IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
SHEIRY MANUFACTURING CO., No. 92-12889
RAYMOND CAREY, Trustee,
v. A.P. No. 94-1027
DAVID G. FRASER, et al.,
Memorandum of Decision
Prior to its Chapter 11 filing, debtor Shiery Manufacturing Company borrowed $110,000.00
from defendants secured by Shiery's machinery and equipment. A UCC-1 financing statement
was filed which described each piece of equipment. There was no language in the statement
indicating that a general lien on all equipment and machinery was created.
After the initial loan and before the bankruptcy, in return for an extension of the loan, Shiery
agreed to give defendants a lien on equipment it had acquired after the initial loan and therefore
not described in the financing statement. No new financing statement was prepared.
Accordingly, on the day the bankruptcy petition was filed defendants' lien on the additional
equipment was unperfected.
Just after this case was converted to Chapter 7, defendants moved the court for relief from the
automatic stay to enforce their security interest in certain equipment. The motion was granted
by default, and defendants took possession of and transferred the equipment to a third party for
vague consideration which has never been paid. At that time, the equipment subject to the
unperfected security interest had a minimum value of $86,000.00.
In this adversary proceeding, the trustee alleges that defendants' security interest was not
perfected and is therefore avoidable pursuant to section 544(a) of the Bankruptcy Code. He also
alleges that he is entitled to recover from defendants $23,375.00 paid to them during the year
before bankruptcy because insiders of Shiery were also liable on the obligation. The payments
were made while Shiery was insolvent and allowed defendants to receive more than their Chapter
7 dividend because the value of their security was far less than the debt owed to them.
II. Effect of Stay Relief
As this court has noted previously in this case, orders granting relief from the stay do not bar
subsequent actions against the secured creditor attacking the perfection of its lien, because the
court does not adjudicate substantive rights in ruling on stay relief motions. Matter of Vitreous
Steel Products Co.
, 911 F.2d 1223, 1234 (7th Cir.1990); Miami Valley Prod. Credit Assn. v.
, 17 B.R. 814 (Bkrtcy.S.D.Ohio 1982). An order lifting the automatic stay is no more
a bar to subsequent litigation than an order dissolving a preliminary injunction.
Defendants might have a colorable argument if the trustee's recovery were limited to the
collateral itself. However, section 550(a) of the Code provides that if a transfer or interest is
avoided under any of the avoidance sections, including 544, the court may enter a judgment for
money in lieu of a judgment for the property. Thus, the only effect of defendant's sale of the
property is to limit the trustee to a money judgment.
Since defendants did not dispose of the equipment in a commercially reasonable manner, the
court cannot enter a money judgment for the consideration they received. The judgment will be
in the amount of $86,000.00, which is the lowest possible value established by the evidence.
III. Insider Preference
The evidence established all of the elements necessary for a recovery from defendants based
on Levit v. Ingersoll Rand Fin. Corp.
, 874 F.2d 1186 (7th Cir.1989) and adopted by this circuit
in In re Sufolla, Inc.
, 2 F.3d 977 (9th Cir.1993). The elimination of this law by the Bankruptcy
Reform Act of 1994 applies only to cases commenced after its effective date. See section 702.
Accordingly, each of the two defendants must return $11,687.50 in preferential payments.
Defendants' unperfected security interest shall be avoided. Pursuant to section 550(a) of the
Code, the trustee shall have judgment against defendants in the sum of $86,000.00. Additionally,
the trustee shall have judgment against each defendant for $11,687.50 on account of insider
preferences. The trustee shall also recover his costs of suit.
This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a)
and FRBP 7052. Counsel for the trustee shall submit an appropriate form of judgment forthwith.
Dated: November 30, 1994 _______________________