In re Penn Housing Corporation

• Decision Date: 05 December 1973
• Docket Number: No. 72-142 Erie.,72-142 Erie.
• Citation: 367 F. Supp. 661
• Parties: In the Matter of PENN HOUSING CORPORATION et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

367 F. Supp. 661

In the Matter of PENN HOUSING CORPORATION et al.

No. 72-142 Erie.

United States District Court, W. D. Pennsylvania.

December 5, 1973.

Norman H. Stark, Erie, Pa., for Security-Peoples Trust Co.

Warren W. Bentz, Erie, Pa., John P. Leemhuis, Erie, Pa., for Trustee.

OPINION AND ORDER ON PETITION FOR REVIEW

WEBER, District Judge.

This is a Petition for Review by the Trustee from an Order of the Bankruptcy Court granting to Security-Peoples Trust Company the accounts receivable and the inventory of the Bankrupt as a secured creditor. The accounts receivable and the inventory have been sold and by stipulation the proceeds are being held pending the determination of this question.

The question at issue is whether the Security-Peoples Trust Company held a perfected security interest in the inventory and accounts receivable.

The transactions between the parties are evidenced by:

(a) a recorded financing statement;

(b) a series of eleven promissory notes;

(c) a letter of the debtor acknowledging the debt and a pledge of security;

(d) a course of dealing between the debtor and the secured party.

Of the eleven promissory notes recited seven (7) are stamped "paid by renewal" and statements contained in them are not being considered as material to this issue. Three notes are material. With respect to another note of June 21, 1971 in the amount of $100,000, this was secured by a mortgage of a leasehold interest. There is no dispute over the perfection of the security interest in this collateral. The mortgage was foreclosed, the sale produced $125,000. The debt on this account being $106,250, the surplus from this sale should be administered by the Bankruptcy Court as an asset of the bankrupt's estate.

There are three remaining notes material to the security interest issue:

(1) April 14, 1971

face amount $126,500

balance due 76,500

Recital: "This note is/is not further secured by: a security interest arising under agreement of even date (if other than specify ____) in the following property.

Inventory Title Mack Tk."

It is not disputed that the security interest in the Mack truck was never perfected by the required delivery of an endorsed title. The proceeds of the sale of the truck were administered as assets of the bankrupt estate.

This note also recites:

"The security interest(s) set forth above secures all other obligations of any of the undersigned to bank which now exist or may rise in the future and covers after acquired property of the undersigned."

This is the only note which refers to after-acquired property.

(2) Jan. 17, 1972

face amount $200,000 Recital: "having deposited herewith as collateral security for said sum and any other liability or liabilities of undersigned to the holder hereof now due or to become due, or that may be hereafter contracted, the following property. Assignment of Accounts Receivable and Inventory with further right in the holder hereof to call ____ for additional security should said collateral in the opinion of the holder hereof have declined in value . . ."

(3) April 17, 1972

face amount $175,000

This note contains the same recital with respect to collateral as note No. 2 above.

There is no separate document of even date or any other date purporting to be the security interest referred to in these notes.

We deem it immaterial that the note of April 17, 1972 was signed by the debtor as Erie Builders Supply Company because the debtor had registered this name as a name under which it conducted business under the Pennsylvania statute: 15 P.S. § 51 et seq. We, therefore, conclude that this is a document signed by the debtor.

We would not hold any of these notes, standing alone, as sufficient to create a security interest.

While a Financing Statement, standing alone, does not create a security interest, but merely gives notice that one may exist, the language contained in a Financing Statement may aid in the determination of whether a security interest was in fact created.

"However, although a standard form financing statement by itself cannot be considered a security agreement, an adequate agreement can be found when a financing statement is considered together with other documents. See In re Carmichael Enterprises, Inc. 334 F.Supp. 94 N.D.Ga.1971 affd. per curiam 460 F.2d 1405 5th Cir. 1972; In re Fibre Glass Boat Corp. 324 F.Supp. 1054 S.D.Fla.1971 affd. per curiam 448 F.2d 781 5th Cir. 1971; In re Center Auto Parts, 6 U.C.C.Rep.Serv. 398 C.D.Cal.1968; Evans v. Everett 279 N.C. 352, 183 S.E. 109 1971."

In re Numeric Corp., 485 F.2d 1328 1st Cir. Oct. 17, 1973; Bankruptcy Law Reports, 11, 15 1973 § 65,038.

In re Carmichael, supra, held that a financing statement and a letter from the creditor upon which the debtor wrote "agreed", taken together, constituted a security agreement.

In re Center Auto Parts, supra, the court held that a financing statement and a promissory note reciting, "This note is secured by a certain financing statement", taken together constituted a security agreement.

In the present case the Financing Statement executed by the parties and filed December 12, 1970 recited:

"This Financing Statement covers the following types (or items) of property: Inventory present and after acquired. All present and future accounts receivable submitted, including new accounts receivable whenever acquired. All cash and non cash proceeds are claimed."

As a third leg to the stool the Bank presents a letter from the debtor dated April 28, 1971, to the Bank, containing a recapitulation of the account and including the following statements:

"A. We owe $326,500.00 in demand notes secured by a financing statement pledging the accounts receivable and inventory."

Again, while this letter, standing alone, would not qualify as a security agreement, it may stand as evidence of a security agreement. In In re Numeric Corp., cit. supra, the court considered that a resolution of the board of directors together with a financing statement, constituted a valid security agreement.

"In this case, we find that the financing statement and the directors' resolution, taken together, constitute a security agreement within the meaning of § 9-203(1)(b). The financing statement's itemization of machinery covered by the security agreement fulfills the evidentiary purpose of the statute. The directors' resolution establishes that an agreement in fact existed to give Blank a security interest and thus fulfills the Statute of Frauds purpose of the statute."

The fourth element urged by the Bank to support the finding of a security interest is the course of dealing of the parties. The Code indicates that the course of conduct of the parties is to be considered:

"`Agreement' means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act. (Sections 1-205 and 2-208)."

12A P.S. § 1-201(3)

Comment 3 to this Section echoes this:

"As used in this Act the word is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of this Act to displace a stated rule of law."

Similar language is found in other Sections of the Code and the Commentaries thereto: See 12A P.S. § 1-205 and Comment 1 thereto.

The courts have followed this mandate. Associated Hardware Supply Co. v. Big Wheel Distribution Co., 236 F. Supp. 879, 882 W.D.Pa.1965, rev. on other grounds 355 F.2d 114 3rd Cir. 1966; Congress Financial Corporation v. Sterling Coin Operated Machine Corporation, 456 F.2d 451 3rd Cir. 1972; Provident Trademen's Bank and Trust Company v. Pemberton, 196 Pa.Super. 180, 173 A.2d 780 1961; Westinghouse Electric Co. v. Murphy, Inc., 425 Pa. 166, 228 A.2d 656 1967; In re Walter W. Willis, Inc., Bankrupt, 313 F. Supp. 1274 E.D.Ohio 1970.

"The parties conducted themselves wholly consistently with an inventory security transaction."

In re United Thrift Stores, Inc., 363 F.2d 11, 14 3rd Cir. 1966.

The essential...