GENERAL ELECTRIC CREDIT CORPORATION v. NARDULLI & SONS, INC. аnd Carlota Bohm, Trustee. Appeal of Carlota M. BOHM, Trustee of the Estate of Nardulli & Sons, Inc. and Nardulli & Sons, Inc., Appellants (Two Cases). KEYSTONE ACCEPTANCE CORPORATION v. NARDULLI & SONS CO., INC. and Carlota M. Bohm, Trustee.
Nos. 87-3079, 87-3155
United States Court of Appeals, Third Circuit
Argued Sept. 14, 1987. Decided Jan. 6, 1988
836 F.2d 184 | Bankr. L. Rep. P 72,160 | 5 UCC Rep.Serv.2d 501
Stephen J. Laidhold (argued), Lampl, Sable, Makoroff and Libenson, Pittsburgh, Pa., for appellee on No. 87-3079.
J. Kent Culley, Beverly Weiss Manne (argued), Tucker Arensberg, P.C., Pittsburgh, Pa., for appellee on No. 87-3155.
Before BECKER, SCIRICA, Circuit Judges and FARNAN, District Judge.*
OPINION OF THE COURT
SCIRICA, Circuit Judge.
The primary issue in this appeal is whether the Chapter 11 plan of reorganization of appellant Nardulli and Sons Co., Inc. (Nardulli) divested security interests in equipment, granted by Nardulli to appellees General Electric Credit Corporation (GECC) and Keystone Acceptance Corporation (Keystone). We hold that the plan did not divest GECC or Keystone of their respective security interests; in fact it preserved those security interests.
The second issue that we decide is whether GECC and Keystone lost their secured positions because they did not file financing statements, as required by the Pennsylvania and Indiana Uniform Commercial Codes (U.C.C.), within four months after Butler County, Pennsylvania became Nardulli‘s sole place of business, or within four months after Nardulli moved to Indiana equipment in which GECC and Keystone had validly perfected security interests. We hold that GECC and Keystone‘s failure to file financing statements in those states did not divest them of their perfected security interests in the equipment, at least with respect to Nardulli‘s claim.
Finally, we must decide whether the trustee, as a hypothetical lien holder under
We review the bankruptcy court‘s findings 66 B.R. 871, by the standard the district court was bound to employ. Factual disputes, although none exist here, are governed by the clearly erroneous standard. Our review of the choice, interpretation or application of legal precepts is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981); see also In re McKeesport Steel Castings Co., 799 F.2d 91, 93 (3d Cir.1986) (quoting Universal Minerals).
I. Facts
In October 1979, GECC loaned Nardulli $448,749.72 and obtained security interests in five pieces of strip mining equipment. Between 1977 and 1979 Nardulli entered into nine similar transactions with L.B. Smith for loans totalling $503,145.43. These transactions were supported by promissory notes and sales-security agreements and later were assigned by Smith to Keystone Acceptance Corporation. Keystone thereby acquired security interests in twenty-one (21) pieces of equipment. Both GECC and Keystone duly perfected their respective security interests by properly filing financing statements pursuant to
On October 22, 1980, Nardulli filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the Unitеd States Bankruptcy Court for the Western District of Pennsylvania.1 In an Order dated July 29, 1981, the bankruptcy court approved a stipulation between Nardulli and GECC that affirmed GECC‘s validly perfected security interest in the five pieces of equipment and authorized Nardulli to grant GECC a security interest in a sixth piece of equipment. General Electric Credit Corp., Joint Appendix at 125a-28a [hereinafter “GECC J.A.“]. GECC then filed the required financing statement for the sixth piece of equipment. Similarly, in an October 7, 1981 order, the bankruptcy court approved a stipulation between Nardulli and Keystone that affirmed the validity of Keystone‘s perfected security interest in the twenty-one pieces of equipment and authorized Nardulli to grant Keystone security interests in specified additional equipment. Keystone Acceptance Corp., Joint Appendix at 125a-28a [hereinafter “Keystone J.A.“]. Keystone did not file financing statements with respect to this additional equipment.2
In March 1982, Nardulli established an office in Butler County, Pennsylvania which it maintained until January, 1986. Between July, 1984 and January, 1986, Butler County was Nardulli‘s only place of business. In 1983, Nardulli moved some equipment in which GECC and Keystone had security interests to Butler County and moved other equipment in which Keystone hаd a security interest to Indiana. In 1984, Nardulli also moved some equipment in which GECC had a security interest to Indiana. Neither GECC nor Keystone filed financing statements in Butler County, Pennsylvania or Indiana.
