In re Brown, Civ. A. No. 85-K-434

• Decision Date: 24 December 1986
• Docket Number: Bankruptcy No. 84-B-00617 M,Adv. No. 84-C-733.,Civ. A. No. 85-K-434
• Parties: In re Tommy M. BROWN and Sally C. Brown d/b/a Boulder Printing and/or Boulder Printing Service, Debtors. Tommy M. BROWN and Sally C. Brown d/b/a Boulder Printing Service, and Robert J. Cunningham, Trustee, Plaintiffs-Appellants, v. BOULDER SERVICES, INC., Defendant-Appellee.
• Court: U.S. District Court — District of Colorado

68 B.R. 670 (1986)

In re Tommy M. BROWN and Sally C. Brown d/b/a Boulder Printing and/or Boulder Printing Service, Debtors.

Tommy M. BROWN and Sally C. Brown d/b/a Boulder Printing Service, and Robert J. Cunningham, Trustee, Plaintiffs-Appellants, v. BOULDER SERVICES, INC., Defendant-Appellee.

Civ. A. No. 85-K-434, Bankruptcy No. 84-B-00617 M, Adv. No. 84-C-733.

United States District Court, D. Colorado.

December 24, 1986.

Ronald B. Porter, Boulder, Colo., Nancy D. Miller, Sterling and Miller and Robert J. Cunningham, Denver, Colo., for plaintiffs-appellants.

David Oppenheim, U.S. Trustee, Denver, Colo. and Barton S. Balis, Balis, Frieling & Barrett, Boulder, Colo., for defendant-appellee.

MEMORANDUM OPINION AND ORDER

KANE, District Judge.

I. BACKGROUND

This is an appeal from Bankruptcy Judge Patricia Clark's finding that Appellee, Boulder Services, Inc., perfected its security interest in the business sold to Appellants, Tommy and Sally Brown. I affirm.

On July 30, 1984 the Browns filed their "Complaint to Recover Property of the Estate and Determine the Validity and Priority of Claim" seeking to recover monies paid to Boulder Services and determine the priority of Boulder Services' claim under The Bankruptcy Code, 11 U.S.C. §§ 547, 549, and 550. Boulder Services answered as defendant.

Hearing was held, October 23, 1985, before Bankruptcy Judge Clark. By order filed November 5, 1985 (entered on the docket November 6, 1984), she denied the Browns' complaint to recover property of the estate and determined Boulder Services' claim was a perfected secured claim. On November 16, 1985, the Browns instituted this appeal seeking to reverse the court's order and to remand the case to the bankruptcy court with instructions.

II. JURISDICTION AND STANDARDS FOR DECISION

Before I examine the merits of this appeal, I shall set forth the jurisdictional basis and standards for decision of this opinion.

I have jurisdiction to hear this appeal by virtue of the authority contained in 28 U.S.C. § 158(a):

"The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title."

The manner of taking such an appeal is governed by Rules of Bankruptcy Procedure, Rule 8001(a):

"An appeal from a final judgment, order, or decree of bankruptcy judge to a district court . . . shall be taken by filing a notice of appeal with the clerk of the bankruptcy court within the time allowed by Rule 8002."

Under Rules of Bankruptcy Procedure, Rule 8013, I may affirm, modify, reverse or remand a judgment of bankruptcy court. It has been stated many times, but most succinctly in In re Hammons, 438 F.Supp. 1143, 1147-48 (S.D.Miss.1977) rev'd on other grounds 614 F.2d 399 (5th Cir.1980):

"The District Court is bound to accept the Bankruptcy Judge\'s findings of fact unless they are clearly erroneous. Similarly, due regard in this context must be given to the lower court\'s opportunity to hear firsthand the testimony of the witnesses. However, this same presumption does not apply to conclusions of law, and this Court may make an independent examination and determination of the ultimate legal conclusions to follow from the facts. In re McCoy, 330 F.Supp. 533, 534-35 (D.Kan.1971). . . .

"The `clearly erroneous\' standard was explained by the Supreme Court in Comm. v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), wherein the Court stated:

`A finding is "clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. citation omitted. The rule itself applies also to factual inferences from undisputed basic facts . . . \'

"Accord, Inland Sec. Co., Inc. v. Kirshner, 382 F.Supp. 338, 344 (W.D.Mo. 1974)."

