Memorandum of Decision Re: Partnership Debt Priority

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re LANE J. GIULIERI,                                                     No. 1-87-00624      Debtor. ______________________/ NILSEN COMPANY,      Plaintiff,    v.                                                                                  A.P. No. 1-88-0035 DALE GUILIERI and FRANCES GUILIERI,      Defendants. ________________________/
Memorandum of Decision
     When debtor Lane Guilieri's father died in 1973, Lane continued to operate the family dairy in partnership with his mother, Agnes Guilieri. In 1976, Agnes deeded the partnership property over to Lane and agreed that the partnership was terminated. In 1980, after Agnes' death, her executor, Lane's brother Dale Guilieri, sued Lane alleging that he used coercion and undue influence to obtain the dairy from Agnes.      In 1981, Lane separated from his wife, Frances Guilieri. In 1982, the Humboldt County Superior Court entered an order in the dissolution proceeding that neither spouse could transfer or hypothecate community property other than in the normal course of business.      Nilsen Company has supplied the dairy with feed, hay, seed, and tools since 1973. In 1985, Nilsen informed Lane that it would decline to sell him further goods on credit unless he agreed to give it a security interest in the dairy assets to cover his account balance of $135,000.00. All of this debt was for feed and supplies used in the dairy. Lane gave Nilsen a security interest in the livestock, equipment, supplies and other assets of the dairy, which Nilsen perfected by filing a UCC-1 on June 3, 1985. At no time did Nilsen have either actual or constructive knowledge of the litigation brought by Dale or the court decree in the dissolution proceedings.      On September 20, 1985, Lane and Dale stipulated to a judgment settling the estate litigation. Pursuant to the settlement, Lane gave Agnes' estate a note to be secured by a "first security interest" as a "purchase money security interest" in one-half of the former partnership assets and a security interest "of a secondary nature" in the other half. In November of 1987, a court decree in the dissolution proceedings gave Frances a lien on Lane's assets to secure a property division judgment.      The issues here are simple. Dale and Frances claim that their liens are superior to Nilsen's. For the reasons stated below, the Court finds these claims totally unfounded.      Dale argues that the Nilsen lien is void because at the time Lane granted it the property was owned by the partnership and therefore Lane had no right to encumber it. This argument has three holes in it.      First of all, the stipulated judgment nowhere purports to declare that the property in question was partnership property after 1976; it merely settles the lawsuit by giving the estate a lien in the former partnership assets. No discussion of partnership law is even necessary until it is proved that there were partnership assets in 1985. The settlement is not proof of this.      Even if the Court assumes that the assets in question were partnership property, the Nilsen lien is nonetheless perfectly valid. A partner has no power to pledge partnership assets to secure his personal debt to one who has due notice of the partnership. Richlin v. Union Bank & Trust Co. (1925) 197 Cal. 296. The Nilsen lien was given for expenses incurred in maintaining the alleged partnership assets themselves, and therefore cannot be considered Lane's personal debt. Even if the debt were personal to Lane, Nilsen had no way of knowing of the estate's claim, while Dale could have taken steps to notify Lane's suppliers if he did not want them to extend credit to the dairy. Where a true owner permits another to appear as owner, an innocent third party who is thus led into dealing with the apparent owner will be protected in equity. Andrade v. Casteel (1947) 81 Cal.App.2d 729.      Dale's "purchase money" argument is meritless, to the extent that it is at all even relevant. The lien to Dale can be "purchase money" only as to the partnership equity, not the assets of the partnership. Parties to a security agreement can no more specify the nature of their transaction than they can specify the priority of the lien; while such recitations may define the rights of the parties to the agreement, they in no way affect the rights of others.      Since the Nilsen lien was for feed and supplies necessary to operate the dairy, Lane did not violate the dissolution order by granting it. Even if granting the lien did violate the order, Nilsen had no notice of the order and is therefore protected by the same equitable principles which protect it from Dale's claims.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for Nilsen shall submit a form of judgment declaring its lien superior to those of Dale and Frances. Nilsen shall recover its costs of suit from both defendants.
Dated: September 12, 1988                                                                          ______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy