Memorandum of Decision Re: Priority of Security Interests

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re BLUE LAKE FOREST PRODUCTS,                                       No. 91-10333 INC.,      Debtor. ___________________________/ PILOT LUMBER COMPANY,      Plaintiff,    v.                                                                              A.P. No. 91-0058 HONGKONG & SHANGHAI BANKING CORPORATION,      Defendant. ______________________________/
Memorandum of Decision
     Debtor Blue Lake Forest Products operates a lumber mill in Humboldt County, California. In 1988, Blue Lake purchased the contractual right to cut timber from certain government land from plaintiff Pilot Lumber Company. Under the purchase agreement, Pilot would be paid over time as the lumber was cut. On October 24, 1988, Pilot filed a financing statement executed by Blue Lake and naming Pilot as the secured party. The financing statement described the collateral as the timber cut from the land, and referenced as the underlying security agreement the Log Purchase Agreement and an Assignment in Trust. The Log Purchase Agreement made no mention whatever of security; the Assignment in Trust described only the contract, and not the timber, as collateral.      On August 8, 1989, defendant Hongkong & Shanghai Banking Corporation filed a financing statement perfecting its security interest in all of the debtor's inventory, including cut timber.      On November 6, 1990, Pilot and Blue Lake entered into a written amendment to the Log Purchase Agreement. The amendment provided, inter alia, that:
       In the event of default by Buyer [Blue Lake],        Buyer shall, on demand of Seller, assemble all        of the Pilot Ridge timber subject to its control        and make it available to Seller at a place to be        designated by Seller and Buyer shall permit Seller        to take immediate possession of all such col-        lateral. [emphasis added]
     In 1991, Blue Lake filed its Chapter 11 petition. The Bank is owed some $9 million, and Pilot is owed about $131,000.00. By this adversary proceeding, Pilot seeks to establish that its security interest in the timber from the property is superior to that of the Bank.      The Bank is of course completely correct in arguing that neither the original Log Purchase Agreement nor the Assignment in Trust gave Pilot a security interest in the timber itself. The Agreement is completely silent as to security, and the Assignment mentions only the contract rights, not the timber. It is elementary commercial law that a financing statement does not itself create a security interest, which is limited to that contained in the security agreement.      However, in determining what the parties have agreed is to be security, the court must look to all relevant documents. In re Amex-Protein Dev. Corp., 504 F.2d 1056 (9th Cir.1974). This includes the amendment, which contains language clearly establishing that the timber is Pilot's collateral.      Although there was no valid security agreement relating to the timber until 1990, Pilot's security interest in the timber is still superior to the Bank's. Pursuant to California Commercial Code section 9312(5)(a), conflicting security interests rank according to priority in time of filing or perfection. Even though Pilot did not have a valid security interest until 1990, its priority relates back to its filing, which was prior to the Bank's. See White & Summers, Uniform Commercial Code (3rd), section 26-4, pp. 498-99.      For the foregoing reasons, Pilot's motion for summary judgment will be granted and judgment will be entered declaring that Pilot's security interest in the timber cut from the subject property is superior to the Bank's security interest. Counsel for Pilot shall submit an appropriate form of judgment, which counsel for the Bank has approved as conforming to this decision.
Dated: September 10, 1991                                                                        _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy