                                                                FILED
                                                              JULY 2, 2019
                                                     In the Office of the Clerk of Court
                                                    WA State Court of Appeals, Division III

             IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
                                DIVISION THREE

In re:                                         )         No. 35926-3-III
                                               )
BATES DRUG STORES, INC., d/b/a                 )
BATES PHARMACY AND MEDICAL                     )
SUPPLY, a Washington corporation.              )         UNPUBLISHED OPINION
                                               )
                                               )

         LAWRENCE-BERREY, C.J. — Cardinal Health appeals the trial court’s order

determining that its security interest in proceeds from the sale of various assets is junior to

Banner Bank’s security interest. Specifically, the assets sold were contracts, books,

records, and intangibles.

         We construe Banner Bank’s security interest in intangibles as intangibles “arising

out of . . . disposition”1 of inventory, accounts, and equipment. We construe Banner

Bank’s security interest in records as records “relating to” inventory, accounts, and

equipment. We remand for the trial court to enter appropriate findings in this regard.




         1
             Clerk’s Papers at 92.
No. 35926-3-III
In re Bates Drug Stores, Inc.


                                           FACTS

       In 2004, Cardinal Health 110, Inc., began providing pharmaceutical products on

credit to Bates Drug Stores, Inc. (Bates Drug). To secure credit, Bates Drug gave

Cardinal Health a security interest in “fixtures, goods, machinery, equipment, vehicles,

inventory, leasehold improvements, accounts, accounts receivable, . . . contract rights,

general intangibles (including without limitation . . . data bases, software and software

systems, licenses, franchises, customer lists, goodwill . . .) [and] all proceeds or products

of any of the foregoing . . . .” Clerks Papers (CP) at 167. Cardinal Health perfected its

security interest by filing a UCC Financing Statement on January 26, 2012.

       In 2012, Banner Bank’s predecessor began extending credit to Bates Drug. To

secure credit, Bates Drug gave Banner Bank’s predecessor a security interest in collateral,

and defined the “collateral” as:

       [T]he following described property, whether now owned or hereafter
       acquired . . .
              All Inventory, Accounts and Equipment
       In addition, the word “Collateral” also includes all of the following,
       whether now owned or hereafter acquired, whether now existing or
       hereafter arising, and wherever located:
              ....
              (C) All accounts, general intangibles, instruments, rents, monies,
       payments, and all other rights, arising out of a sale, lease, consignment or
       other disposition of any of the property described in this Collateral section.
              ....


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No. 35926-3-III
In re Bates Drug Stores, Inc.


              (E)    All records and data relating to any of the property described
      in this Collateral section, [regardless of form], together with all of
      Grantor’s right . . . to all computer software required to utilize . . . any such
      records or data on electronic media.

CP at 92 (emphasis added). Banner Bank’s predecessor perfected its security interest by

filing a UCC Financing Statement on October 10, 2012.

      In 2014, Cardinal Health entered into a subordination agreement with Banner

Bank’s predecessor. The agreement provides in relevant part:

             WHEREAS, [Cardinal Health] has extended credit to Bates Drug
      Stores, Inc. (“Borrower”) secured by certain personal property of Borrower,
      including, but not limited to all assets of Borrower, as more particularly
      described in and as evidenced by [Cardinal Health’s financing statement]
      filed on January 26, 2012, and all amendments thereto and continuations
      thereof (the “UCC Filing”);
             ....
             WHEREAS, to induce Bank to continue to extend credit to
      Borrower, [Cardinal Health] is willing to subordinate its security interest in
      the Borrower’s assets, as set forth in the UCC Filing, to the security interest
      of Bank in the same assets, on the terms and conditions set forth herein.
             ....
             1.      [Cardinal Health’s] security interest in Borrower’s assets . . .
      shall be and is hereby declared subordinate, inferior and junior in priority to
      the security interest of Bank in Borrower’s assets.

CP at 73.

