Appeal from the United States District Court for the Western District of New York (Elfvin, J.) by appellant Woodlawn Auto Workers, F.C.U., which was ordered to turn over to appellee Ronald A. Bradt, debtor in bankruptcy, estate proceeds of an insurance check for repairs made to the debtor's automobile.
Meskill, Kearse and Cardamone, Circuit Judges.
Woodlawn Auto Workers Federal Credit Union (Woodlawn or Credit Union) appeals from an order of the United States District Court for the Western District of New York (Elfvin, J.), which upheld an earlier decision of the bankruptcy court. The district court ordered Woodlawn to turn over to the trustee of appellee Ronald Bradt's estate in bankruptcy an insurance company's payment for repairs made to Bradt's automobile. Because we find that the payment by the insurance company is property of the estate in bankruptcy, we affirm.
In November 1980 Ronald Bradt purchased a 1979 automobile with funds loaned him by appellant Credit Union. Bradt pledged the purchased automobile as collateral for the loan and signed a Security Agreement that read, in pertinent part, as follows:
(1) This security interest covers the Secured Property and any additions to it. It also covers replacements acquired within 10 days from the date of loan or proceeds (including insurance) from it.
(4) I will keep insurance which you approve on the Secured Property at all times and will furnish you proof of the insurance. The insurance will cover ....normal risks such as fire, theft, property loss and damage. If the Secured Property includes motor vehicles, I will obtain collision insurance. My insurance policies will show your interest in the Secured Property. The insurance will provide payment up to the amount of the debt owed to you. I authorize you to make settlements with the insurance company to take any money paid by it. I will make sure that you receive ten days written notice before the insurance policies are cancelled.
Nearly a year later, in September 1981 Bradt filed a petition for relief under Chapter 7 of the Bankruptcy Code. In November the automobile was involved in a traffic accident and sustained substantial property damage. Towne Lincoln-Mercury, an automobile dealership that has joined Bradt in this action, repaired the car. The bill for repairs was $4,863.76. Pursuant to the Security Agreement with Woodlawn, Bradt had insured the automobile for damages or loss, naming himself and Woodlawn as loss payees. The insurance company issued a check, which fully covered the repair bill, payable to both Bradt and Woodlawn.
Bradt endorsed the carrier's draft and brought it to the Credit Union for its endorsement. Instead of signing and returning it to Bradt so that he could pay for the repairs and obtain his automobile, Woodlawn seized the check, cashed it, and refused to release the proceeds. It proposed to use the funds to discharge the $4,936.52 balance due on Bradt's loan. Towne Lincoln-Mercury has retained possession of the automobile pursuant to a repairman's lien since November 1981. On January 7, 1982 appellee converted his Chapter 7 case to one under Chapter 13 of the Bankruptcy Code and commenced an action against Woodlawn for return of the proceeds of the insurance draft, which are being held in escrow by Woodlawn's attorneys. III
The Credit Union argues that its agreement with Bradt entitled it to the proceeds of the insurance draft. It points to New York's Uniform Commercial Code § 9-306(2), which provides:
a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.
Section 9-306(1) explains that "proceeds"
includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is ...