Stoumbos v. Kilimnik - 988 F.2d 949 (9th Cir. 1993)

Rule:

The rationale of the automatic security interest does not apply to after-acquired equipment.

Facts:

Individual defendant sought to enforce a security interest against debtor, a company which individual defendant had sold. Individual defendant then incorporated corporate defendant. Individual defendant took control of debtor and then transferred all of its assets to corporate defendant. Creditors filed an involuntary chapter 7 bankruptcy against debtor. Plaintiff, bankruptcy trustee, brought an adversary proceeding against defendants to recover the value of the assets surrendered, to subject individual defendant to equitable subordination and to impose successor liability on corporate defendant. Both parties filed motions for summary judgment. The bankruptcy court granted summary judgment in favor of defendants, holding that individual defendant had a valid perfected security interest in debtor's assets. The district court affirmed the order. 

Issue:

Did the district court err in affirming the summary judgment?

Answer:

Yes.

Conclusion:

The court reversed, holding that summary judgment was improper as the security interest did not include after-acquired equipment, individual defendant was subject to equitable subordination and corporate defendant was a successor to debtor.