The bankruptcy court, in a November 29, 1983 order, confirmed Nardulli‘s Chapter 11 plan of reorganization. The plan provided a schedule for payment of the debts owed by Nardulli to GECC and Keystone. It did not expressly divest GECC or Keystone of their respective security interests in the equipment. Indeed, the only references in the plan to these security interests provided that if any asset in which GECC or Keystone had a security interest was sold, the monthly payments due them would be reduced by the same proportion as any sale proceeds they realized bore to the total balance due.
After the plan was confirmed, Nardulli leased the equipment located in Indiana to the Whole Nine Yards Coal Company, which, according to the lease, serviced, maintained and repaired the equipment. The Whole Nine Yards Company also placed an Indiana artisan‘s lien on the equipment. In June, 1986, the trustee, at a bidding sale, sold the equipment to Whole Nine Yards Co. for $250,000, payments to be made in installments.3
1. GECC
Claiming security interests in six pieces of equipment owned by Nardulli, GECC filed a complaint in the United States Bankruptcy Court for reclamation of property, adequate protection and/or relief from stay. (GECC J.A. at 146a). The trustee contested that GECC had validly perfected security interests. (GECC J.A. at 175a). Subsequently, the bankruptcy court held that upon confirmation of the plan, GECC‘s security interests were divested. (GECC J.A. at 242a). Citing
Alternatively, the bankruрtcy court held that even if the plan did not divest GECC of its security interests, GECC‘s failure to file financing statements in Butler County, Pennsylvania and Indiana resulted in the loss of its perfected status. The court found inapplicable the Pennsylvania U.C.C.‘s provision exempting secured creditors from filing continuation statements to preserve a perfected security interest during insolvency proceedings.4 The court also held that the insolvency proceedings terminated on December 29, 1983—the plan‘s consummation date. Therefore, under Sec. 9403(b), which grants an exemption from filing during the pendency of insolvency procеedings and up to sixty days thereafter, GECC was required to file continuation statements at the specified intervals after December 29, 1983. Furthermore, the court held that when a debtor moves its place of business to another county or moves collateral to another state, the Sec. 9403(b) exemption is inapplicable even during insolvency proceedings. Consequently, GECC‘s failure to file financing statements in Butler County resulted in the loss of GECC‘s security interests.
The bankruptcy court also held that GECC lost its secured status on equipment that Nardulli moved to Indiana, because it failed to file financing statements within four months of the move, as required by the Indiana U.C.C.5
The district court vacated the bankruptcy court‘s order and rejected its findings of fact as clearly erroneous. The district court held that GECC has perfected security interests in the six pieces of equipment pursuant to
2. Keystone
Keystone also filed a complaint in the United States Bankruptcy Court for a determination of the validity of its liens, and to direct the trustee to turn over proceeds from the sale of equipment in which Keystone had a perfected security interest. (Keystone J.A. at 210a). The bankruptcy court held that the plan did not expressly provide for retention of Keystone‘s security interest, and even if it did, Keystone did not comply with the filing requirements of the Uniform Commercial Code of Pennsylvania and Indiana. Consequently, Keystone lost its security interests. The court found that termination of the bankruptcy proceedings occurred on December 29, 1983 and that sixty days thereafter Keystone was once again subject to the filing requirements of the Pennsylvania U.C.C. Because Keystone failed to file financing statements in Butler County, Pennsylvania and Indiana after the expiration of the Sec. 9403(b) exemption, it lost its security interest.
On appeal, the district court found that the insolvency proceedings were not yet terminated. It reversed the decision of the bankruptcy court and reinstated the liens held by Keystone. This appeal followed.
1. The Plan
Appellants contend that because the plan did not expressly preserve the creditors’ security interests, upon confirmation of the plan, Nardulli possessed the equipment free and clear of all claims.
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
(c) After confirmation of a plan, thе property dealt with by the plan is free and clear of all claims and interests of creditors, of equity security holders, and of general partners in the debtor, except as otherwise provided in the plan.
