RF Cunningham & Co Inc

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------------------------------------x
In re:
Case No. 805-84105-511
R.F. CUNNINGHAM & CO., INC.,
Chapter 11
Debtor.
-----------------------------------------------------------------x
MEMORANDUM DECISION
(Re: Motion for Relief from the Automatic Stay)
APPEARANCES:
Counsel for Champaign Landmark, Inc.
Jeffrey Herzberg, Esq.
Zinker & Herzberg, LLP
278 East Main Street
Suite C
PO Box 866
Smithtown, NY 11787-0866
Counsel for the Debtor
Michael S. Amato, Esq.
Ruskin Moscou Faltisckek PC
East Tower, 15th Floor
1425 EAB Plaza
Uniondale, NY 11556--1425
Counsel for the Official Committee of Unsecured Creditors
Alan D. Halperin, Esq.
Halperin Battaglia Raicht, LLP
555 Madison Avenue
New York, NY 10022
Counsel for Agland Grain, Inc., Fulton-Marshall Co-Op and Stockland Grain Co.
David C. Barrett, Jr.
Barrett, Easterday, Cunningham & Eselgroth LLP
7269 Sawmill Road, Suite 100
Dublin, Ohio 43016
HON. MELANIE L. CYGANOWSKI, United States Chief Bankruptcy Judge:
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 2 of 19
At a hearing held on September 29, 2005, this Court heard and determined a motion
by Champaign Landmark by which it sought relief from the automatic stay pursuant to 11 U.S.C.
§ 362(d) for the purpose of enforcing an Ohio statutory lien that encumbered certain agricultural
commodity assets of the debtor, R.F. Cunningham and Company (the “Debtor”). The motion was
denied. At the request of the parties, the Court issues this Memorandum Decision which reflects the
oral decision rendered at the time of the hearing.
BACKGROUND OF THE PROCEEDINGS
The Debtor filed a voluntary petition for relief under Chapter 11 of Title 11 of the
United States Code (“Bankruptcy Code”), on June 13, 2005, and has been acting as a debtor in
possession since that time. According to the Debtor’s petition, it is a New York corporation licensed
to transact in sales of grain commodities in the State of New York. 	The movant, Champaign
Landmark, Inc., is a cooperative of grain farmers located in the State of Ohio. 	Champaign
Landmark did business with the Debtor prepetition, selling it grains for pick-up within the
boundaries of Ohio.
The Debtor, on its petition, indicated that Champaign Landmark was owed
approximately $140,000 for grains picked up in Ohio for resale. Champaign Landmark disputes the
sum, and argues its records show the sum owing from the Debtor to be approximately $150,000.
Champaign Landmark relies on the statutory scheme of the State of Ohio as the basis
for relief from the stay. It contends that Chapter 926 of Ohio’s Revised Code Annotated (“ORCA”)
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 3 of 19
applies to the situation at hand. Ohio Rev. Code Ann. § 926 (West 2005). Specifically, Champaign
Landmark contends that by virtue of ORCA § 926.021, there is a statutory lien that attaches to the
grain sold to the Debtor and that as a consequence, Champaign Landmark should be permitted to
have the automatic stay lifted to allow it to enforce its lien against the Debtor. 	Champaign
Landmark argues that it is not adequately protected in any fashion and that the Debtor has no equity
in the grain deposits until the same are resold and payment is made to Champaign Landmark.
Opposing the motion for relief from the stay is the Debtor, the Committee of
Unsecured Creditors and Agland Grain, Inc., a creditor of the Debtor. Among the arguments offered
is that by the Debtor which urges that Ohio law does not apply in the first instance because the
contract between Champaign Landmark and the Debtor, entered into in New York, provides, in
substance, that it is New York law that controls the parties’ rights under the agreement.
The Debtor further argues that even if Ohio law applies, any lien arising under the
statutory scheme of ORCA § 926.021 must be avoided pursuant to 11 U.S.C. § 544, because it is in
effect a “secret lien,” creating a priority secured claim in derogation and in detrimental harm to the
rights of other creditors, all of which is in violation of the statutory priority scheme of the
Bankruptcy Code. 	This argument is based on the proposition that the statutory lien that arises
pursuant to ORCA § 926.021 extends beyond the grain sold by Champaign Landmark to the Debtor.