III. STATEMENT OF FACTS

The bankruptcy court found that the Browns purchased a going business concern from Boulder Services, Inc. A security agreement was executed by the parties to the sale. The security agreement set forth the names and signatures of the parties, their mailing addresses, and contained an elaborate description of the secured collateral. The total amount of the secured interest was $275,000.00. In addition to this security agreement with Boulder Services, the Browns obtained a loan from the First National Bank and Trust Company of El Dorado, Kansas for the down payment on the business ($40,000.00). The First National Bank and Trust Company secured its $10,000.00 loan to the Browns with the same collateral as did Boulder Services.

The bankruptcy court further found that two financing statements utilizing the uniform UCC-1 Form were filed with the secretary of state on June 1, 1983. Each financing statement bore the debtors' names and signatures. Both financing statements listed the First National Bank and Trust Company of El Dorado, Kansas as the secured party. The financing statements, each with its own consecutive financing number, indicated that the statements represented a "second security interest in equipment per attached Exhibit `A'" (emphasis added). Attached to one financing statement was a copy of the signed security agreement between the Browns and Boulder Services, Inc. Attached to the other financing statement was a copy of the same security agreement, exclusive of the page bearing the signatures of the parties.

The bankruptcy court considered testimony elicited from Mr. Robert Gillespie, the administrative officer for the Uniform Commercial Code in the office of the Colorado Secretary of State. Mr. Gillespie testified, and the court found, that filed financing statements and security agreements are indexed according to the debtor's name. A potential creditor may then make an "information request" which results in a computer printout showing the name and address of the debtor, the filing and expiration dates of any relevant financing statement, and the name and address of the secured party. The information request (computer printout) in the instant case did not list Boulder Services as a secured party.

Information request printouts, however, do not describe the collateral underlying the security agreement or financing statement. In order for a creditor to examine this critical information he or she must make a "copy request". A copy request provides the requesting party with copies of the financing statements and all other documents filed with the financing statements. In the instant case, a "copy request" would have provided an interested creditor with the security agreement between Boulder Services and the Browns.

Mr. Gillespie testified that prudent creditors would not rely solely on the computer printout in deciding whether to extend credit to a given individual. A more prudent approach would be to make a "copy request" in order to examine the copies of the actual documents listed on the computer printout. (Transcript at 45-46).

The Browns argue Boulder Services' security interest was not perfected because its name did not appear on the computer printout as a secured creditor in order to alert other potential creditors of the encumbered status of the Browns' property. Moreover, the Browns assert Boulder Services' security interest was never perfected because it was never filed correctly.

The bankruptcy court ruled in favor of Boulder Services and concluded the security interest was filed and perfected. The court noted prospective creditors could have contacted the debtors who then would have been charged with providing the information desired. A creditor also could make a "copy request" and receive copies of financing statements and security agreements listed under the debtor's name. The court held that a prudent inquiry would have disclosed the nature of Boulder Service's security interest. The court also held the errors in filing the security agreement were so minor that they could not have misled any prospective creditors.

IV. CONCLUSIONS OF LAW

The ultimate issue on this appeal is simply: whether or not Boulder Services is a secured creditor with a perfected security interest. Since the bankruptcy judge did not rule on the priority between Boulder Services and the First National Bank of El Dorado, Kansas, neither will I.

The Browns argue Boulder Services is not a secured creditor and the bankruptcy judge erred in ruling it as such. The Browns assert that enroute to making this determination, the bankruptcy judge erred in five respects: (1) in requiring the Browns to prove the existence of an actual creditor who was misled by Boulder Services' "purported filing"; (2) in assuming that Boulder Services' security agreement was properly filed simply because it was contained within the secretary of state's records as an attachment of the filing of another creditor; (3) in deciding that Boulder Services' security agreement was properly filed and perfected despite its not appearing on the secured creditor information provided by the secretary of state (the "information request"); and, (4) in determining the Browns would realize a "windfall" if Boulder Services were found not to be a secured creditor.

I shall discuss each of these arguments in turn.

A. No Evidence of Any Creditor Having Been Misled.

The alleged error is that the bankruptcy court effectively imposed the burden upon the Browns of proving that an actual creditor was actually misled, rather than the burden of showing that "a hypothetical creditor, despite reasonable inquiry, might have been misled." (Browns' Brief at 9.)

THE STANDARD APPLIED BY THE BANKRUPTCY JUDGE

I find no merit in the Browns' argument because the bankruptcy court's reasoning comports with the standard proposed by the Browns. The bankruptcy court, in holding Boulder Services' security interest to be perfected, stated "any prudent creditor would have...