United States District Court, D. Alaska
NACOLE M. JIPPING, TRUSTEE, Appellant,
v.
FIRST NATIONAL BANK ALASKA, Appellee. BK. A15-00076-HAR Adv. No. A15-90018-HAR BAP No. AK-16-1155
DECISION & ORDER ON APPEAL
SHARON
L. GLEASON UNITED STATES DISTRICT JUDGE
Appellant
Nacole M. Jipping, Trustee of the Chapter 7 bankruptcy estate
of Omni Enterprises, Inc. (“Omni”), appeals the
United States Bankruptcy Court for the District of
Alaska's order granting summary judgment to First
National Bank Alaska (“FNBA”). The bankruptcy
court determined that FNBA held a valid security interest in
the bank account owned by Omni in the months preceding
Omni's filing a Chapter 7 bankruptcy petition, and
therefore held that FNBA's sweep of the account was
supported by its lien rights and not avoidable under 11
U.S.C. § 550.[1] On January 25, 2017, the Court heard oral
argument on the appeal. Having considered the documents filed
with the Court, the applicable law, and the arguments of the
parties, the bankruptcy court's ruling granting summary
judgment to FNBA and denying summary judgment to the Trustee
is REVERSED and REMANDED with directions to enter summary
judgment in favor of the Trustee.
BACKGROUND/JURISDICTION
Before
filing for bankruptcy, Omni operated retail stores in Bethel,
Alaska.[2] It maintained a bank account at FNBA from
at least 2005 up to the date it filed for bankruptcy in
2015.[3] Omni and FNBA also maintained a
borrower-lender relationship at certain times during that
period. In July 2009, Omni borrowed $1.3 million from FNBA
(the “2009 Loan”).[4] The 2009 Loan was secured by a
Commercial Security Agreement (the “2009 Security
Agreement”), which included as collateral
“Deposit Accounts.”[5] The 2009 Security Agreement
contained a future advances clause as well as a
cross-collateralization clause that provided that the 2009
Security Agreement secured “all obligations, debts and
liabilities, plus interest thereon, of Grantor to Lender . .
. whether now existing or hereafter
arising.”[6] The 2009 Security Agreement also contained
a “Perfection of Security Interest” section
stating: “This is a continuing Security Agreement and
will continue in effect even though all or any part of the
Indebtedness is paid in full and even though for a period of
time Grantor may not be indebted to
Lender.”[7] Omni paid off the 2009 Loan in full in
July 2011, and had no indebtedness to FNBA until August
2013.[8]
In
August 2013, Omni borrowed $2.6 million from FNBA for
equipment for a new grocery store (the “2013
Loan”).[9] The Commercial Security Agreement securing
the 2013 Loan (the “2013 Security Agreement”)
granted FNBA a lien on a detailed list of specific items of
equipment, but did not explicitly include “Deposit
Accounts” or refer to the 2009 Security
Agreement.[10] The 2013 Security Agreement contained an
integration clause stating that “[t]his Agreement,
together with the Related Documents, constitutes the entire
understanding and agreement” between FNBA and Omni with
respect to the 2013 loan.[11]
In
early 2015, Omni defaulted on the 2013 Loan. FNBA debited
Omni's FNBA-maintained bank account to satisfy the
mortgage payments for January and February
2015.[12] In March 2015, FNBA swept Omni's
account, seizing roughly $1.3 million, which it applied
against the 2013 Loan.[13] The Trustee then filed this adversary
action in bankruptcy court to recover the seized
funds.[14] On cross-motions for summary judgment,
the bankruptcy court entered summary judgment for FNBA, after
finding that (1) FNBA's security interest in the
“Deposit Accounts” in the 2009 Security Agreement
did not terminate when the 2009 Loan was paid off; and (2)
the integration clause in the 2013 Security Agreement did not
exclude the 2009 Security Agreement from applying to the 2013
loan.[15] Accordingly, the bankruptcy court
concluded that the FNBA sweep was supported by its lien
rights on Omni's bank account, and the Trustee could not
avoid it under the Bankruptcy Code.[16]
The
Trustee filed a timely notice of appeal on June 1,
2016.[17] FNBA then filed a notice of election to
have the appeal decided by the district court, [18] to which the
case was then transferred.[19] This Court has jurisdiction to
review final orders of a bankruptcy court under 28 U.S.C.
§ 158(a)(1).
ISSUES
PRESENTED/STANDARD OF REVIEW
The
parties agree that resolution of this appeal turns on whether
FNBA held a valid security interest in Omni's
FNBA-maintained bank account when FNBA swept the account in
early 2015.[20] The Trustee challenges both of the
findings of the bankruptcy court.[21]
“The
issues raised here involve interpretation of a security
agreement executed between [Omni and FNBA] and the scope of a
claimed security interest. The Alaska Uniform Commercial Code
and applicable state law regarding contract interpretation
will govern their resolution.”[22] Under Alaska law,
“[t]he objective of contract interpretation is to
determine and enforce the reasonable expectations of the
parties.”[23]
This
Court reviews de novo a bankruptcy court's ruling on
cross-motions for summary judgment, its interpretation of
security agreements, and its interpretation of state
law.[24] Here, the parties agree that whether
FNBA held a valid security interest in Omni's bank
account when FNBA performed the sweep in early 2015 should be
reviewed de novo.