The Debtor points out that the definition of “agricultural commodity assets” (the collateral to which
the lien purportedly attaches) is found in ORCA § 926.021(A)(3). 	That section provides that
“agricultural commodity assets” include the agricultural commodities owned or stored, redeposited
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 4 of 19
agricultural commodities, proceeds from the sale of the agricultural commodities due or to become
due, any other unencumbered funds, property or equity in funds or property wherever located that
can be directly traced to the sale of agricultural commodities by the handler, and any other
unencumbered funds, property or equity in assets. Because ORCA § 926.021(B) provides that a lien
shall exist on all of the Debtor’s agricultural commodity assets, the Debtor argues this lien, if held
to apply, would attach to all assets of the Debtor, wherever located, and thus would be a secret lien
as the term has been utilized in other cases. See, e.g., In re Canney, 284 F.3d 362 (2d Cir. 2002).
The Debtor also argues that Champaign Landmark, in any event, does not have
standing to assert the lien rights under Ohio law. Subsection (D) of ORCA § 926.021 provides that
it is the Director of Agriculture who has exclusive authority to enforce the lien claims that arise by
virtue of the statute.
The Committee of Unsecured Creditors joins in the Debtor’s arguments, and also
argues that it is black letter law that state statutory schemes, such as ORCA § 926.021, cannot be
applied to property outside of the state, and that the doctrine prohibiting such extraterritorial
application limits the reach of the Ohio statute. The Committee argues, therefore, that because the
Debtor has no assets in the State of Ohio, the statutory lien cannot reach the assets of the Debtor.
Champaign Landmark argues in reply that the mere fact that Champaign Landmark
agreed to the New York choice of law provision is of no moment given that the lien is held by the
Department of Agriculture and the Department was not a signatory to the contract. With respect to
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 5 of 19
the extraterritorial application of the statute, Champaign Landmark argues that the lien follows the
grain and that even if the Court were to hold it inappropriate to have extraterritorial application
beyond the borders of Ohio, the decision of In re Eddingfield, 67 B.R. 1000 (Bankr. C.D. Ill. 1986),
supports the notion that this Court should give comity and recognize the lien of the sister state.
DISCUSSION
11 U.S.C. § 362(d) governs motions for relief from the stay. That section provides,
to the extent relevant:
(d) 	On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section, such as by
terminating, annulling, modifying, or conditioning such stay-
(1) 	for cause, including the lack of adequate protection of an interest in property
of such party in interest;
(2) 	with respect to a stay of an act against property under subsection (a) of this
section, if-
(A) 	the debtor does not have an equity in such property; and
(B) 	such property is not necessary to an effective reorganization ....
11 U.S.C. §362(d) (2000).
The Court has broad discretion to lift the stay. See, e.g., Capital Communications
Federal Credit Union v. Boodrow, 197 B.R. 409, 412-13 (N.D.N.Y. 1996), aff’d, 126 F.3d 43 (2d
Cir. 1997), cert. denied, 522 U.S. 1117 (1998) (“Since cause is not defined in the Code, a court has
broad discretion to lift the stay in ‘appropriate circumstances’”) (citation omitted). With respect to
relief for “cause,” however, it is the movant who must make an initial showing of cause before any
burden shifts to the debtor; absent such showing, relief from the stay will be denied. 	See In re
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 6 of 19
Mazzeo, 167 F.3d 139, 142 (2d Cir. 1999). The determination of whether to lift or modify the stay
ultimately turns on the facts of each given motion. See, e.g., In re Bogdanovich, 292 F.3d 104, 110
(2d Cir. 2002). In general, before relief will be granted, there must be a showing of harm to the
secured creditor caused by the continuation of the stay. Boodrow, supra, 197 B.R. at 413. There
is no statutory requirement that unsecured creditors receive adequate protection, and the lack of
adequate protection does not entitle an unsecured creditor to relief from the stay. See In re Aquarius
Disk Services, Inc., 254 B.R. 253, 260 (Bankr. N.D. Cal. 2000). 	Only in extraordinary
circumstances will an unsecured creditor be granted relief from the stay. See, e.g., In re Leibowitz,
147 B.R. 341, 345 (Bankr. S.D.N.Y. 1992) (citing Sonnax Industries, Inc. v. Tri Component
Products Corp., 99 B.R. 591, 595 (Bankr. D. Vt. 1989), aff’d, 907 F.2d 1280 (2d Cir. 1990)); In re
Burack, Inc., 132 B.R. 814, 817 (Bankr. S.D.N.Y. 1991); In re Pioneer Commercial Funding Corp.,
114 B.R. 45, 48 (Bankr. S.D.N.Y. 1990)). The general principle is that “unsecured claims should
not be granted relief from the stay because to do so would result in a violation of one of the
fundamental concepts of bankruptcy law; that there should be an equality of distribution among
creditors.” Liebowitz, 147 B.R. at 345.
