In re Southern Properties, Inc., Bankruptcy No. 83-01581-R. Adv. No. 84-0029-R.
| Decision Date | 03 December 1984 |
| Docket Number | Bankruptcy No. 83-01581-R. Adv. No. 84-0029-R. |
| Citation | 44 BR 838 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re SOUTHERN PROPERTIES, INCORPORATED t/a Pardners Restaurant and Lounge, Debtor. RICHMOND FIXTURE & EQUIPMENT COMPANY, Plaintiff, v. Robert E. HYMAN, Trustee in Bankruptcy for Southern Properties, Incorporated, Defendant. |
Robert L. Flax, Richmond, Va., for plaintiff.
John F. Ames, Richmond, Va., for defendant.
This matter came before the Court upon the filing of a motion for relief from stay by Richmond Fixture & Equipment Company. After holding a hearing on the plaintiff's motion for relief from stay, this Court took the matter under advisement. The parties submitted memoranda of law in support of their respective positions and requested oral argument thereon. After considering the evidence adduced at the hearing and argument by counsel, this Court makes the following findings of fact and conclusions of law.
On or about May 17, 1980 Richmond Fixture & Equipment Company ("Richmond Fixture") entered into a contract with and sold to Walter Chewning ("Chewning") certain items of restaurant equipment (the "property"). The parties executed a written contract and security agreement dated May 8, 1980.
Richmond Fixture perfected its security interest in the property sold to Chewning by properly filing the required financing statements. The written contract prohibits Chewning from selling the property sold to him by Richmond Fixture unless the sale was agreed to by Richmond Fixture. In addition to Richmond Fixture's consent of such a sale, Chewning was required, by the contract, to pay a $100.00 transfer fee to Richmond Fixture.
On or about July 23, 1982, Chewning sold his restaurant business and the property to the debtor, Southern Properties, Inc. ("Southern Properties"). The transfer fee was paid to Richmond Fixture. Southern Properties assumed the existing security agreement between Richmond Fixture and Chewning "with full rights and responsibilities." However, Richmond Fixture did not record a new financing statement or an amendment or extension of the previously filed financing statement with regard to the property.
Southern Properties filed for relief in bankruptcy pursuant to Chapter 11 of the Bankruptcy Code on October 24, 1983. Upon motion by the debtor, this Court entered an Order on January 17, 1984 granting the debtor's motion to convert the debtor's bankruptcy proceeding to Chapter 7 of the Bankruptcy Code. Robert E. Hyman was appointed interim trustee on January 23, 1984, accepted the appointment on January 25, 1984, and is acting at this time as trustee for the debtor.
Richmond Fixture has sought relief from the automatic stay provisions of 11 U.S.C. § 362(a) in order to recover property first sold to Chewning and later sold to the debtor. Pursuant to 11 U.S.C. § 362(d), a creditor is entitled to relief and the Court shall grant such relief from the automatic stay:
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or (2) with respect to a stay of an act against property, if—(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization.
11 U.S.C. § 362(d). Richmond Fixture contends that because it has a lien on the property in excess of its value and because the debtor is now in Chapter 7 () the requirements of § 362(d)(2) are satisfied.
The trustee has opposed Richmond Fixture's motion on the ground that his interest in the property is superior to any interest Richmond Fixture may have because Richmond Fixture does not have a perfected security interest. The basis of the trustee's position is that pursuant to 11 U.S.C. § 544(a) the trustee stands in the position of a lien creditor on the date the petition in bankruptcy is filed and, thereby, has an interest in property of the debtor superior to an unperfected security interest. Richmond Fixture argues that the debtor expressly assumed its security agreement with respect to the property, thereby continuing a valid security interest, and that the security interest remained perfected and thereby effective against the trustee because no further financing statement filing was required. Therefore, the precise issue presented to this Court by the parties is whether Richmond Fixture has a perfected security interest in the property which Southern Properties purchased from Chewning.
