Hammons, Matter of, BORG-WARNER

• Decision Date: 24 March 1980
• Docket Number: No. 77-3372,BORG-WARNER,77-3372
• Citation: 614 F.2d 399
• Parties: , 28 UCC Rep.Serv. 857 In the Matter of Rex L. HAMMONS et al., Bankrupts.ACCEPTANCE CORPORATION, Appellant, v. FEDDERS FINANCIAL CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 399

614 F.2d 399

6 Bankr.Ct.Dec. 187, 28 UCC Rep.Serv. 857

In the Matter of Rex L. HAMMONS et al., Bankrupts.

BORG-WARNER ACCEPTANCE CORPORATION, Appellant, v. FEDDERS FINANCIAL CORPORATION, Appellee.

No. 77-3372.

United States Court of Appeals, Fifth Circuit.

March 24, 1980.

Pat H. Scanlon, Jackson, Miss., for appellant.

Billups S. Allen, Alex Alston, Jr., Jackson, Miss., for appellee.

Appeal from the United States District Court for the Southern District of Mississippi.

Before CHARLES CLARK, RONEY, and HENDERSON, Circuit Judges.

CHARLES CLARK, Circuit Judge:

Borg-Warner Acceptance Corporation (Borg-Warner) appeals from the decision of the district court that its security interest in the inventory of Shady Grove TV & Appliance was inferior to that claimed by Fedders Financial Corporation (Fedders). While acknowledging that it did not file a financing statement perfecting its security interest prior to the filing made by Fedders, Borg-Warner contends that its perfected security interest should take priority over the security interest asserted by Fedders on the grounds that Fedders did not make the local filing required under Mississippi law in the correct county, that the financing statement filed by Fedders stated the debtor's name incorrectly and was therefore seriously misleading, and that Fedders failed to file a new financing statement to reflect a change in the name of the debtor. We reverse.

I. Facts

During 1974 Rex L. Hammons and Donald R. Ball, as partners, conducted a business in Raleigh, Smith County, Mississippi, under the trade name "Hammons' Heating and Air Conditioning" (Hammons' Heating). Hammons actually operated the business, while Ball, who was an employee of a hardware store, characterized his involvement with it as being that of a "silent partner." Hammons' Heating primarily sold, installed, repaired, and serviced heating and air conditioning units and systems.

To finance the purchase of new inventory, Hammons and Ball on October 3, 1974, executed a security agreement with Fedders granting it a security interest in the partnership's presently owned and after-acquired inventory. On October 14, 1974, Fedders filed a financing statement with the Mississippi Secretary of State, listing the debtor as:

Hammons' Heating and Air Conditioning (a partnership)

Rex L. Hammons and Don R. Ball (partners)

Route 2

Raleigh, Mississippi

Only Ball signed the financing statement but the partners' individual names and the partnership's trade name were typed above the space designated for the debtor's signature. Seeking to comply with Mississippi's local filing requirement, Fedders filed an identical financing statement with the Chancery Clerk of Smith County on October 22, 1974.

In December, 1974, Hammons and Ball closed their place of business in Raleigh, Smith County, and relocated it in Laurel, Jones County, Mississippi. At the same time they changed their trade name to "Shady Grove TV and Appliance" (Shady Grove). Both Hammons and Ball actively participated in the operation of the Jones County business. In addition to the types of merchandise previously sold by Hammons' Heating, Shady Grove sold televisions, radios, citizens band radios, refrigerators, freezers, and other electrical appliances.

On December 3, 1974, Hammons and Ball executed a security agreement with Borg-Warner granting it a security interest in all of the partnership's present and after-acquired inventory. In response to a request by Borg-Warner for information about any prior filings listed under "Ball, Donald R., and Hammonds, Rex L., individually and as copartners DBA Shady Grove TV and Appliance Center" (emphasis supplied), the Mississippi Secretary of State certified that no prior financing statements had been recorded for those debtors. Borg-Warner then filed a financing statement with the Secretary of State on December 9, 1974, listing the debtor as "Ball, Donald R., and Hammonds, Rex L., individually and as copartners DBA Shady Grove TV and Appliance Center" (emphasis supplied). Borg-Warner also filed an identical financing statement with the Chancery Court of Jones County on December 10, 1974.

Fedders did not deliver to the partnership any of the merchandise financed under its October 14, 1974, security agreement until December 19, 1974, and this merchandise was delivered to the Shady Grove place of business in Jones County. At that time, Fedders, of course, had actual knowledge of the relocation of the partnership's place of business to Jones County and its adoption of a new trade name.