DISCUSSION
The
Trustee seeks reversal of the bankruptcy court's decision
for two reasons. First, she argues that the 2009 Security
Agreement, which provides that it terminates once the
“Indebtedness” is paid in full, terminated in
2011 when Omni paid off the 2009 Loan.[25] FNBA responds
that the 2009 Security Agreement defines
“Indebtedness” to specifically include future
advances[26] and also includes a
cross-collateralization clause.[27]Therefore, FNBA maintains
that the 2009 agreement, which included Omni's
FNBA-maintained “Deposit Accounts” as collateral,
was not terminated when the 2009 Loan was paid
off.[28] FNBA cites to a provision in the 2009
Security Agreement that it “is a continuing Security
Agreement and will continue in effect even though all or any
part of the Indebtedness is paid in full and even though for
a period of time Grantor may not be indebted to
Lender.”[29]
As
discussed below, the Court has determined that the second
issue raised in this appeal is dispositive. Therefore, the
Court will assume, without deciding, that the 2009 Security
Agreement remained in effect after Omni paid off the 2009
Loan and turn to this second issue: whether the 2013 Security
Agreement's integration clause precludes FNBA's
reliance on the 2009 Security Agreement as security for the
2013 Loan.
The
2013 Security Agreement contains the following integration
clause:
Amendments. This Agreement, together with
any Related Documents, constitutes the entire understanding
and agreement of the parties as to the matters set forth in
this Agreement. No alteration or amendment to this Agreement
shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the
alteration or amendment.[30]
FNBA
maintains that the integration clause does not exclude the
2009 Security Agreement and instead argues that the 2009
Security Agreement is implicitly included as a “Related
Document[]” referenced in the integration clause
itself.[31] The bankruptcy court agreed with FNBA,
concluding, “The reference to the 2009 Security
Agreement is not specific, and is in fact exceedingly
obscure. But, in parsing the meaning of Related Documents, I
conclude the 2009 Security Agreement is not
excluded by the integration clause; it is in fact
included.”[32] The bankruptcy court
reasoned:
The answer lies in the somewhat circular definitions of
“Related Documents” and
“Indebtedness” in the 2013 Security Agreement. It
becomes a chicken-and-egg question-does the integration
clause exclude the 2009 Security Agreement or not? Despite
this circularity, the Related Documents definition in the
2013 Security Agreement is sufficiently clear to mean, in
this case [emphasis and bracket matter added]:
Related Documents. The words “Related Documents”
mean all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security
agreements [such as the 2009 Security Agreement], mortgages,
deeds of trust, security deeds, collateral mortgages, and all
other instruments, agreements and documents, whether now or
hereafter existing [such as the 2009 Security Agreement],
executed [by virtue of the Future Advances clause in the 2009
Security Agreement] in connection with the Indebtedness [such
as the 2013 loan].[33]
The
Court finds, however, that FNBA and the bankruptcy
court's interpretation constitutes a strained reading of
the Related Documents clause, as perhaps best evidenced by
the parentheticals added by the bankruptcy court. In this
Court's view, a more natural reading of the Related
Documents clause favors the Trustee's position. For the
2009 Security Agreement to secure payment for the 2013 Loan,
the 2009 Security Agreement must be a “Related
Document[], ” meaning that it was “executed in
connection with the Indebtedness.” The bankruptcy court
concluded that the 2009 Security Agreement was
“executed in connection with” the 2013 Loan
because the definition of
“Indebtedness”[34] in the 2013 Security Agreement
refers to “future advances, ” which the
bankruptcy court then interpreted to extend to the future
advances clause of the 2009 Security Agreement.[35] But, as the
bankruptcy court acknowledged, this interpretation of the
2013 clause constitutes a “somewhat circular”
construction of the relevant terms so as to result in an
“exceedingly obscure” connection between the 2009
and 2013 Security Agreements.[36]
Giving
ordinary words their ordinary meaning, as required by Alaska
law, [37] it is more logical to construe “in
connection with the Indebtedness” in the 2013 Security
Agreement to refer solely to those documents executed with
respect to the 2013 Loan, thus excluding from “Related
Documents” the 2009 Security Agreement, as that
document was executed in connection with the 2009 Loan. And
FNBA offers no evidence by way of conduct or independent
contractual language that shows that FNBA or Omni intended to
incorporate the 2009 Security Agreement into the 2013
Security Agreement.
Moreover,
the Alaska Supreme Court has articulated an objective
standard to contract interpretation.[38] A third party examining
the 2013 Security Agreement would be unlikely to discern that
the 2009 Security Agreement was incorporated into the 2013
Security Agreement. To do so would require the third party to
have knowledge of the earlier-terminated loan and the 2009
Security Agreement, and to employ the circular interpretation
used by the bankruptcy court. More to the point, it is
unlikely that a potential creditor to Omni in 2012, after the
2009 loan had been paid in full, ...