In re Vermont Fiberglass, Inc., Bankruptcy No. 83-155.

• Decision Date: 21 November 1984
• Docket Number: Bankruptcy No. 83-155.
• Citation: 44 BR 505
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re VERMONT FIBERGLASS, INC. d/b/a Pettit Pools of Rutland, Debtor.

44 B.R. 505 (1984)

In re VERMONT FIBERGLASS, INC. d/b/a Pettit Pools of Rutland, Debtor.

Bankruptcy No. 83-155.

United States Bankruptcy Court, D. Vermont.

November 21, 1984.

COPYRIGHT MATERIAL OMITTED

Robert I. Tepper, Rutland, Vt., for First Vermont Bank & Trust Co.

Mark Butterfield, Rutland, Vt., for debtor.

David D. Robinson, Rutland, Vt., trustee.

MEMORANDUM AND ORDER

CHARLES J. MARRO, Bankruptcy Judge.

On August 5, 1983, Vermont Fiberglass, Inc. (Fiberglass), a Vermont Corporation whose principal business is the manufacture of swimming pools and spa equipment, filed a petition under chapter 11 of the Bankruptcy Code (Code) in order to rehabilitate as an ongoing business. The case was converted to a chapter 7 liquidation on March 8, 1984, 38 B.R. 151 (Bankr.). April 27, 1984 the First Vermont Bank & Trust Company (Bank), a secured creditor in this proceeding, filed a motion for relief from the automatic stay of Code section 362(a). A hearing, after notice, was held on August 4, 1984. The parties submitted memoranda of law in September and October 1984. From the records in the case and the testimony adduced at the hearing, facts as set forth herein were established.

FACTS

Fiberglass is the successor-in-interest to Brown, Goodrich & Orr, Inc. (BGO).

In 1974 a Vermont corporation known as Pettit Brothers, Inc. (Pettit Brothers) purchased a parcel of land (real estate) and mortgaged the same to the Bank. The mortgage was duly recorded. In 1976 Pettit Brothers executed a promissory note in favor of the Bank in the amount of $86,000 in consideration of a loan of equal amount expressly secured by the real estate.

In 1978 BGO bought the real estate from Pettit Brothers and mortgaged the same to Pettit Brothers in consideration of a loan in the principal amount of $284,000. The mortgage was duly recorded.

Also in 1978 Pettit Brothers and BGO joined in executing in favor of the Bank a "Subordination Agreement and Assignment" drafted by the Bank, which document recites that (a) BGO is indebted to Pettit Brothers as "evidenced by a promissory note and secured by a security agreement;" (b) for valuable consideration (as between BGO and the Bank, a loan in the principal amount of $146,000) Pettit Brothers "sells, assigns, sets over, mortgages and conveys" to the Bank the 1978 indebtedness of BGO to Pettit Brothers "and all of the property securing the same;" (c) BGO's 1978 indebtedness to Pettit Brothers "is hereby subordinated to any and all indebtedness, absolute or contingent, present or future, several or otherwise" of BGO to the Bank; (d) "any collateral or other security . . . which said Bank may hold, or which may come into its possession, may be released or otherwise dealt with by said Bank;" and (e) "the possession by said Bank of any promissory note or other commercial paper, or other evidence of indebtedness . . . shall be conclusive that it is a part of the indebtedness covered hereby." The document is not notarized, was not recorded, and does not refer to or incorporate by reference the BGO-Pettit Brothers mortgage. Curiously, with respect to this transaction, the Bank did not require (1) delivery of the promissory note BGO executed in favor of Pettit Brothers in connection with the BGO-Pettit Brothers mortgage or (2) tender to it of payments under the BGO-Pettit Brothers note. In fact Pettit Brothers kept possession of the note, BGO made payments to Pettit Brothers under the note, and Pettit Brothers made no payments to the Bank in keeping with the Bank's request to merely be kept informed as to whether BGO kept payments current.

In addition to the 1974 and 1978 mortgages, the 1976 note, and the 1978 Security Agreement and Assignment, the following documents are in evidence:

(a) a 1978 security agreement executed by BGO in favor of the Bank in consideration for a loan in the principal amount of $146,000, evidenced by a promissory note, and financing statements with respect thereto, signed by the debtor. The financing statements were duly filed in May 1978.

(b) a 1978 security agreement executed by BGO in favor of Pettit Brothers in consideration of a loan in the principal amount of $284,000, and financing statements with respect thereto, signed by the debtor. Recorded with the Rutland City Clerk in May 1978, the security agreement recites that it "is subordinate to a promissory note and security agreement from BGO to the Bank in the amount of $146,000 and is also subject to a subordination agreement between Pettit Brothers and the Bank". Duly filed in May 1978, the financing statements recite: "This lien is expressly subordinate to a lien of the Bank, of record."