To the extent Champaign Landmark is requesting relief from the stay in order to
enforce a statutory lien, it is a threshold question for the Court whether Champaign Landmark does
indeed hold an enforceable lien against the Debtor’s assets.
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 7 of 19
STATUTORY FRAMEWORK
We begin with a review of the Ohio statutory framework to better understand the
issues presented in this case. Subsection (B) of ORCA § 926.021 states:
(B) A lien shall exist on all agricultural commodity assets of an agricultural
commodity handler in favor of any of the following:
(1) 	Claimants, including lenders, who possess receipts covering grain
owned or stored by the handler;
(2) 	Claimants who possess written evidence of ownership other than a
receipt disclosing a storage obligation of the handler, including
tickets;
(3) 	Claimants who surrendered receipts as part of an agricultural
commodity sales transaction but were not paid fully for the
agricultural commodity and the handler failed within twenty-one days
after the surrender;
(4) 	Claimants who possess any other written evidence of the sale of
agricultural commodities to the handler for which they were not paid
fully, including the sale of agricultural commodities for a nominal
sum under a feed agreement.
(emphasis added).
In turn, Section 926.021(A)(3) of the ORCA defines “agricultural commodity assets”
as:
(a) 	All agricultural commodities owned or stored, including agricultural
commodities in transit shipped by the handler but not yet paid for;
(b) 	Redeposited agricultural commodities;
(c) 	Proceeds from the sale of agricultural commodities due or to become due;
(d) 	The equity less any secured financing directly associated therewith in assets
in hedging or speculative margin accounts held by commodity or security
exchanges or dealers representing the exchanges, and any moneys due or to
become due less any secured financing directly associated therewith from
any transactions on the exchanges;
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 8 of 19
(e) 	Any other unencumbered funds, property, or equity in funds or property,
wherever located, that can be directly traced to the sale of agricultural
commodities by the handler, provided both that the funds, property, or equity
in funds or property shall not be considered to be encumbered unless the
encumbrance results from good and valuable considerations advanced by any
secured party on a good faith basis and that the encumbrance is not the result
of the taking of funds, property, or equity in funds or property as additional
collateral for an antecedent debt;
(f) 	Any other unencumbered funds, property, or equity in assets.
The terms “agricultural commodity handler” and “handler” are defined by ORCA §
926.01(C) to mean, “any person who is engaged in the business of agricultural commodity
handling.” This in turn requires reference to ORCA § 926.01(B), which states:
(B) 	“Agricultural commodity handling” or “handling” means any of the
following:
(1) 	Engaging in or participating in the business of purchasing from
producers agricultural commodities for any use in excess of thirty
thousand bushels annually;
(2) 	Operating a warehouse as a bailee for the receiving, storing, shipping,
or conditioning of an agricultural commodity;
(3) 	Receiving into a warehouse an agricultural commodity purchased
under a delayed price agreement;
(4) 	Providing marketing functions, including storage, delayed price
marketing, 	deferred 	payment, 	feed 	agreements, 	or 	any 	other
marketing transaction whereby control is exerted over the monetary
proceeds of a producer’s agricultural commodities by a person other
than the producer.
A “claimant” is defined by ORCA § 926.021(A)(1) to mean, as used in that section, “a person to
whom an agricultural commodity handler owes a financial obligation for agricultural commodities
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 9 of 19
or the actual monetary proceeds from agricultural commodities that have been delivered to the
handler.”
The mechanics of the lien are outlined by ORCA § 926.021(C), which states:
The lien that shall secure all claims described in division (D) of this section, shall
arise, attach to the agricultural commodity assets of an agricultural commodity
handler, and become effective at the time of delivery of the agricultural commodity
for sale or for storage under a bailment agreement, commencement of the storage
obligation, or when funds are advanced by the lender, and shall terminate when the
liability of the agricultural commodity handler to the claimant is discharged,
provided that the priority of each lien among the respective claimants shall not relate
to the date the claim arises but shall be governed by the priorities established in
division (D) of this section. In the event of a failure, the lien claims of all claimants
shall be considered to be assigned by operation of this section to the department of
agriculture, and in the event of a failure and subsequent liquidation, the lien shall
transfer over to assets or proceeds of assets either received or liquidated by the
department.
