word “proceeds” from U.C.C. § 9-319, the
17   U.C.C. drafters silently negated all of the provisions cited
18   above that treat a consignment as a security interest and treat
19   a security interest in proceeds the same as the security
20   interest in the original collateral.      We cannot adopt such a
21   strained interpretation of U.C.C. § 9-319.      Instead, we read
22   U.C.C. § 9-319 as simply providing that a consignee can sell and
23   encumber consigned goods just the same as it could if it had
24   title to the consigned goods.
25        U.C.C. § 9-202 reinforces this conclusion and also explains
26   the difference between a true consignment and other types of
27   security transactions.   Recall that the formal difference
28   between a typical secured transaction and a consignment is that

                                     -12-
 1   a consignor retains title to the collateral.   Section 9-202
 2   states that, with a limited and irrelevant exception, this
 3   difference does not matter.   “Except as otherwise provided with
 4   respect to consignments . . . , the provisions of this article
 5   with regard to rights and obligations apply whether title to
 6   collateral is in the secured party or the debtor.”   Official
 7   Comment 3.a explains:
 8         This section explicitly acknowledges two circumstances
           in which the effect of certain Article 9 provisions
 9         turns on ownership (title). First, in some respects
           sales of accounts, chattel paper, payment intangibles,
10         and promissory notes receive special treatment. See,
           e.g., Sections 9-207(a), 9-210(b), 9-615(e). Buyers
11         of receivables under former Article 9 were treated
           specially, as well. See, e.g., former Section
12         9-502(2). Second, the remedies of a consignor under a
           true consignment and, for the most part, the remedies
13         of a buyer of accounts, chattel paper, payment
           intangibles, or promissory notes are determined by
14         other law and not by Part 6. See Section 9-601(g).
15   (Emphasis added.)   In other words, the consignor’s retention of
16   title to the collateral may affect the remedies it can employ to
17   recover the collateral in the event of default.    But retention
18   of title does not change the rules concerning priority among
19   competing claimants to the collateral.
20         Our conclusion is bolstered by reference to the U.C.C.
21   sections which governed true consignments prior to the revision
22   of the U.C.C. in 2001.   Before then, certain true consignments
23   were dealt with in former U.C.C. §§ 2-326(3) and 9-114.   Those
24   provisions were deleted and replaced by U.C.C. §§ 9-109(a)(4),
25   9-103(d) and 9-319.   See U.C.C. § 2-326 cmt. 4.
26   ///
27   ///
28   ///

                                    -13-
 1        U.C.C. § 9-1146 addressed priority in certain consigned
 2   goods and limited cases of identifiable cash proceeds received
 3   on or before delivery of the goods to a buyer.   The Official
 4   Comments to U.C.C. § 9-114 give some insight into how consignors
 5   were subjected to Article 9’s filing requirements for perfection
 6   and priority with respect to proceeds generated from the sale of
 7   their consigned goods.
 8        The Official Comment to U.C.C. § 9-114 stated that if a
 9   consignor wished to have priority in accounts receivable or
10   other proceeds (cash) generated from the sale of the consigned
11   goods, it had to comply with the rules for the creation and
12   perfection of a security interest contained in Article 9.
13        Except in the limited cases of identifiable cash
          proceeds received on or before delivery of the goods
14        to a buyer, no attempt has been made to provide rules
          as to perfection of a claim to proceeds of
15        consignments . . . or the priority thereof . . . . It
          is believed that under many true consignments the
16        consignor acquires a claim for an agreed amount
          against the consignee at the moment of sale, and does
17        not look to the proceeds of sale. In contrast to the
          assumption of this Article that rights to proceeds of
18        security interests under Section 9-306 represent the
          presumed intent of the parties (compare Section
19        9-203(3)), the Article goes on the assumption that if
          consignors intend to claim the proceeds of sale, they
20
21       6
             The statute provided:
22
         A person who delivers goods under a consignment which
23       is not a security interest and who would be required
         to file under [Article 9] by paragraph (3)(c) of
24       Section 2–326 has priority over a secured party who is
         or becomes a creditor of the consignee and who would
25       have a perfected security interest in the goods if
26       they were the property of the consignee, and also has
         priority with respect to identifiable cash proceeds
27       received on or before delivery of the goods to a
         buyer, if . . . the consignor complies with [specified
28       notice requirements].

                                     -14-
 1        will do so by expressly contracting for them and will
          perfect their security interests therein.
 2
 3   Official Comment to U.C.C. § 9-114 (emphasis added).
 4        In addition, Official Comment 2 to U.C.C. § 9-319 states,
 5   “[i]nsofar as creditors of the consignee are concerned,
 6   [Article 9] to a considerable extent reformulates the former
 7   law, which appeared in former [U.C.C.] Sections 2-326 and 9-114,
 8   without changing the results.”
 9        In the end, the rules pertaining to perfection and
10   priorities of competing security interests apply to consignors
11   who intend to claim priority in accounts receivable or cash
12   generated from the sale of the consigned goods.    It is
13   undisputed that IPC did not comply with the U.C.C. requirements
14   to protect itself against Debtor’s creditors with respect to the
15   A/R and Cash.   Trustee’s judicial lien attached to all Debtor’s
16   real and personal property on the Petition Date.    Rev. Code
17   Wash. § 6.17.090 (lien arises in all real and personal
18   property).   Therefore, IPC is simply an unsecured creditor and
19   is subordinate to the rights of Trustee as a judicial lien
20   holder.   See also Bank of Cal. v. Thornton-Blue Pac., Inc., 53
21   Cal. App. 4th 841 (Cal. Ct. App. 1997) (flower grower who was in
22   consignment arrangement with flower wholesaler was subordinate
23   to wholesaler’s lender who had security interest in flowers and
24   proceeds from their sale).
25                            VI.   CONCLUSION
26        For the reasons stated, we AFFIRM.
27
28

                                      -15-
