Nacio Investment Group, LLC v. Nacio Systems, Inc., a Nevada Corporation

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Entered on Docket
May 13, 2009
US BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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7 UNITED STATES BANKRUPTCY COURT
8 NORTHERN DISTRICT OF CALIFORNIA
9} Inre
10 || NACIO SYSTEMS, INC., No. 08-10078
11 Debtor(s).
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3 NACIO INVESTMENT GROUP, LLC,
14 Plaintiff(s),
15 V. A.P. No. 08-1098
16 || NACIO SYSTEMS, INC.,
17 Defendant(s).
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19 Memorandum After Trial
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In 2002, a company known as Nacio Systems, Inc., a Califomia corporation (“Nacio
7 Califomia”’), filed an Chapter 11 petition in this court. That case culminated in a confirmed plan of
“2 reorganization in 2003. The means for performance of that plan was up to $500,000.00 in financing to
a be supplied by plaintiff Nacio Investment Group, LLC (“NIG”). The plan provided that NIG would
. have a lien on the reorganized debtor’ s assets, including its leasehold improvements, all personal
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INFORMATION

CRS 08-01098 Doc#79 Filed: 05/13/09 Entered: 05/13/09 15:46:29 Page 1of6

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26 	1The debtor’s business is providing data storage and internet services.
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property, intellectual property, equipment, receivables, and customer accounts.1
After confirmation of the Nacio California plan, NIG loaned it over $800,000.00. Other than
the plan itself, there are no other documents granting NIG’s security interest.
NIG has filed four financing statements with the Secretary of State California and two with the
Secretary of State of Nevada. In all of the financing statements, the collateral is described as “a lien on
all leasehold improvements (except those subject to any mechanics liens currently under litigation), all
personal property, intellectual property, equipment, customer accounts and receivables.”
In 2005, the reorganized Nacio California entered into an asset purchase agreement by which it
transferred all of its assets to the current debtor, a Nevada corporation which also took the name Nacio
Systems, Inc. To avoid confusion, the court refers to this corporation as “Nacio Nevada.” Nacio
Nevada also assumed all of Nacio California’s obligations. The ownership of Nacio Nevada is
unrelated to that of Nacio California.
Nacio Nevada filed the current Chapter 11 case on January 18, 2008. NIG has filed a secured
claim for about $1 million. The issue in this adversary proceeding is the nature and extent of its
security interest. Nacio Nevada argues that NIG is wholly unsecured because there is no grant to it of
a security interest. It further argues that even if the confirmed plan of Nacio California grants a
security interest, such an interest is limited to assets existing when the Nacio California plan was
confirmed. NIG argues that this case is a “virtual continuation” of the Nacio California case such that
Nacio is Nevada may not be a debtor in bankruptcy. It also argues that it would be “inequitable to
limit or circumscribe” its lien because its loans saved the business.
The court finds little merit in NIG’s arguments. The “equity” argument is completely without
basis in the law; equitably, assets of a debtor ought to be distributed equally to all creditors. The rights
of secured creditors are honored in bankruptcy, despite the inequitable result, but only if all the
requirements for perfection have been met. There is no basis in the law for finding an “equitable”
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2There is no evidence that NIG had a prepetition claim in the Nacio California case. Most of its
claim arose after confirmation of the Nacio California plan. While some advances may have been
made during that case, those advances would have been treated as administrative expenses and not
prepetition debts entitling NIG to a vote on the plan. Thus, this is not a case where the same debtor is
seeking to deal with the same debts a second time.
3Moreover, a finding of “virtual continuation” is not something a court ought to make lightly,
as potential buyers of assets would be chilled if there is any sort of risk that the buyer, by virtue of the
purchase, might be barred from itself seeking bankruptcy relief thereafter.
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security interest enforceable against a debtor in bankruptcy.
Likewise, the “virtual continuation” argument is less than compelling. In order for the court to
dismiss a second filing as a continuation of a prior filing, the moving party must show that the debtor
is the same a prior debtor and the debts are the same debts dealt with in the prior case, such that the
second case is “akin to modifying the previous plan.” In re Northampton Corp., 39 B.R. 955, 956
(Bankr.E.D.Pa.1984). In this case, NIG’s argument seems predicated on the fact that Nacio Nevada
chose to use the word “Nacio” as part of its name, but NIG did that also. The equity ownership of