ORCA § 926.021(C) (emphasis added). “Failure,” as used in the statutory language, is a defined
term meaning, for the purposes of this case, “an inability to satisfy claimants financially,” and is
essentially a trigger for certain elements of the statute. 	See ORCA § 926.021(A)(2). 	The
enforcement authority is then vested with the Director of Agriculture by ORCA § 926.021(D), which
states, “Except as provided in division (E) of this section, in the event of a failure, the director of
agriculture shall possess exclusive authority to enforce the lien claims and allocate the proceeds ....”
Exception is provided by ORCA § 926.021(E):
In the event that any adversary proceeding is commenced to recover agricultural
commodity assets upon which the lien imposed in this section is imposed and the
department declines to enter the proceeding, the director, upon application to the
director by any claimant, shall assign to the claimant the applicable lien to permit the
claimant to pursue the claimant’s lien in the adversary proceeding to the extent the
action will not delay the resolution of the proceeding, the prompt liquidation of the
assets, or the ultimate distribution of the assets to all claimants.
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 10 of 19
These statutory passages are at the center of the dispute between the parties in this
case. The Court is thus called upon to interpret and apply this law, drafted by a legislature with a
unique and specialized understanding of the agricultural industry of Ohio.
STANDING TO ENFORCE THE LIEN
The Ohio statute provides by its terms that the Director of Agriculture possesses the
exclusive authority to enforce the lien claims. ORCA § 926.021(D) states, that upon a failure, “the
director of agriculture shall possess exclusive authority to enforce the lien claims.” 	ORCA §
926.021(E) provides an exception, however, for situations where the Director assigns the right to
enforce the lien to a party who requests such assignment. Champaign Landmark argues that by
reason of a letter provided to it, the State of Ohio has assigned to it the right to enforce the lien. This
letter is dated July 28, 2005, and was written by the Assistant Attorney General for the Ohio
Department of Agriculture. It reads in pertinent part:
I understand that your client, Champaign Landmark, is asserting a claim against the
bankruptcy estate of R.F. Cunningham & Co. (“R. F. Cunningham”) for amounts due
from the sale of agricultural commodities. You have advised me that your client is
asserting that a lien exists against certain assets of R.F. Cunningham pursuant to R.C.
926.021(B).
The Ohio Department of Agriculture (“ODA”) has not made a determination that
such a lien is in existence against the assets of R.F. Cunningham. Accordingly, ODA
declines to intervene in the R.F. Cunningham bankruptcy matter, and does not assert
that it has any exclusive authority to assert such a lien against R. F. Cunningham.
ODA has no objection to any effort by Champaign Landmark to assert a lien against
any assets of R. F. Cunningham.
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 11 of 19
The issue presented is whether the letter is indeed an “assignment” in words and
effect, particularly given that an “adversary proceeding” has not yet been commenced. Although
the word “assignment” is not expressly used in the letter, the Court finds that the intent of the letter
was to assign to Champaign Landmark whatever lien enforcement rights existed under the statute.
Moreover, for the purpose of this decision (both now and with respect to the Court's conclusions as
to whether or not a lien exists and may be avoided under 11 U.S.C. § 544), the Court believes that
it is not necessary that an “adversary proceeding” be commenced. More specifically, the Court does
not believe the Ohio legislature intended their use of the phrase “adversary proceeding” in the statute
to necessarily have the same meaning ascribed to it by the Bankruptcy Code and Federal Rules of
Bankruptcy Procedure, which require that certain actions be adjudicated within the context of an
“adversary proceeding.” Fed. R. Bankr. Pro. 7001. In a bankruptcy setting, the Ohio statute could
be read more fairly to mean “adversarial proceeding,” rather than “adversary proceeding,” which
is a bankruptcy term of art.
Here, the Court believes that it would elevate form over substance not to deal with
the merits of the issue that has been presented to this Court by the claimant, Champaign Landmark,
that chose to bring a motion before this Court in lieu of an adversary proceeding. The Court does
not believe the rights of the affected parties, be they the Debtor or Champaign Landmark, have not
been adequately represented or suffer any prejudice or adverse effect by reason of having the Court
render its decision in the context of a contested proceeding pursuant to Fed. R. Bankr. Proc. 9014
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

1
The decision of Judge Gerling in In re Command Services Corp., 102 B.R. 905 (Bankr. N.D.N.Y.
