In re Bluegrass Ford-Mercury, Inc.

In the mid-1970s, Farmers National Bank of Cynthiana (Farmers) (defendant) entered into a floor-plan financing arrangement with Bluegrass Ford, pursuant to which Farmers provided Bluegrass Ford with a line of credit intended to be secured by Bluegrass Ford’s fleet of automobiles. On June 7, 1977, Farmers filed a Uniform Commercial Code (UCC) financing statement covering all new cars and demonstrators in Bluegrass Ford’s inventory. In August 1979, Bluegrass Ford’s assets, including inventory, were sold to a new owner, which became known as Bluegrass Ford-Mercury, Inc. (Bluegrass) (plaintiff). The floor-plan financing arrangement continued, but Farmers did not file any new financing statement as a result of the change. By spring 1981, Bluegrass experienced financial difficulties and stopped paying Farmers the proceeds from the sold vehicles, so that the cars were sold out of trust. As of April 9, Bluegrass owed Farmers $232,084.24, inclusive of the amount related to vehicles sold out of trust. Also on April 9, Bluegrass obtained a loan from Farmers in the amount of $250,000, which was guaranteed by the Small Business Administration (SBA). The SBA loan was accompanied by a security agreement and UCC financing statement that identified collateral as including “all inventory,” which were filed with the county clerk on April 9. On October 8, Farmers filed another UCC financing statement covering “all new and used vehicles” in Bluegrass’s inventory. On January 5, 1982, Bluegrass filed for bankruptcy. In the 89-day period from the filing of the financing statement on October 8 to the filing of bankruptcy, Bluegrass paid Farmers $91,950.31 in principal and $10,545.54 in interest. All remaining vehicles in inventory were sold as part of the bankruptcy proceeding. The proceeds, totaling $23,938.87, were remitted to Farmers. Bluegrass also made various other payments to Farmers pursuant to the SBA loan. Subsequently, Bluegrass, as debtor-in-possession, filed an action to recover certain payments as preferential transfers. The bankruptcy court ruled in Bluegrass’s favor. The bankruptcy court allowed Bluegrass to recover payments made in the preference period. The district court affirmed the bankruptcy court’s decision, and Farmers appealed. Farmers argued that it was entitled to the payments made during the relevant period because it was a perfected and secured creditor.