      Bates Drug could not pay its creditors. On May 18, 2017, a petition for

receivership was filed for Bates Drug. That same day, an order was entered appointing

Barry Davidson as the general receiver.

                                              3
No. 35926-3-III
In re Bates Drug Stores, Inc.


       On June 8, 2017, a contested hearing was held to authorize the sale of Bates

Drug’s assets. Orders were subsequently issued authorizing the sale of certain assets to

Geneva Woods Pharmacy (Geneva Woods) and to Sixth Avenue Medical Building

Pharmacy, Inc. (Sixth Avenue Medical).

       On June 20, 2017, Mr. Davidson sent an e-mail reporting the status of the two

sales. The e-mail valued the “accounts” purchased by Geneva Woods at $202,500, and

the “inventory” purchased by Geneva Woods at $12,352. CP at 106. The e-mail also

valued the “accounts” purchased by Sixth Avenue Medical at $75,000, and the

“inventory” purchased by Sixth Avenue Medical as somewhere between $35,187 and

$42,650. CP at 106.

       On August 1, 2017, Mr. Davidson filed the “Asset Purchase Agreement,” a report

that differed from his e-mail description of the types of assets purchased by Geneva

Woods. The report described the assets and amounts as $202,500 for “Contracts, Books

and Records, and Intangibles,” and an estimated $50,000 for five percent of gross revenue

for the first five months following closing. CP at 405.

       On August 8, 2017, Banner Bank filed a motion to determine priority in the

proceeds gathered by the receiver. Cardinal Health was the only responding creditor. It




                                             4
No. 35926-3-III
In re Bates Drug Stores, Inc.


asserted that Banner Bank did not have a security interest in the proceeds relating to

Geneva Woods’ $202,500 payment for contracts, books, records, and general intangibles.

       On August 25, 2017, the trial court heard argument on Banner Bank’s motion. Mr.

Davidson also was present. In the midst of the parties’ oral arguments, the trial court

questioned Mr. Davidson:

               THE COURT: I want to frame this as holistic as I can. Do you think
       referring to what was sold as general intangibles was a mischaracterization
       or error in the asset purchase agreement?
               MR. DAVIDSON: No. I think it was — I think it was accurate.
                . . . [W]hen this matter came across my desk, I’m looking at
       communications and, you know, there’s references to customer accounts.
       And my thoughts turned to, you know, accounts receivable. And it
       developed that accounts receivable were not being sold. The accounts
       receivable were not what the buyers were interested in. They were
       basically buying the business opportunity to continue servicing the
       customer base. And the long-term care business was sold to Geneva Woods
       and the pharmacy business was sold to 6th Avenue. And that was done
       very deliberately. And there was some inventory sold separately and it was
       identified as inventory. I believe there was allocation of dollars towards
       that.
               I did look at what I could find to the extent it was really relevant to
       what I was doing as to the nature of customer lists, customer records as
       general intangibles or something else. Frankly, I found it interesting under
       Cardinal Health’s security interest . . . there’s a long parenthetical and it
       covers a lot of different asset categories, but in that asset category is
       customer list. So to the extent it was relevant to what I was doing, I . . .
       characterized these customer lists, customer records, contact information
       as general intangibles. Certainly, the receivables were specifically called
       out and excluded. So, no, I don’t think that was incorrectly characterized in
       the asset purchase agreement.


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No. 35926-3-III
In re Bates Drug Stores, Inc.


Report of Proceedings at 25-27 (emphasis added).

       Mr. Davidson’s remarks would have permitted a finding that the $202,500 in

dispute was comprised of general intangibles. Nonetheless, the trial court did not enter

any finding on that issue. Nor did the trial court determine the scope of Banner Bank’s

security interest. Instead, the trial court summarily concluded that the security interest of

Banner Bank’s predecessor “is broad enough to cover all collateral sold by the Receiver

in the Geneva Woods and Sixth Avenue transactions.” CP at 228.

       Cardinal Health appealed to this court.

