In re 8760 Serv. Grp., LLC

• Decision Date: 08 May 2018
• Docket Number: Case No. 17–20454–drd–11
• Citation: In re 8760 Serv. Grp., LLC, 586 B.R. 44 (Bankr. W.D. Mo. 2018)
• Parties: IN RE: 8760 SERVICE GROUP, LLC, and Pelham Property, LLC, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Missouri

586 B.R. 44

IN RE: 8760 SERVICE GROUP, LLC, and Pelham Property, LLC, Debtors.

Case No. 17–20454–drd–11

United States Bankruptcy Court, W.D. Missouri.

Signed May 8, 2018

Victor F. Weber, Merrick Baker & Strauss, Kansas City, MO, for Debtors.

MEMORANDUM OPINION

HONORABLE DENNIS R. DOW, UNITED STATES BANKRUPTCY JUDGE

This matter is before the Court on the Order Granting Joint Motion to Establish Administrative Procedures for Determination of Validity, Priority and Extent of Liens in Sales Proceeds. For all the reasons set forth below, the Court finds that Bancorpsouth Bank ("BCS") holds a first priority security interest in the non-office equipment and inventory of 8760 Service Group, LLC and a first priority security interest in the blast booth installed on the real property at 5105 Pelham Drive¹ .

I. FACTUAL AND PROCEDURAL BACKGROUND²

Debtor 8760 Service Group, LLC ("8760"), operated a custom industrial construction and fabrication business with a business office located at 1803 W. Main Street, Sedalia, Missouri. Buck Barnes is the only member of 8760. Debtor Pelham Property, LLC ("Pelham") was formed to own the real estate located at 5105 Pelham Drive, Sedalia, Missouri, from which debtor 8760 operated a fabrication facility. Debtor 8760 is the only member of Pelham.

BCS was the Debtors' primary lender. Pelham was the primary obligor on the loan from BCS to purchase the land and build the structure on Pelham Drive. 8760 was a guarantor on the loans and made all of the loan payments. BCS holds a deed of trust on the real estate at 5105 Pelham Drive (the "Real Property"). 8760 also entered into loans with BCS to fund its operations and entered into security agreements pledging as collateral its inventory, equipment and accounts receivable. In 2014, BCS filed a UCC–1 financing statement to perfect its lien which identifies the collateral as all of 8760's accounts receivable, inventory, and equipment located at 1534 Redwood Drive, Sedalia, Missouri, which was the home of Buck Barnes. In 2015, BCS filed a UCC–3 amending the description of collateral to include "all accounts receivable, inventory, equipment, and all business assets located at 1803 W. Main Street, Sedalia, Missouri." That address was the business office of 8760 and very little of its property was ever located there.

A blast booth was installed in the building located at 5105 Pelham Drive. It was paid for and installed with funds drawn on Pelham's construction loan with BCS. However, the contract to build the blast booth and the invoices for its construction were in the name of 8760.

In 2016, Hudson Insurance Company ("Hudson") provided payment and performance bonds to debtor 8760. To secure the bond, 8760 transferred an interest in and granted liens to Hudson in substantially all of its property. In 2017, Hudson filed a UCC–1 with respect to 8760's inventory, equipment and accounts.

II. LEGAL ANALYSIS

A. Collateral Description Issue

The parties are in dispute as to the validity, priority and extent of the liens on 8760's equipment and inventory. The principal dispute is whether BCS or Hudson holds the first-priority lien position on certain of 8760's equipment and inventory. Debtors and Hudson contend that the collateral description in BCS's financing statement referenced a specific address location which restricted the collateral to that location. While BCS filed prior to Hudson, Debtors and Hudson contend that BCS is unperfected and thus unsecured due to the limitations contained in the financing statement³ .

BCS contends that the collateral description contained in the financing statement was sufficient to perfect its interest in all assets regardless of location because the collateral description was an unambiguous, blanket description with no location restriction and, that if there was any ambiguity in the collateral description it was sufficient to serve as a notice filing and trigger a duty to investigate further into the covered collateral.

BCS and debtor 8760 entered into certain promissory notes and security agreements in which 8760 granted BCS a security interest in all of its accounts and other rights to payments, inventory and equipment. In November 2014, BCS filed its initial UCC–1 financing statement listing 8760 as debtor and describing the collateral covered on page 1 as "All Accounts Receivable, Inventory and equipment, located at 1534 Redwood Drive, Sedalia, MO 65301."