Resolution of this dispute requires an examination of Nardulli‘s Chapter 11 plan. Article I, Part B of the plan is entitled “Provision for the Treatment of Secured Creditors.” Part B, Section 1 establishes a payment schedule under which the debtors, including Nardulli,7 will pay GECC, the sole Class 1 claimant. In that same section, the plan provides that “[i]f any asset in which GECC has a security interest is sold, the monthly payments shall be reduced in the same proportion as the proceeds of sale realized by GECC bear to the total balance due GECC.” (GECC J.A. at 137a; Keystone J.A. at 174a). Similarly, Part B, Section 2 contains a payment schedule and identical sale provision applicable to Keystone, the sole Class 2 claimant. (GECC J.A. at 138a; Keystone J.A. at 174a). We conclude that these provisions sufficiently preserved the security interests of both GECC and Keystone.
Although the plan does not explicitly state that the security interests of GECC and Keystone are preserved, it expressly acknowledges the continued existence of their respective security interests. Furthermore, that acknowledgement is implicit in the inclusion of schedules for payment to GECC and Keystone, in the part of the plan entitled “Provision for Treatment of Secured Creditors.”
Our conclusion is bolstered by reference to Nardulli‘s disclosure statement submitted pursuant to
We recognize that
We conclude therefore that the plan preserved the perfected security interests of GECC and Keystone in the equipment.
2. Filing requirements
Appellants contend that even if the plan preserved the security interests, appellees lost their secured status by not filing financing statements in Butler County, Pennsylvania and Indiana after termination of thе insolvency proceedings. The bankruptcy court agreed and held that upon conversion to a Chapter 7 proceeding, the trustee, pursuant to
The district court, in two separate orders, reversed. It held that GECC had a validly perfected security interest in the five pieces of equipment pursuant to the October 1979 security agreement with Nardulli, and in a sixth piece of equipment pursuant to a stipulation with Nardulli that was approved by the bankruptcy court on July 29, 1981. Similarly, the district court reinstated and validated Keystone‘s liens that were in existence prior to October 22, 1980, the initiation of bankruptcy proceedings. We affirm. We also hold that because both GECC and Keystone complied with the filing requirements of the Pennsylvania Uniform Commercial Code as of the date of filing the bankruptcy petition, their rights as lienholders are superior to those of the trustee as a hypothetical lienholder under
We now consider the filing requirements of the Pennsylvania U.C.C. A security interest perfected by filing prior to the commencement of insolvency proceedings remains perfected until sixty days after tеrmination of the insolvency proceedings or five years from the filing date of the financing statement, whichever is later.
Insolvency proceedings terminate upon confirmation of a plan of reorganizаtion, or on the effective date or consummation date of the plan, if provided for in the plan. See
For the reasons discussed below, we hold that the failure to file continuation statements after December 29, 1983 did not divest perfected liens as against Nardulli, although it would have divested priority over subsequent creditors of Nardulli or subsequent purchasers of the equipment, such as the Whole Nine Yards Co.
A. Equipment located in Butler County, Pennsylvania
In October, 1979, GECC originally perfected security interests in five pieces of equipment by filing financing statements with the Secretary of the Commonwealth of Pennsylvania and the Prothonotary of Allegheny County, Pennsylvania. (GECC J.A. at 164a-68a). In September, 1981, GECC filed a financing statement on the sixth piece of equipment. (GECC J.A. at 170a and 172a). On April 23, 1984, GECC filed continuation statements with the same offices. Similarly, Keystone perfected security interests in twenty-one pieces of equipment by filing financing statements in 1977, 1978 and 1979 with the proper offices. (Keystone J.A. at 406a-24a).
Nardulli had places of business in Allegheny County, Pennsylvania from 1940 until October, 1983; in Washington County, Pennsylvania from 1971 until June, 1984; and in Butler County, Pennsylvania from March, 1982 until January, 1984. (See Affidavit of James A. Nardulli, President of Nardulli, GECC J.A. at 185a-86a). From June, 1984 until January, 1984, Nardulli‘s only place of business was in Butler County, Pennsylvania.
