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In re Oriental Rug Warehouse Club, Inc.

United States Bankruptcy Court for the District of Minnesota
205 Bankr. 407 (1997)


Oriental Rug Warehouse Club, Inc. (Oriental) (defendant) agreed to resell rugs provided by Yashar Rug Company, Inc. (Yashar) (plaintiff). Oriental purchased the rugs from Yashar for $106,073 and agreed to remit all proceeds from the resale of the rugs back to Yashar to be applied against Oriental’s total outstanding debt. However, Oriental instead invested the resale proceeds into purchasing more rugs to increase its inventory. Thereafter, Oriental filed a Chapter 11 bankruptcy petition. Yashar filed a proof of secured claim in Oriental’s property, seeking the outstanding balance owed from the resale proceeds. Yashar argued that because Oriental’s current inventory of rugs was purchased using the revenue generated from reselling the original rugs, Yashar retained a security interest in Oriental’s current inventory. Yashar conceded that the money used to purchase the new rugs could not be traced back to the sale of the original rugs. However, Yashar argued that Oriental, as the debtor, should bear the burden of tracing the proceeds.

Rule of Law


Holding and Reasoning (Dreher, J.)

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