Nacio Nevada is entirely different from Nacio California, and NIG has made no showing that its debt
structure is anything like that of Nacio California’s. It appears that NIG, Nacio Nevada’s largest
creditor, had no voting rights in Nacio California’s plan. 2 NIG accordingly has not met its burden of
showing the court that this case is a bad faith continuation of the Nacio California case. 3
Although Nacio Nevada is not the same entity as Nacio California, it is a successor to Nacio
California by virtue of its assumption of its obligations. Thus, NIG has a valid security interest is at
least some of Nacio Nevada’s assets if it had a valid security interest in Nacio California’s assets when
Nacio Nevada acquired them.
Nacio Nevada argues that since NIG has no security interest, the most it ever had by virtue of
the Nacio California plan was a judicial lien which was not perfected because NIG filed the wrong
form with the secretaries of state. The court disagrees. 	There is no magic form of security agreement.
White & Summers, Uniform Commercial Code, § 30-1b (5 th ed., 2002). The confirmed plan in the
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26 	4Stoumbos interpreted Washington law. The law does not appear to be different in California.
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Nacio California case is signed by the debtor, clearly intends that NIG have a security interest, and
clearly describes the collateral. “A reorganization plan resembles a consent decree and therefore,
should be construed basically as a contract.” Hillis Motors, Inc. v. Haw. Auto. Dealers' Ass'n, 997 F.2d
581, 588 (9th Cir.1993) contract.” The court accordingly concludes that the plan gave NIG an
enforceable interest in the collateral.
Having determined that the plan is sufficient to constitute a security agreement, there remains
the issue of the extent of NIG’s security interest. As Nacio Nevada points out, there is no description
of after acquired property. In addition, the plan clearly specified that the loan amount was up to a
$500,000.00 maximum.
The court agrees with Nacio Nevada that since a mechanic’s lien attaches to an entire work of
improvement and not just the work performed by the lienholder, no security interest in Nacio
California’s leasehold improvements as they were all subject to a mechanic’s lien claim.
The court disagrees with Nacio Nevada to the extent it argues that California Commercial Code
§ 9204 provides that a security interest does not attach to after-acquired property unless the security
agreement has an after-acquired property clause. Whether or not a security agreement creates an
interest in after acquired property is a question of fact, largely centering around the nature of the
collateral. Thus, in most cases there is a security interest in after-acquired receivables even without an
express after-acquired clause in the agreement, but no security interest in after-acquired equipment.
Stoumbos v. Kilimnik, 988 F.2d 949, 956 (9th Cir. 1993). 4 Since there was neither an after-acquired
property clause nor convincing evidence of intent to have an interest in after-acquired equipment,
NIG’s security interest is limited to equipment existing at the time Nacio California’s plan was
confirmed. Its interest in receivables, however, extends to any existing when it sold its assets to Nacio
Nevada in 2005.
NIG does not contest that it never filed a claim of its security interest with the United States
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5NIG attempted to “prove” what equipment still exists today by dumping thousands and
thousands of pages of equipment inventory on the court from now and 2003 on the court, evidently
expecting the court to devote the next five or six years of its term in office to comparing the two. The
court expects a party-suppled witness to do this sorting, and in the absence of such testimony the court
will determine who has the burden of proof and rule against that party.
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Copyright Office. Accordingly, any security interest it may have in any registered copyrights is
avoidable.
For the foregoing reasons, the court concludes that NIG has a security interest in any
equipment Nacio California had upon confirmation of its plan in 20035 which is still owned by Nacio
Nevada and any outstanding receivables of Nacio California existing when Nacio Nevada purchased
Nacio California’s assets in 2005, and that this collateral secures a debt of $500,000.00 plus accrued
interest.
The court will give NIG a chance to properly determine what equipment is subject to its lien
and the value thereof in further proceedings. As to all other issues, the above findings and conclusions
shall be deemed to be without substantial controversy. No judgment will be entered until the rights of
all parties have been determined.
Counsel for NIG shall give notice to all parties to this adversary proceeding of a new
scheduling conference to be held on June 22, 2009, at 2:00 P.M.
Dated: May 13, 2009
SAlan Jaroslovsky
U.S. Bankruptcy Judge
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