Overhead Door Corp. v. Allstar Building Products, Inc. (In re Allstar Building Products, Inc.)

PER CURIAM; On August 9, 1984, debtor Allstar Building Products executed a note in favor of appellant Overhead Door Corporation (Overhead), which gave Overhead a security interest in, among other things, “[a]ll equipment, machinery, and tools of the trade” owned by the debtor. On August 30, 1984, Overhead recorded the security [899] interest in the office of the Secretary of State in Montgomery, Alabama. On June 4, 1985, the debtor filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. Overhead sought to foreclose its interest in the debt- or's shop and office equipment and filed a motion for relief from the automatic stay imposed by 11 U.S.C. § 362(a). The bankruptcy court denied relief because it found that, under Alabama law, Overhead did not hold a perfected security interest in this property. Adopting the findings of fact and conclusions of law of the bankruptcy court, the district court affirmed. On appeal, a divided panel of this court affirmed the district court. 809 F.2d 1534. We granted rehearing in banc to determine whether the bankruptcy court improperly altered the parties’ burdens of proof in deciding that Overhead was not entitled to relief from the automatic stay. Section 362 of the Bankruptcy Code enjoins creditor actions against the assets of a debtor's estate upon a filing of a bankruptcy petition under §§ 301, 302 and 303 of the Code. But the statute also provides that “[o]n request of a party in interest and after notice and a hearing, the court shall grant relief from the stay, ... by terminating, annulling, modifying, or conditioning” it, “for cause, including the lack of adequate protection of an interest in property of such party in interest.” 11 U.S.C. § 362(d)(1). Whenever a hearing is held to determine whether a party in interest should be granted relief from the stay for cause, the Code allocates the parties’ respective burdens of proof: (1) the party requesting such relief has the burden of proof on the issue of the debtor’s equity in such property; and (2) the party opposing such relief has the burden of proof on all other issues. 11 U.S.C. § 362(g). In this case, the bankruptcy court held that Overhead was not entitled to relief because it had not perfected its security interest under Alabama law. It relied on § 10-2A-160 of the Alabama Code which requires the approval of a corporation’s board of directors whenever it attempts to pledge “all, or substantially all, of [its] assets ... in the ... regular course of business.” Because Overhead did not present proof that the debtor’s board of directors approved the security agreement by way of corporate resolution, the bankruptcy court found that the agreement was unauthorized. Appellant contends that in so doing, the bankruptcy court altered the burdens of proof allocated by the Bankruptcy Code. We agree. In its motion for relief from the stay, Overhead alleged (1) that it held a valid, perfected security interest; (2) that the debtor was in default of the note; (3) that the debtor failed to adequately protect Overhead’s interest; and (4) that the debtor lacked equity in the individual property items listed in the motion. Overhead also appended a copy of the security agreement to its motion. At a hearing before the bankruptcy court, Overhead established that the security agreement was filed with the Secretary of State and that the debtor lacked equity in the property. Counsel for the bankruptcy trustee called the trustee as a witness and presented no other evidence. Yet under these circumstances, it was incumbent upon the debtor or the trustee, as parties opposing Overhead’s motion, to prove that Overhead failed to perfect its security interest in the property, or that there was no cause for lifting the stay. As the statute indicates, a lack of protection of the interest of a party such as Overhead would supply sufficient cause. Again, it was the burden of the trustee or the debtor to prove adequate protection. In re Gauvin, 24 B.R. 578, 580 (9th Cir. BAP 1982); In re Elsan Transmission Corp., 55 B.R. 73, 75 (Bankr.E.D.N.Y.1985); In re Dixie-Shamrock Oil & Gas, Inc., 39 B.R. 115, 117 (Bankr.M.D.Tenn.1984); In re Philadelphia Consumer Discount Co., 37 B.R. 946, 949 (Bankr.E.D.Pa.1984); In re Hinton, 30 B.R. 796, 798 (Bankr.M.D.Tenn.1983); In re Schaller, 27 B.R. 959, 961 (Bankr.W.D.Wis.1983). Even if the trustee or the debtor had attempted to prove that Overhead failed to perfect its security interest, it does not appear that either could have relied upon [900] the statute cited by the bankruptcy court. The perfection of security interests in Alabama is governed by the state’s version of the Uniform Commercial Code. Section 7-9-303 of the Alabama Code states that the “steps required for perfection [of a security interest] are specified in sections 7-9-302, 7-9-304, 7-9-305, and 7-9-306.” These statutes do not include the requirement that a pledge of assets be authorized by a pledgor corporation’s board of directors, or evidenced by a resolution thereof. Even if the trustee or the debtor could prove that the board failed to approve the transaction, it does not appear that this would affect Overhead’s right to seek relief from the automatic stay. Following the guide of the American Bar Association’s Model Business Code, Alabama has restricted the defense of ultra vires to a very narrow category of cases. See Ala.Code § 10-2A-24 commentary; In re Terminal Moving & Storage Co., Inc., 631 F.2d 547, 549-50 (8th Cir.1980) (applying analogous Arkansas law to bankruptcy proceeding). Where a party who opposes the lifting of the automatic stay imposed by § 362(a) fails to meet its burden as allocated by § 362(g), the stay should be lifted. The party opposing the motion cannot merely rest once the party seeking to have the stay lifted makes a prima facie showing he is entitled to relief. As the trustee and the debtor in this case failed to present any evidence on the question of whether Overhead perfected its security interest, or whether its interest in the property was adequately protected, Overhead was entitled to relief from the stay. In re Highcrest Management Co., Inc., 30 B.R. 776, 778 (Bankr.S.D.N.Y.1983); In re L.H. & A. Realty Co., Inc., 57 B.R. 265, 269 (Bankr.D.Vt.1986). Yet because the bankruptcy court failed to properly apply § 362(g), the trustee and the debtor should be given another opportunity to show why the stay should not be lifted. REVERSED and REMANDED.