1989), is on point. There the Court held that "[w]hile there is merit to [the movant’s] contention that
a determination as to the validity, priority and extent of a lien is properly brought before a bankruptcy
court within the context of an adversary proceeding, pursuant to Bankr. R. 7001(2) rather than as a
contested matter pursuant to Bankr. R. 9014, courts have concluded that where the rights of the
affected parties have been adequately presented so that no prejudice has arisen, form will not be
elevated over substance and the matter will be allowed to proceed on the merits as originally filed."
Id. at 908.
Page 12 of 19
in lieu of requiring an adversary proceeding to be commenced pursuant to Fed. R. Bankr. Proc.
7001(2).1
The Court concludes that, to the extent it is necessary to address the issue of whether
Champaign Landmark has standing to enforce the lien created by ORCA § 926.021, Champaign
Landmark has received the requisite assignment from the Director of Agriculture.
AVOIDABILITY UNDER THE STRONG ARM PROVISION
After hearing oral argument, reviewing the briefs and considering the statutory
framework of ORCA § 926.021, the Court concludes that the statute is indeed susceptible to being
avoided by 11 U.S.C. § 544 because it is too broad and gives rise to a secret lien avoidable by the
provisions of the Bankruptcy Code. The Court reaches this conclusion for the reasons that follow.
First, contrary to the arguments of Champaign Landmark and the words of In re
Merchants Grain, 93 F.3d 1347 (7th Cir. 1996), cert. denied, 519 U.S. 1111 (1997), a decision by
the Court of Appeals for the Seventh Circuit nearly a decade ago, in which it interpreted ORCA §
926, clearly indicated that the statute itself does not confine the lien to only the grain that is at issue.
Rather, ORCA § 926.021(B) provides that a “lien shall exist on all agricultural commodity assets
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

2
See 11 U.S.C. § 541 (2000).
Page 13 of 19
of an agricultural commodity handler in favor of any of the following ....” (emphasis added). The
statutory lien that arises, and is assigned to the Director of Agriculture upon a “failure” as defined
in ORCA § 926.021(A)(2), is not limited to the agricultural commodity for which payment is not
forthcoming. The lien extends to all that is covered by the definition of agricultural commodity
assets contained in ORCA § 926.021(A)(3), i.e., all unencumbered funds, property and equity of the
Debtor. The lien is extremely broad, almost as broad as the notion of property of the estate. 2 For
that reason, it falls within the parameters of 11 U.S.C. § 544(a)(1), which provides in pertinent part:
(a) The trustee shall have, as of the commencement of the case, and without regard
to any knowledge of the trustee or of any creditor, the rights and powers of, or may
avoid any transfer of property of the debtor or any obligation incurred by the debtor
that is voidable by-
(1) a creditor that extends credit to the debtor at the time of the
commencement of the case, and that obtains, at such time and with
respect to such credit, a judicial lien on all property on which a
creditor on a simple contract could have obtained such a judicial lien,
whether or not such a creditor exists; ....
11 U.S.C. § 544 (2000). 	Under 11 U.S.C. § 544(a)(1), a debtor in possession (vested with the
powers of a trustee by 11 U.S.C. § 1107(a)) has the so-called “strong arm power” to cut off
unperfected security interests such as secret liens. As observed by the Court of Appeals for the
Second Circuit, the “purpose of the ‘strong arm clause’ is to cut off unperfected security interests,
secret 	liens 	and 	undisclosed 	prepetition 	claims 	against 	the 	Debtor’s 	property 	as 	of 	the
commencement of the case.” In re Canney, 284 F.3d 362, 374 (2d Cir. 2002) (citation omitted); see
also In re Reasonover, 236 B.R. 219, 230 (Bankr. E.D. Va. 1999) (“trustee’s strong-arm powers are
meant in part to avoid ‘secret liens’ which take away from unsecured creditors”).
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 14 of 19
This Court shares the concerns of the Debtor and the Committee, that were the Court
to embrace the lien of the Ohio statutory scheme, it would annex to all properties, funds or equity
of the Debtor otherwise unencumbered or within the definition of ORCA § 926.021(A)(3), and
would be a secret lien that would be detrimental to the interests of other creditors. Simply put,
creditors would have no idea whether monies that were given to them prepetition, or monies held
by the Debtor at this time, were encumbered by reason of the wide reaching lien arising from ORCA
§ 926.021(B).
