Citizens Bank & Trust v. Gibson Lumber Co.

Gibson Lumber Company (Gibson Lumber) (debtor) entered into a security agreement with Citizens Bank and Trust Company (Citizens) (creditor). In the security agreement, Gibson Lumber gave Citizens a security interest in, among other things, “all sawmill equipment…, including, but not limited to…,” 21 items separately listed items. The security agreement separately listed “saws,” but did not list Gibson Lumber’s Corley gang saw, Delta feeder mechanism, nor Detroit Allison diesel generator (the subject equipment), all of which Gibson Lumber used to operate its sawmill. Citizens filed a financing statement. Gibson Lumber later filed for bankruptcy. The bankruptcy trustee sold the subject equipment at auction. Citizens claimed entitlement to the proceeds from the sale and argued that the omnibus, catch-all phrase of “all sawmill equipment” or “saws” sufficiently covered the subject equipment. After reviewing Kentucky law, the bankruptcy court applied an inquiry test deeming a description of collateral sufficient in a security agreement or a financing statement if it puts subsequent creditors on notice that the collateral may be encumbered and to inquire further. The bankruptcy court found that a fair reading of the security agreement in question would not put subsequent creditors on notice that the parties intended for the security agreement to cover the subject equipment because the subject equipment was large, expensive, and not separately listed with the other, similar items. Accordingly, the bankruptcy court ruled that Citizens did not have a security interest in the subject equipment.