In December 2015, BCS filed an amended financing statement in which the collateral was described as "All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301." Page 2, section 14 further describes the collateral as "the above collateral, whether now owned or hereafter acquired, together with all supporting obligations, proceeds, products, software, accessories and accessions, including, but not limited to the items listed...."

BCS claims that its financing statements were not seriously misleading and triggered a duty to further investigate the extent of BCS's security interest. BCS relies on ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A. , 558 F.3d 809 (8th Cir. 2009), an 8^th Circuit case applying Missouri law, to support its position. In the ProGrowth case, the debtor and creditor entered into a promissory note and security agreement with two annuity contracts issued by Fidelity & Guaranty Life Insurance Company as security. The annuity contracts were identified as "L9E00015" and "L9E00016." The creditor filed a financing statement in which it identified the collateral as "All of Debtor's right, title and interest in and to, assets and rights of Debtor, wherever located and whether now owned or hereafter acquired or arising, and all proceeds and products in that certain Annuity Contract No.: LE900015 issued by Lincoln Benefit Life...." (Emphasis added). This description transposes the E and 9 in the contract number and identifies the issuer as Lincoln Benefit Life rather than Fidelity & Guaranty Life Insurance Company. An additional financing statement was filed with the same description for the other annuity contract identifying it as "that certain Annuity Contract No.: L9E00016 issued by Lincoln Benefit Life...." (Emphasis added). This contract number was described correctly but the issuer was incorrect.

Thereafter, the debtor obtained a loan from ProGrowth and assigned his interest in the same annuity contracts. ProGrowth filed two financing statements accurately describing the annuity contract numbers and issuer. ProGrowth then filed a lawsuit seeking a declaratory judgment that its perfected security interests in the annuity contracts were prior to and superior to any perfected security interests claimed by the defendants because the prior financing statements were seriously misleading in transposing the contract numbers and misidentifying the issuer. The district court granted summary judgment in favor of ProGrowth and the defendants appealed.

On appeal, the 8^th Circuit applied Missouri U.C.C. law to determine whether the defendants' security interests in the annuity contracts were perfected. Missouri Revised Statute § 400.9–502(a) provides, "a financing statement is sufficient only if it: (1) [p]rovides the name of the debtor; (2) [p]rovides the name of the secured party or a representative of the secured party; and (3) [i]ndicates the collateral covered by the financing statement." The relevant question there, as here, was whether the financing statement sufficiently indicated the collateral that it covered. A financing statement "sufficiently indicates the collateral that it covers if the financing statement provides: (1) a description of the collateral pursuant to section 400.9–108; or (2) an indication that the financing statement covers all assets or all personal property." Mo. Rev. Stat. § 400.9–504. The referenced section § 400.9–108 provides that a "description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described." Additionally, a financing statement "substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading." Mo. Rev. Stat. § 400.9–506(a).

The 8th Circuit noted that the U.C.C. requirements are intended to provide those dealing with commercial activities knowledge of the status of the commodity with which they are dealing and, to that end, the financing statement serves the purpose of putting subsequent creditors on notice the property is encumbered. ProGrowth , 558 F.3d at 812 (quoting First Nat. Bank of Steeleville, N.A. v. Erb Equip. Co. , 921 S.W.2d 57, 62 (Mo. Ct. App. 1996) and Thorp Commercial Corp. v. Northgate Indus., Inc. , 654 F.2d 1245, 1248 (8th Cir. 1981) ). Thus, the court stated that it views the validity of a financing statement in terms of whether "it provides notice that a person may have a security interest in the collateral claimed." Id. The U.C.C. recognizes further inquiry may be necessary and that therefore, errors or omissions in the description of the collateral do not render financing statements ineffective unless they are seriously misleading.

Id. (citing Mo. Rev. Stat. § 400.9–506 (U.C.C. cmt. 2) ).

So, what renders a financing statement's collateral description seriously misleading? In our case, Debtors and Hudson both urge the Court to find that BCS's description, because it includes an address, is seriously misleading. In ProGrowth , the court instructed that "when faced with a financing statement purporting to cover ‘all assets’ of a debtor, it is then incumbent upon the subsequent creditor to investigate whether the collateral at issue is in fact covered by a security agreement." Id. at 813. The court then concluded that the financing statements satisfied the provisions of the Missouri U.C.C. because they indicated coverage over all assets thus giving an indication...