As such, the Court believes that it is too broad a lien created by the statute.
Notwithstanding the argument of Champaign Landmark or the words of the Seventh Circuit in
Merchants Grain, the statutory language as drafted provides that the lien is not limited to the grain
at issue. Merchants Grain concerned an action under 11 U.S.C. § 547(b) by a Chapter 11 trustee
to recover payments made to depositors in the 90-day period preceding the petition date on account
of the sales of grain by the debtor, which operated an Ohio grain storage and marketing facility. The
trustee’s argument for the recovery of the alleged preferences was that the statutory lien arising by
operation of the Ohio statute was avoidable pursuant to 11 U.S.C. §§ 545(1) and (2), and that if the
payments were made on account of a voidable lien, then those funds should be recoverable by the
estate. The critical issue before the court, insofar as determining whether the statutory lien was
avoidable, was the point at which the lien attached. Whether the lien attached was not at issue in
that case and the Seventh Circuit did not have to decide whether the statute was overbroad.
Consequently, this Court believes that the Seventh Circuit limited its comments and was not required
to focus upon its statements when making such statements along the lines that the lien created by
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 15 of 19
ORCA § 926.021 attached to the grain. Those comments are replete throughout the case, and the
Court believes it was because the issue did not arise to focus the court’s attention upon the fact that
the lien does more than attach to the grain deposits, but rather, attaches to all of the property defined
in ORCA § 926.021(A)(3) as agricultural commodity assets.
For these reasons, this Court does not believe that the Merchants Grain case is on
point, nor one that applies to the case at hand where the argument is that the lien attaches to property
above and beyond the bushels of grain that traveled from Ohio to other places by reason of the
business done between the Debtor and Champaign Landmark. 	To the extent that the statutory
scheme of Ohio applies, the Court believes that it is, by its terms, far too broad. By its breadth, the
statutory lien is akin to a secret lien, giving a priority secured claim in derogation of the rights of
other creditors and in violation of the very statutory scheme sought to be enforced by this Court by
reason of the Bankruptcy Code. Were the Court to permit the Ohio statutory lien to arise and attach
to all the assets to which it believes it may attach, it would disrupt the equitable distribution scheme
envisioned by Congress in the Bankruptcy Code, and for that reason, the Court believes that
Congress has given debtors in possession, as well as a trustee, the necessary power to avoid such
a situation and to avoid such a secret lien.
THE PRINCIPLES OF COMITY & EXTRATERRITORIAL LIENS
As an alternative holding, even assuming that ORCA § 926.021 applies and the Court
did not find the lien created by Ohio law was avoidable, the Court agrees with the Creditors’
Committee that the principles of extraterritoriality prohibit the enforcement of the lien beyond the
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 16 of 19
boundary of the State of Ohio. There are several cases of particular interest to this Court relevant
to this issue. The first is Chicago Title & Trust Co. v. Fox Theatres Corp., 105 F.2d 147 (2d Cir.
1939) (relying on J.T. Fargason Co. v. Furst, 287 F. 306 (8th Cir. 1923), and Driver v. J.T. Fargason
Co., 288 F. 671 (8th Cir. 1923)), where the Second Circuit rejected the notion that a local statute
could impose a lien on property wherever located. A lien created by state statute, based upon this
caselaw, has no extraterritorial force. Rather, as the Supreme Court has held, the “priority of the
state extends to all property of the Debtor within its borders.” Marshall v. New York, 254 U.S. 380,
385 (1920). 	The Court believes that by reason of the doctrine of extraterritoriality, it must be
concluded that the Ohio statute cannot reach beyond the borders of the State of Ohio and thus is
inoperative with respect to the property of the Debtor outside of Ohio. The parties concede that
there are no assets of the Debtor within the State of Ohio, and even if the lien were held to be valid,
there is no property within the state to which the lien would attach.