                                        ANALYSIS

       A.     STANDARD OF REVIEW

       The trial court did not enter any findings of fact, other than that Banner Bank was

entitled to “priority disbursement of the [contested] funds.” CP at 346. This finding is

actually a conclusion of law. We review mislabeled conclusions of law de novo. Scott’s

Excavating Vancouver, LLC v. Winlock Props., LLC, 176 Wn. App. 335, 344, 308 P.3d

791 (2013).

       B.     BANNER BANK’S SECURITY INTEREST

       Mr. Davidson’s report describes the $202,500 proceeds as being allocated between

“Contracts, Books and Records, and Intangibles.” CP at 405.


                                              6
No. 35926-3-III
In re Bates Drug Stores, Inc.


       Banner Bank first argues subsection (C) of its security agreement extends to

intangibles. Subsection (C) describes the collateral as including “[a]ll accounts, general

intangibles . . . and all other rights, arising out of . . . disposition of any of the property

described in this Collateral section.” CP at 92 (emphasis added). The collateral section

describes inventory, accounts, and equipment. We construe Banner Bank’s security

interest as extending to general intangibles only if they arose from the disposition of

inventory, accounts, and equipment. The trial court did not make any findings about what

items accounted for the $202,500 in proceeds, and which of those items come within the

scope of subsection (C) as we have construed it. We remand for the trial court to make

such findings.

       Banner Bank next argues that subsection (E) of its security agreement extends to

records. Subsection (E) describes the collateral as including “[a]ll records and data

relating to any of the property described in this Collateral section . . . .” CP at 92

(emphasis added). Again, the collateral section describes inventory, accounts, and

equipment. We construe Banner Bank’s security interest as extending to records and data

only if those records and data relate to inventory, accounts, and equipment. “Relate to” is

an inherently factual issue. The trial court did not make any findings about what items

accounted for the $202,500 in proceeds, and which of those items come within the scope


                                                7
No. 35926-3-III
In re Bates Drug Stores, Inc.


of subsection (E) as we have construed it. We remand for the trial court to make such

findings.

       The first numbered paragraph of the parties’ subordination agreement subordinates

Cardinal Health’s security interest only to the extent Banner Bank has a security interest.

Banner Bank’s security interest does not extend to the $202,500 proceeds unless those

proceeds are (1) intangibles that arise out of the disposition of inventory, accounts, or

equipment, or (2) records that relate to inventory, accounts, or equipment. Because the

trial court did not enter findings in this regard, we remand.2

       C.     ATTORNEY FEES

       Both parties request an award of attorney fees on appeal. Attorney fees are not

awardable on appeal unless permitted by statute, contract, or a recognized ground of

equity. King County v. Vinci Constr. Grands Projets/Parsons RCI/Frontier-Kemper, JV,

188 Wn.2d 618, 625, 398 P.3d 1093 (2017). The subordination agreement does not

contain an attorney fee clause. Cardinal Health does not cite any basis for its request for




       2
          Banner Bank asserts that Cardinal Health’s security interest is not properly
perfected. We need not decide this issue. If Banner Bank has an interest in the $202,500
proceeds, the subordination agreement makes its interest superior to Cardinal Health’s
interest. If Banner Bank has no interest in the proceeds, Cardinal Health’s secured
interest is sufficient for it to be awarded the proceeds.

                                              8
No. 35926-3-III
In re Bates Drug Stores, Inc.


fees. Banner Bank does not cite a sufficient basis for its request for fees. We, therefore,

deny the parties' requests.

       Reversed and remanded.

       A majority of the panel has determined this opinion will not be printed in the

Washington Appellate Reports, but it will be filed for public record pursuant to

RCW 2.06.040.

                                           LA._,s.,.., ~ ..
                                                        ~'lJYd              c.. ~.
                                          Lawrence-Berrey, C.J.     1   1




WE CONCUR:




                                          Pennell, J.




                                             9
