In re C.W. Mining Co.

C.W. Mining Co. (debtor) filed a Chapter 11 bankruptcy, having first sold its accounts to Standard Industries, Inc. (Standard) (creditor). The bankruptcy trustee filed an adversary proceeding, seeking to avoid the transfers or to avoid Standard’s security interest in the accounts. Standard did file a financing statement to perfect its security interest, but that financing statement had already been deemed seriously misleading and ineffective for purposes of perfection. The accounts at issue were referenced as either open accounts (unpaid as of the date of C.W. Mining’s bankruptcy filing) or closed accounts (paid prior to the date of C.W. Mining’s bankruptcy filing). The bankruptcy trustee asserted that because Standard had failed to perfect its security interest, C.W. Mining still had some interest in the accounts and that they should accordingly become part of the bankruptcy estate. The trustee further asserted that it should be able to avoid Standard’s security interests in both open accounts and closed accounts, using the trustee’s status as a hypothetical lien creditor. The trustee motioned the bankruptcy court for a determination that 1) the assignment of accounts was subject to the Uniform Commercial Code (UCC), 2) the accounts were property of C.W. Mining or the bankruptcy estate, and 3) the trustee could avoid Standard’s security interest in the accounts.