Champaign Landmark argues that even if the Court were to adopt the view that a
statute of a state has no extraterritorial effect, it should nonetheless give the statute comity, as was
done in In re Eddingfield, 67 B.R. 1000 (Bankr. C.D. Ill. 1986). In that case, the court recognized
the doctrine of extraterritoriality, but also indicated that by virtue of the doctrine of comity, a court
of one state may give effect to a lien granted by the laws of another state. After considering the
issues as to whether comity should be given, the Eddingfield court concluded that the affected party
had not asserted any injury to its interest which would cause the court to find that comity should not
be observed, and thus granted the non-domicile state’s statutory lien priority. That is not the case
here. Indeed, the Debtor, the Creditors’ Committee and others have risen to assert that were this
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

3
See Debtor’s Memorandum in Opposition of the Motion, Exhibit A, ¶ 14 (a copy of the contract
entered into by the Debtor and Champaign Landmark).
Page 17 of 19
Court to give comity to the Ohio statutory lien, injury would result to the affected parties, namely,
the creditors and Debtor in this bankruptcy proceeding. 	Moreover, the entire priority and
distribution scheme of the Bankruptcy Code would be disrupted if this Court granted comity to the
Ohio lien. 	For these reasons, the Court believes that granting comity to the Ohio statute is not
appropriate.
CONTRACTUAL CHOICE OF LAW
As a further alternative ruling, this Court finds that New York law, and not Ohio law,
governs the relationship of the parties here. The Debtor urges that Champaign Landmark chose, by
virtue of the choice of law provision of the contract, to have its contract interpreted and enforced in
accordance with the laws of the State of New York without regard to principles of conflict of laws.3
Champaign Landmark urges that the lien is held by the State of Ohio and that because the state was
not a signatory to the contract, it therefore is not bound by the contractual choice of law agreed to
by Champaign Landmark with the Debtor. The Court disagrees.
The Court believes, as the Debtor rightly points out, that the lien is held by a
“claimant.” The claimant in this instance is Champaign Landmark. Subsection (D) of ORCA §
926.021 grants to the Director of Agriculture the exclusive authority to enforce the lien claims, but
does not grant the Director of Agriculture the lien. Rather, as provided by ORCA § 926.021(C),
and notwithstanding the enforcement authority vested in the Director of Agriculture, the lien that
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 18 of 19
arises is held by the claimant. Here, Champaign Landmark, voluntarily and without dispute, entered
into a contract with the Debtor under which it agreed that the laws of the State of New York would
govern. Champaign Landmark argues that notwithstanding the contractual choice of law, the Ohio
law in the statutory scheme nonetheless arises and applies. As the Debtor points out, however, Ohio
law permits its residents to, in effect, give away or contract away the protection of its state of
domicile. More specifically, ORCA § 1301.05, entitled “Territorial Application of the Act; Parties’
Power to Choose Applicable Law” states in pertinent part:
(A) 	Except as otherwise provided in this section, when a transaction bears a
reasonable relation to this state and also to another state or nation, the parties
may agree that the law either of this state or of the other state or nation shall
govern their rights and duties. In the absence of an agreement of that nature,
Chapters 1301., 1302., 1303., 1304., 1305., 1307., 1308., 1309., and 1310.
of the Revised Code apply to transactions bearing an appropriate relation to
this state.
The Court agrees with the Debtor that New York law – indeed, this state and the transaction that is
at issue – bears as reasonable a relation to the State of New York as it does to the State of Ohio.
Thus Champaign Landmark, pursuant to or in accordance with ORCA § 1301.05, had the right to
agree that the law of another state would apply. 	The Court is prepared to find that Champaign
Landmark had the right to choose to have the laws of another state apply to its business dealings.
That is what it did by having voluntarily entered into a contract prepared by the Debtor in New York
that provided for the applicability of New York law. 	Having so agreed, Champaign Landmark
voluntarily waived the protection that might have been afforded to it by ORCA § 926.021. Even if
the lien was not avoidable, the Court believes that the statutory scheme of Ohio does not arise to the
benefit of Champaign Landmark because of the voluntary agreement by Champaign Landmark to
have New York law apply and be looked to when the contract is being enforced.
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37

Page 19 of 19
CONCLUSION
For the foregoing reasons, the motion for relief from the automatic stay by
Champaign Landmark is DENIED.
The Court will separately enter an Order consistent with this Decision.
Dated: 	Central Islip, New York
November 20, 2006
/s/ Melanie L. Cyganowski
Hon. Melanie L. Cyganowski, U.S.B.J.
Case 8-05-84105-ast Doc 352 Filed 11/20/06 Entered 11/21/06 09:34:37