Although not addressed by any of the parties this Court feels obliged to briefly address the issue of whether Article 6 of the Uniform Commercial Code, as adopted in Virginia, applies to the instant matter. Generally, transactions similar to that involved in this case are considered a "bulk sale" because in selling the property in question here to Southern Properties, Chewning was transferring a major part of the materials, supplies, merchandise and other inventory of the business to another entity which was a sale not in the ordinary course of Chewning's business. See Va. Code § 8.6-102(1) (Repl.Vol.1965). However, the Virginia Supreme Court has held that a sale of the equipment and fixtures employed in the operation of a restaurant are not covered by the bulk sale provisions of the pre-Uniform Commercial Code (UCC) Virginia Bulk Sales Act. See O'Connor v. Smith, 188 Va. 214, 49 S.E.2d 310 (1948). The same result is reached under the UCC and Virginia Code § 8.6-102(3). See, Va. Code § 8.6-102, Official Comment No. 2, Virginia Comment (Repl.Vol.1965). Therefore, it appears clear that the instant matter is properly determined with reference to the provisions of Article 9 of the Uniform Commercial Code as enacted in Virginia.
The issue before the Court turns on the application of the commercial law of Virginia regarding the validity and perfection of security interests in personal property. The parties stipulate that when Richmond Fixture sold the property to Chewning that it properly perfected a security interest in the property. The parties disagree, however, as to whether a perfected security interest continued in the property in favor of Richmond Fixture after the authorized sale to the debtor, Southern Properties. Should Richmond Fixture have such a perfected security interest, relief from the automatic stay would be appropriate because the debtor lacks equity in the property and the property is not necessary for an effective reorganization inasmuch as the debtor has converted to Chapter 7. See 11 U.S.C. § 362(d)(2).
Pursuant to § 544(a) of the Bankruptcy Code, the trustee in bankruptcy, as a hypothetical lien creditor on the date of filing, defeats any holder of an unperfected security interest. Therefore, in order for Richmond Fixture to prevail in the instant matter it must demonstrate that it has a perfected security interest in the property. The trustee has conceded that Richmond Fixture had a properly perfected security interest in the equipment with respect to the initial sale to Chewning. Thus, that issue need not concern us here. Rather, Richmond Fixture's burden involves proof on two major issues: 1) whether Richmond Fixture's security interest was retained upon the authorized transfer to Southern Properties; and 2) if Richmond Fixture's security interest survived the transfer, whether further filing of financing statements was required to maintain its priority status.
The agreement between Richmond Fixture and Chewning was expressly assumed by Southern Properties. No statute, regulation, or policy appears to restrict the voluntary assumption of such an agreement by another party; thus, the transaction would appear to be governed by general contract law. In fact, it would frustrate the Uniform Commercial Code's policy of encouraging commercial transactions to defeat the security interest in this matter. In addition, none of the parties have argued that the assumption of the security agreement between Richmond Fixture and Southern Properties was not valid and enforceable. For these reasons, this Court finds that a valid and enforceable agreement was assumed between Richmond Fixture and Southern Properties. Thus, Richmond Fixture retained its security interest unless Virginia Code § 8.9-306(2) would require a different result.
The Uniform Commercial Code as adopted in Virginia provides that "a security interest continues in collateral notwithstanding a sale, exchange, or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise. . . ." Va.Code § 8.9-306(2) (Cumm.Supp.1984) (Emphasis added). Based upon this Code section the trustee argues that because Richmond Fixture authorized the sale of the property, its security interest does not continue and, therefore, the trustee should prevail.
No dispute exists as to the fact that Richmond Fixture authorized the sale of the property. The question that remains is the effect of Richmond Fixture's authorization. The facts are clear that Richmond Fixture's authorization was conditional. Richmond Fixture authorized the sale with the proviso that Southern Properties assume the existing security agreement between Chewning and Richmond Fixture.
The Supreme Court of Virginia has considered Va.Code § 8.9-306(2) in the case of Graves Construction Co. v. Rockingham National Bank, 220 Va. 844, 849, 263 S.E.2d 408, 411 (1980). The trustee argues that this Court's determination herein is controlled by the Virginia Supreme Court's decision in Graves. The trustee relies on the holding in that case that a sale of collateral authorized by the secured party terminates that party's security interest in the collateral.
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