(c) a 1979 security agreement executed by BGO in favor of the Bank, referencing the 1978 BGO-Bank $146,000 note, and financing statements with respect thereto, referencing the 1978 BGO-Bank financing statements executed in connection with the $146,000 note. Filed with the Rutland City Clerk and the Secretary of State in 1979, each 1979 financing statement is marked "AMENDMENT," recites additional and further collateral not covered by the referenced financing statements, and is not executed by the debtor.

(d) two 1979 security agreements executed in favor of the Bank in consideration of a loan in the principal amount of $200,000, evidenced by a promissory note. The security agreements reference the 1978 BGO-Pettit Brothers security agreement and financing statements. Pettit Brothers joined in executing each of these two 1979 BGO-Bank security agreements for the purpose of acknowledging that its 1978 security agreement and accompanying financing statements are to be subordinated to "BGO's line of credit in the amount of $200,000 and this security agreement."

(e) a 1980 security agreement executed by Fiberglass in favor of the Bank in consideration of a loan in the principal amount of $15,460, and accompanying U.C.C. statements. Filed with the Rutland City Clerk and the Secretary of State in 1980, each filed U.C.C. statement (1) references the 1978 BGO-Bank financing statements, (2) is marked "AMENDMENT" and "Continuation," and (3) recites additional and further collateral not covered by the referenced financing statements.

(f) a 1980 security agreement executed by Fiberglass in favor of the Bank in consideration of a loan in the principal amount of $245,000, evidenced by a promissory note. The note appears to be a rewrite of, inter alia, the 1979 $200,000 note and the 1980 $15,460 note.

(g) a 1981 security agreement executed by Fiberglass in favor of the Bank in consideration of a loan in the principal amount of $165,000.

Each filed financing statement shows on its face that the relevant security interest attaches to proceeds of collateral. No security agreement was filed with respect to any transaction, with the exception of the 1978 BGO-Pettit Brothers security agreement.

DISCUSSION

In broad terms, the issue is the extent to which the Bank's security interests are enforceable against the collateral.

AS TO LAPSED FINANCING STATEMENTS:

Where a secured creditor allows a perfected security interest to lapse, the trustee may avoid the security interest to protect unsecured creditors. See, Matter of Vintero Corp., 735 F.2d 740 (2d Cir. 1984). In this regard, Vermont Statutes, Title 9A, section 9-403(2) provides that

a filed financing statement is effective for a period of five years from the date of filing. The effectiveness of a filed financing statement lapses upon the expiration of the five year period unless a continuation statement is filed prior to the lapse . . . Upon lapse the security interest becomes unperfected . . .

The financing statements executed in favor of Pettit Brothers were filed in May 1978. These financing statements lapsed in May 1983 for the reason that no continuation statement with respect thereto was filed. Under the statute, the BGO-Pettit Brothers security interest is unperfected. The result is that the bankruptcy trustee as lien creditor may avoid the unperfected security interest. See Code § 544.

AS TO CONTINUATION STATEMENTS:

A continuation statement may only be employed to continue the subject matter of the original financing statement, and, conversely, additional collateral may not be described in the continuation statement. In re Merrill, 29 B.R. 531, 35 U.C. C.Rep.Serv.1976 (Bankr.D.Me.1983). A continuation statement cannot be used as a device to add collateral. Atty.Gen.Op., 27 U.C.C.Rep.Serv. 594 (Ky.1978). Thus, a continuation statement may be effective to extend the duration of a financing statement, but is not effective to give notice of a security interest in additional and further collateral not described in the underlying financing statement. In the instant case, the filed statements marked "Continuation" purport to add additional and further collateral to the subject matter of the underlying financing statements. To the extent that such filed statements purport to perfect a security interest in such identified further and additional collateral, the filed statements are without legal effect.

A continuation statement is timely filed when it is filed not sooner than six months prior to the expiration of the underlying financing statement. 9A Vt.Stat. § 9-403(3); see, In re Callahan Motors, Inc., 396 F.Supp. 785 (D.N.J.1975); In re Davidson, 29 B.R. 987, 989 (Bankr.W.D. Mo.1983). A continuation statement filed before six months prior to the expiration of the original financing statement is of no effect. Atty.Gen.Op., 14 U.C.C.Rep.Serv. 860, 863 (Ohio 1974). The policy reason is that a creditor should not be required to search the records before the beginning of the proper period for the filing of a continuation statement. Chrysler Credit Corp. v. United States, 24 U.C.C.Rep.Serv. 794, 795, 796 (E.D.Va.1978); Atty.Gen.Op., 12 U.C.C.Rep.Serv. 1251, 1252 (Iowa 1973). Thus, a continuation statement must be timely filed to continue the effectiveness of the original financing...