We now examine the purpose for the filing requirements of the Uniform Commercial Code. The U.C.C.‘s filing requirement intended to put future creditors and subsequent purchasers of the collateral on notice of the lien. Industrial Packaging Products Co. v. Fort Pitt Packaging International, Inc., 399 Pa. 643, 648, 161 A.2d 19, 21 (1960); Cаsterline v. General Motors Acceptance Corp., 195 Pa.Super. 344, 351, 171 A.2d 813, 814 (1961). Because Nardulli is not a subsequent purchaser or creditor, unlike Whole Nine Yards Co., it may not take advantage of GECC and Keystone‘s failure to file. In re McGovern Auto Specialty, Inc., 51 B.R. 511, 512 (E.D.Pa.1985). In reaching this decision, we rely on the fact that Nardulli entered into court-approved stipulations with both GECC and Keystone that affirmed the validity of their perfected security interests in certain equipment, and authorized granting security interests in other equipment. The filing of financing statements by GECC or Keystone would have served no purpose with respect to Nardulli. The purpose of a financing statement is to put a credit-searcher on notice of the possible existence of a lien and indicate where to obtain further information. J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code 952 (2d ed. 1980); see 2 R. Alderman, A Transactional Guide to the Uniform Commercial Code, 968-80 (2d ed. 1983). In light of these facts and the purposes of the U.C.C. filing requirements, Nardulli cannot avoid those liens merely because GECC and Keystone failed to comply with statutory requirements not intended to protect Nardulli.
Similar issues were examined in Rodi Boat Co. v. Provident Tradesmens Bank & Trust Co., 236 F.Supp. 935 (E.D.Pa.1964), aff‘d 339 F.2d 259 (3d Cir.1964). The court held that failure to file a financing statement did not result in a loss by a lienholder of title to a boat as between lienholder and purchaser:
whatever rights, if any, the [lienholder] may have lost through failing to file a financing statement, it did not lose title to the boat between it and [the purchaser]. It is not questioned that in most jurisdictions, including Pennsylvania, failure to comply with the recording statutes makes a conditional sale absolute and the reservation of title invalid as to the persons protected by the statutes. Such persons are bona fide purchasers, creditors who have extended credit to the buyer in reliance upon his possession of the cоllateral, and the like....
Id. at 937 (emphasis in original). Therefore, despite GECC‘s failure to file in Butler County a copy of its previously filed financing statements, it maintains a valid security interest in this equipment as between it and Nardulli. For the same reasons, Nardulli may not avoid Keystone‘s liens on the equipment located in Butler County.
B. Equipment located in Indiana
For reasons already expressed, we also hold that, as against Nardulli, appellees have valid security interests in the equipment Nardulli moved to Indiana in 1983 and 1984.
Under the Indiana and Pennsylvania U.C.C.,9 when collateral subject to a security interest perfected in another jurisdiction is moved into Indiana or Pennsylvania, financing statements must be filed within four months.
We affirm the district court‘s holding that GECC has a perfected security interest and therefore is entitled to the full proceeds resulting from the sale of the equipment. We also affirm the district court‘s holding that Keystone maintains the liens that existed prior to the initiation of the bankruptcy proceedings in 1980.
3. The Trustee
The trustee contends that her status as a hypothetical lienholder under
GECC and Keystone contend that the trustee‘s status as a hypothetical lienholder is determined as of the date of commencement of the bankruptcy proceedings, not the date of conversion. Accordingly, they argue that because their liens were validly perfected as of commencement of the bankruptcy proceedings, their position as lienholders is superior to that of the trustee. We agree. Section 544 puts the trustee in the position of a hypothetical lien creditor as of the date a debtor files for relief in bankruptcy.
Conversion from a Chapter 11 to a Chapter 7 proceeding is irrelevant.
Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.
Other courts have held that the hypothetical lienholder status granted a trustee by
The case before us is different from other cases that have held that a trustee, as a hypothetical lienholder, may avoid security interests that were unperfected at the time of commencement of the bankruptcy proceeding. For example, in In re Dennis Mitchell Indus., Inc., 419 F.2d 349, 358 (3d Cir.1969), this court held that the unperfected security interest of a lienholder was subordinate to the rights of the trustee12 as a hypothetical lienholder pursuant to Sec. 70(c) (the predecessor to
In Mitchell and Video East, the creditors’ security interests were not perfected at the time of commencement of bankruptcy proceedings. Bеcause both GECC and Keystone had validly perfected security interests on October 22, 1980, the date on which Nardulli filed its voluntary petition for relief in bankruptcy, and because Nardulli affirmed the continuing validity of those security interests in the court-approved stipulation, the rights of GECC and Keystone as lienholders are superior to those of the trustee as a hypothetical lienholder under Sec. 544.
For the reasons discussed, the judgments of the district court will be affirmed.