Hammons and Ball, individually and as a partnership, filed a voluntary bankruptcy petition on July 19, 1976. At that time the value of the partnership's inventory did not exceed $50,000 and would not suffice to satisfy the claims of either Fedders or Borg-Warner.

In an adversary proceeding initiated by Borg-Warner, the bankruptcy judge determined that Shady Grove was a new, distinct business from Hammons' Heating, and he ruled that Fedders' security interest in the partnership's inventory was unperfected, since its financing statement listed an incorrect name for the debtor and had not been filed in the correct county in Mississippi. Fedders appealed this decision to the district court, which reversed as clearly erroneous the bankruptcy court's determination that Shady Grove was a new business. It held that Fedders' security interest remained perfected under its Smith County filing even though the location and trade name of the partnership's business had changed.

On this appeal Borg-Warner contends that the bankruptcy court's finding that Shady Grove was a new business distinct from Hammons' Heating was not clearly erroneous, that Fedders' financing statement was seriously misleading since it listed Hammons' Heating as the debtor, that Fedders was under a duty to file an amended financing statement when it learned of the change in the partnership's trade name, and that Fedders did not make its local filing in the proper county. In response, Fedders asserts that it perfected its security interest by filing its October 14, 1974, financing statement in the name of the debtor and in the local county in which the debtor had its only place of business at that time. It maintains that the Uniform Commercial Code did not obligate it to refile or amend its original filing to reflect the change in the partnership's trade name and the location of its business.

II. Two Businesses or One?

The first issue raised by this appeal is the correctness of the district court's ruling that Shady Grove was not a new or legally distinct business entity but was merely a continuation of Hammons' Heating, the original business operated by the partnership of Hammons and Ball. The bankruptcy judge, relying primarily upon four factors: (1) the relocation of the business in a different county, (2) the partnership's adoption of a new trade name under which the partnership operated, (3) the alteration of Ball's status from a silent to an active partner, and (4) the expansion of the business to include new lines of merchandise, concluded that Shady Grove constituted a legally distinct business from Hammons' Heating. The district court, however, ruled that the bankruptcy judge's determination that Shady Grove was a new, distinct business from Hammons' Heating was clearly erroneous. Noting that the partners had not altered their legal relationship in effectuating the relocation of their business, the district court found Ball's active participation in Shady Grove was without significance, since as a "silent partner," he had had the same right to participate in the management and operation of Hammons' Heating as Hammons. It rejected the contention that the addition of new types of merchandise to Shady Grove's inventory caused it to be a distinct entity from Hammons' Heating, citing the testimony of the partners that after relocation their business was essentially the same and they continued to offer the lines of merchandise that they had sold in Raleigh.

The district court is bound to accept the bankruptcy judge's factual findings unless clearly erroneous. The bankruptcy judge is the trier of fact who sees and hears the witnesses, makes credibility determinations, and resolves conflicts in the proof. The district court, however, must independently determine the correctness of the ultimate legal conclusion adopted by the bankruptcy judge on the basis of the facts found. The district court treated the determination that Shady Grove was a legally distinct business from Hammons' Heating as a factual finding that could be reversed only if it was clearly erroneous. We do not agree that this test was proper. The strictures of the clearly erroneous rule did not bind the district court here. The bankruptcy judge's "new and different business" determination was a conclusion as to the legal significance of evidentiary facts. As such, it was subject to review free of the clearly erroneous rule. See Parson v. Kaiser Aluminum & Chemical Corp., 575 F.2d 1374, 1382-83 (5th Cir. 1978) cert. denied, 441 U.S. 968, 99 S.Ct. 2417, 60 L.Ed.2d 1073 (1979); Stepp v. Estelle, 524 F.2d 447, 452-53 (5th Cir. 1975); Causey v. Ford Motor Co., 516 F.2d 416, 420-21 (5th Cir. 1975); Galena Oaks Corp. v. Scofield, 218 F.2d 217, 219 (5th Cir. 1954). The district court was bound by the bankruptcy court's findings of fact concerning the nature of Ball's involvement with Hammons' Heating and Shady Grove and the differences between the lines of merchandise sold by the partnership at its two locations. However, it had the duty to examine these evidentiary facts and determine their legal significance in light of all other facts found or established by the record. The district court did not set aside any underlying factual findings made by the bankruptcy judge; it only refused to reach the legal conclusion that those and other facts meant that the partnership's business in Jones County was...