## Facts

- Pettit Oil Company operated fuel distribution businesses, including “card lock” fuel sites, and later filed for Chapter 7 bankruptcy.
- IPC (USA), Inc. delivered fuel to Pettit under a consignment agreement for sale at Pettit’s sites.
- Under the agreement, Pettit invoiced customers and instructed them to pay IPC directly, but some customers paid Pettit instead.
- The agreement required Pettit to forward any misdirected customer payments to IPC, and Pettit often did so before bankruptcy.
- On the petition date, Pettit still had IPC’s consigned fuel in its possession and also held proceeds from prior sales of that fuel in the form of cash and accounts receivable (unpaid customer balances).
- IPC did not file a U.C.C. financing statement or otherwise perfect its interest in the consigned fuel or in the proceeds.
- The Chapter 7 trustee, Kathryn A. Ellis, brought an adversary proceeding seeking to avoid IPC’s unperfected interests under the trustee’s strong-arm powers and to treat the fuel and proceeds as property of the estate.
- The bankruptcy court granted summary judgment for the trustee, and the Ninth Circuit Bankruptcy Appellate Panel affirmed.
- IPC appealed to the Ninth Circuit, disputing only the ruling as to proceeds (cash and accounts receivable), arguing those proceeds never became Pettit’s property and therefore were beyond the trustee’s avoidance power.

## Issues

1. Under U.C.C. Article 9 and the trustee’s strong-arm power in 11 U.S.C. § 544(a), may a bankruptcy trustee avoid an unperfected consignor’s interest not only in consigned goods, but also in the cash and accounts receivable proceeds of those goods held by the debtor on the petition date?

## Decision

- The Ninth Circuit affirmed.
- The court held that Article 9 treats a “true” consignment, for creditor-rights purposes, like a security interest that must be perfected to defeat a lien creditor.
- Because IPC did not perfect its interest, the trustee (as a hypothetical judicial lien creditor under § 544(a)) had priority over IPC’s interest in the consigned fuel and in identifiable proceeds (cash and accounts receivable) in Pettit’s possession when the bankruptcy case commenced.
- The court rejected IPC’s argument that U.C.C. § 9-319(a) covers only “goods” and not proceeds; when the consignment is treated as a security interest, the usual Article 9 rules regarding proceeds apply.
- Judgment for the trustee was left in place, confirming the estate’s superior rights to the consigned fuel and the proceeds held at filing.

## Legal Principles

- Under 11 U.S.C. § 544(a), a Chapter 7 trustee has the rights and powers of a hypothetical judicial lien creditor as of the petition date and may avoid unperfected security interests that would be subordinate to such a lien creditor under state law.
- U.C.C. Article 9 generally governs consignments that fit the statutory definition, and it treats the consignor’s interest, for priority purposes, as a security interest that should be perfected (typically by filing a financing statement) to defeat competing creditor claims.
- U.C.C. § 9-319(a) deems the consignee to have rights and title to consigned goods sufficient for the consignee’s creditors to reach the goods, unless the consignor has perfected its interest.
- A perfected security interest in collateral ordinarily extends to identifiable proceeds of that collateral, including cash proceeds and accounts receivable generated by sales; an unperfected interest is vulnerable both as to the goods and as to proceeds in the debtor’s possession at bankruptcy.
- Even if a consignor asserts that proceeds “belong” to the consignor by contract, Article 9’s priority framework and the trustee’s § 544(a) status control the outcome against the bankruptcy estate when the consignor failed to perfect.

## Conclusion

In *In re Pettit Oil*, the Ninth Circuit held that IPC’s failure to perfect its Article 9 consignment interest allowed the Chapter 7 trustee, exercising § 544(a) rights as a hypothetical lien creditor, to take priority over IPC not only in the consigned fuel but also in the cash and accounts receivable proceeds of that fuel held by Pettit on the petition date, so the trustee could avoid IPC’s unperfected interests and treat the goods and proceeds as property of the estate.


In re Pettit Oil, 917 F.3d 1130 (9th Cir. 2019)