## Facts

- Filtercorp, Inc., a Washington corporation, developed and distributed carbonated pads used to filter cooking oils.
- Beginning in 1991, Henry Paulman made several short-term loans to Filtercorp, documented by promissory notes prepared by Paulman’s counsel.
- A final note dated June 30, 1992 stated it was secured by (among other collateral) Filtercorp’s “accounts receivable and inventory,” referencing a UCC-1 filing and an attached inventory listing.
- Paulman filed a UCC-1 financing statement listing “accounts receivable and inventory” as collateral.
- After default and a state-court judgment, Filtercorp transferred substantially all assets to a related limited partnership entity.
- Insider lenders (the “Gateway” group) later obtained a blanket security interest in the assets and acquired them through a bankruptcy sale approved under 11 U.S.C. § 363.
- In bankruptcy, the debtor disputed whether Paulman’s security interest extended to after-acquired inventory and after-acquired accounts receivable.
- The bankruptcy court granted summary judgment against Paulman, ruling an express after-acquired property clause was required to reach after-acquired collateral; the Bankruptcy Appellate Panel affirmed.

## Issues

1. Under Washington law, does a security agreement granting an interest in “inventory” or “accounts receivable,” without additional after-acquired language, presumptively include after-acquired inventory or receivables absent evidence of contrary intent?
2. Did Paulman’s security interest cover after-acquired accounts receivable and/or after-acquired inventory under the parties’ agreement?
3. Could Paulman obtain appellate relief from the order approving the § 363 sale where no stay was obtained and the buyer purchased in good faith?
4. Did the bankruptcy court err in refusing to equitably subordinate or avoid other creditors’ claims, or in limiting discovery?

## Decision

- The Ninth Circuit reversed in part, affirmed in part, and remanded.
- The court rejected the rule that an express after-acquired clause is always required; under Washington law, a grant of “inventory” or “accounts receivable” presumptively includes after-acquired property unless intent to limit is shown.
- Paulman held a security interest in after-acquired accounts receivable because the agreement contained no limiting language as to receivables.
- Paulman did not hold a security interest in after-acquired inventory because the reference to an attached inventory listing showed intent to limit inventory collateral to identified items.
- The court rejected Paulman’s challenges to the § 363 sale order and affirmed denial of equitable subordination/avoidance and discovery-related relief.

## Legal Principles

- Under Washington’s UCC Article 9 framework, a security interest described as “inventory” or “accounts receivable” generally functions as a floating lien that includes after-acquired property absent evidence of a contrary intent.
- Contract language and incorporated documents can rebut the presumption of after-acquired coverage; referencing an attached inventory schedule may show intent to limit inventory collateral.
- Under 11 U.S.C. § 363(m), failure to obtain a stay of a bankruptcy sale order to a good-faith purchaser generally prevents effective appellate relief that would unwind or modify the sale.
- Equitable subordination or avoidance requires an adequate factual and legal basis; appellate review defers to bankruptcy court factfinding and discretionary case-management decisions, including discovery rulings.

## Conclusion

The Ninth Circuit held that Washington law presumptively treats security interests in “accounts receivable” and “inventory” as including after-acquired collateral, but found the parties’ agreement limited inventory by reference to an attached listing, while leaving receivables unrestricted; it also left intact the consummated § 363 sale and other bankruptcy rulings.


In re Filtercorp, Inc., 163 F.3d 570 (9th Cir. 1998)