Memorandum of Decision Re: Security Interest in Timber

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re DOYLE and GLADYS LANCASTER,                                    No. 98-14048      Debtor(s). ______________________________________/ AMERICAN LAND CONSERVANCY,      Plaintiff(s),    v.                                                                                              A.P. No. 99-1062 BLUE LAKE FOREST PRODUCTS, et al.,      Defendant(s). _______________________________________/
Memorandum on Motions for Summary Judgment
     The principal issue in this adversary proceeding is the validity of plaintiff American Land Conservancy's claimed security interest in the cash proceeds of timber cut from the real property of debtors and defendants Doyle and Gladys Lancaster. The Lancasters sold the timber to defendant Blue Lakes Forest Products. The payment from Blue Lakes is being held in counsel's trust account pending resolution of this adversary proceeding. The Lancasters and defendant Six Rivers national Bank argue that ALC's security interest was not properly perfected. The Lancasters allege that an assignment agreement they signed within 90 days of their bankruptcy in order to facilitate the cutting of the timber was preferential. ALC and the Lancasters have filed countermotions for summary judgment.      The only argument made by the Lancasters is that they never signed a security agreement. They appear to have poor memories. ALC having produced the agreement, the Lancasters' motion will be denied.      ALC's perfection if its security interest, and its rights in relation to the Bank, are much more problematical. The Bank holds a junior deed of trust on the real property as well as a security interest in the Lancasters' accounts receivable. It alleges that its security interest in the timber proceeds is senior to that of ALC.      Both ALC and the Bank obtained and filed UCC-1 financing statements. ALC's was filed on February 14, 1997, with the Mendocino County Recorder. The Bank's was filed on August 15, 1995, with the California Secretary of State.      California Commercial Code § 9401(b) provides that when the collateral is timber to be cut, the proper place to file in order to perfect a security interest is the office where a mortgage on real estate would be recorded, thus, ALC had a perfected security interest in the timber under this statute until it was cut.      Once the timber was cut, § 9401(b) became irrelevant. ALC's rights were thereafter governed by Commercial Code § 9306, dealing with the proceeds of collateral.(1) Section 9306(3) provides that a security interest becomes unperfected 10 days after the debtor has received the proceeds of the sale of the collateral unless at least one of four exceptions apply.      The first exception, provided in subsection (a), is not applicable because the office for filing a financing statement for cut timber or receivables is different than the office for filing the statement for timber to be cut. The former is the office of the Secretary of State, the latter is the County Recorder. This subsection only applies where the place for perfection of both the collateral and its proceeds is the same. 4 White & Summers, Uniform Commercial Code (4th Ed.), § 31-11, p. 150.      The third exception, provided in subsection (c), deals with a kind of property not at issue here.      The fourth exception, provided in subsection (d), is that the security interest in the proceeds is perfected with in the 10 day period. This section does not apply because ALC did not file a financing statement with the Secretary of State.      ALC relies on the second exception, provided in subsection (b), which directs that a security interest does not expire as to proceeds if "[a] filed financing statement covers the original collateral and the proceeds are identifiable cash proceeds."      It appears undisputed that the proceeds at issue in this case are identifiable cash proceeds. They are held in the trust account of the Lancaster's attorney by order of court, and have not been commingled. Since a properly filed statement covered the timber before it was cut, and since the proceeds of the sale are identifiable, ALC has a perfected interest in the proceeds pursuant to Commercial Code § 9306(3)(b).      Since the parties have not briefed the priority issue between ALC and the Bank, the court will not resolve any such disputes at this time and may consider a request for abstention, since that issue does not impact the bankruptcy estate. However, since ALC's security interest in the proceeds of the timber is valid, court will resolve the preference and related issues summarily. The court finds that the Lancasters' memory lapses have not created a triable issue of fact as to the lack of a security agreement.      The Lancasters' counterclaim alleges that an assignment they executed within 90 days of their bankruptcy filing, in order to facilitate the harvesting of the timber, created rights in ALC which constituted an avoidable transfer. Since ALC had a valid security interest before the assignment, the assignment created no new rights. Therefore, there was no preferential transfer. Summary judgment will therefore be granted in favor of ALC and against the Lancasters on the preference claim.      To reiterate, the court will order as follows:      1. It shall be deemed without substantial controversy in this adversary proceeding that ALC has a valid security interest in the proceeds of the sale of the timber.      2. The Lancasters' motion for summary judgment will be denied.      3. ALC's motion for summary judgment, as to the preference claim of the Lancasters, will be granted.      4. The court will make no order at this time as to the priority claims of ALC and the Bank against each other.      Counsel for ALC shall submit an appropriate form or order which counsel for the Lancasters and the Bank have approved as to form.
Dated: August 9, 1999                                                                        ____________________________                                                                                                             Alan Jaroslovsky                                                                                                             United States Bankruptcy Judge

1. Since perfection is not by filing with the county recorder after the timber has been cut, the fact that the cut timber was sold to a buyer in another county is irrelevant. ALC is not, as argued by the Lancasters and the Bank, rendered unperfected because it did not file in the buyer's c