In re North End Timber Productions LLC

North End Timber Productions LLC (NET) (debtor) filed a Chapter 11 bankruptcy in 2006, which was converted to a Chapter 7 bankruptcy in 2007. An adversary proceeding arose between three creditors in regard to $150,000 of insurance proceeds following a fire at NET. All three creditors had perfected security interests in all personal property equipment owned by NET. Three Rivers Bank of Montana (TRB) (creditor) perfected its security interest first, with Jobs Now, Inc. (JNI) (creditor) perfecting its interest second, and Johnson Brothers Contracting, Inc. (JBC) (creditor) perfecting its interest third. TRB and JNI were named as loss payees on the insurance policy, and while JBC was to be named under its security agreement with NET, it was not so named. Also, TRB and JBC entered a subordination agreement under which TRB agreed to subordinate its interest in certain machinery and equipment to JBC. It was agreed that $104,000 of the equipment destroyed in the fire was listed in that subordination agreement, with the remaining damage occurring to wiring and support structure at NET. TRB claimed it should take the $150,000, because it had first priority and did not subordinate its interest in insurance proceeds. Or, if the subordination agreement applied, it only applied to the extent of $104,000, and TRB should recover the remaining $46,000, based on having first priority. JNI argued that if TRB kept first-priority position, JNI would then receive any remaining funds as second in priority. JNI also asserted that if TRB had subordinated its interest to JBC, then JNI should move into first position and should receive all funds. Finally, JBC believed that it should receive first position subjected to the subordination agreement and should receive either the full $150,000 or the $104,000; JBC asserted no position as to the remaining $46,000. While there were several ancillary issues present, the biggest was whether JBC could leapfrog JNI for priority by virtue of its subordination agreement with TRB.