Kitchin Equipment Co. of Virginia, Inc., In re, 91-2060

• Decision Date: 30 March 1992
• Docket Number: No. 91-2060,91-2060
• Citation: 960 F.2d 1242
• Parties: 17 UCC Rep.Serv.2d 322 In re KITCHIN EQUIPMENT COMPANY OF VIRGINIA, INCORPORATED, Debtor. CRESTAR BANK, Plaintiff-Appellee, v. George W. NEAL, Trustee, Defendant-Appellant, and Kitchin Equipment Company of Virginia, Incorporated, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1242

960 F.2d 1242

17 UCC Rep.Serv.2d 322

In re KITCHIN EQUIPMENT COMPANY OF VIRGINIA, INCORPORATED, Debtor CRESTAR BANK, Plaintiff-Appellee, v. George W. NEAL, Trustee, Defendant-Appellant and Kitchin Equipment Company of Virginia, Incorporated, Defendant.

No. 91-2060.

United States Court of Appeals Fourth Circuit.

Argued Oct. 4, 1991.

Decided March 30, 1992.

Lawrence Hoyt Glanzer, Pender & Coward, P.C., Virginia Beach, Va., argued, for defendant-appellant.

James L. Miller, Williams, Kelly & Greer, P.C., Norfolk, Va., argued, for plaintiff-appellee.

Before PHILLIPS and NIEMEYER, Circuit Judges, and BUTZNER, Senior Circuit Judge.

OPINION

BUTZNER, Senior Circuit Judge:

George W. Neal, trustee in bankruptcy of the debtor, Kitchin Equipment Company of Virginia, Inc., appeals an order granting relief to Crestar Bank from the automatic stay of collection provided by 11 U.S.C. § 362. The district court affirmed the bankruptcy court's order granting relief. This appeal presents the sole issue whether, after Crestar erroneously filed a termination statement, it still retained a perfected security interest in Kitchin's assets. We reverse the judgment and remand to the district court with instructions to reinstate the automatic stay.

I

The relevant facts have been stipulated by the parties. In 1984, Kitchin entered into a financing arrangement which secured its debt to Crestar by a lien against Kitchin's furniture, fixtures, equipment, inventory, accounts receivable, and personal property. Crestar perfected its security interest in the collateral by properly filing a financing statement in September of that year. In July 1989, Crestar filed a valid continuation statement, extending its security interest in the collateral. In March 1990, Kitchin obtained a loan of $1,232,526.26 from Crestar, giving in exchange a negotiable promissory note securing the debt by reference to the previously filed security agreement. In May of 1990, Kitchin sought protection from its creditors under Chapter 11 of the Bankruptcy Code. In June, Crestar filed a statement that was intended to release from the security agreement only two specific items of heavy equipment.

The statement, entered on a printed form prepared by Crestar, was headed "Financing Statement." After the name of the debtor appeared a section headed "Check the box indicating the type of statement. Check only one box." The choices available were: ORIGINAL FINANCING STATEMENT, CONTINUATION--ORIGINAL STILL EFFECTIVE, AMENDMENT, ASSIGNMENT, PARTIAL RELEASE OF COLLATERAL, and TERMINATION. By error, Crestar checked the TERMINATION box. In a space labeled "Description of collateral covered by original financing statement" the bank typed: "The following two (2) specific pieces of equipment are to be released under Crestar's blanket security lien: 1) Crane ID # LC700 SN C 19006 [and] 2) Crane ID # LRT 220 SN 79055." The State Corporation Commission and the Clerk of the Circuit Court of Chesapeake recorded the statement; the latter stamped "TERMINATED" across it twice.

In October 1990, Kitchin moved to convert its proceedings to a Chapter 7 bankruptcy. Shortly thereafter, Crestar moved for relief from the automatic stay. In its amended answer opposing the modification of the automatic stay, Kitchin denied that Crestar's claim was secured. The bankruptcy court allowed the trustee to rely on Kitchin's response.

The bankruptcy court, without discussing its reasons, held that Crestar terminated its perfected security interest only with respect to the two items of equipment listed on the termination statement. On appeal, the district court, affirming the bankruptcy court, held that "no potential creditor could have possibly been misled when confronted with the description of the designated collateral to be released by Crestar." The district court relied on Va.Code § 8.9-402, official comment para. 2, and it distinguished the cases on which the trustee relied.

II

The Bankruptcy Code provides that filing a petition under Chapter 7 or Chapter 11 of the Code operates as an automatic stay against any attempt to collect or enforce any lien, judgment, or claim against the estate. 11 U.S.C. § 362(a). A party with an "interest in property" held by the debtor may ask the court for relief from the stay upon a showing of "lack of adequate protection" of that interest or that the debtor lacks equity in the property. 11 U.S.C. § 362(d)(1). A trustee or a debtor in possession, without regard to any knowledge, is empowered to avoid any transfer of property of the debtor or any obligation of the debtor that is voidable by a hypothetical lien creditor. 11 U.S.C. §§ 544(a)(1) and 1107(a). Rock Hill Nat'l Bank v. York Chem. Indus., Inc., (In re York Chem. Indus., Inc.), 30 B.R. 583, 585 (Bankr.D.S.C.1983). The trustee's powers "serve essentially to marshal all of the debtor's assets, including some that the debtor itself could not recover, in order to enhance the resources available to the pool of creditors." Vineyard v. McKenzie (In re Quality Holstein Leasing), 752 F.2d 1009, 1014 (5th Cir.1985).

While federal law confers on the trustee the power to avoid some transfers and obligations of the debtor, state law controls the exercise of this power. Havee v. Belk, 775 F.2d 1209, 1218 (4th Cir.1985). In Virginia, secured transactions are governed by Va.Code Ann. Title 8.9, which enacts the Uniform Commercial Code. A security interest in personal property and fixtures must be perfected by filing of a financing statement. Va.Code Ann. § 8.9-302(1) (Michie 1991). An effective financing statement may be amended by a second filing signed by both parties. The term "financing statement" in the Code refers both to the original and to any amendments. Va.Code Ann. § 8.9-402(4) (Michie 1991). A financing statement "substantially complying" with statutory requirements "is effective even though it contains minor errors which are not seriously misleading." Va.Code Ann. § 8.9-402(8) (Michie 1991).

Another section, § 8.9-404, governs a "termination statement," which is to be filed by the secured creditor after the debt is satisfied and the debtor makes a written demand. § 8.9-404(1) (Michie 1991). Unlike § 8.9-402, § 8.9-404 contains no provision excusing minor errors that are not seriously misleading. Termination of a security interest does not discharge the debtor's obligation to pay the creditor. Termination, however, releases the secured creditor's lien against the debtor's property.

III

Crestar advances several reasons why it retained its security interest in most of Kitchin's assets. As its first ground, it argues that the statement it filed complied with Va.Code Ann. § 8.9-406, which permits a secured creditor to release a part of the collateral by filing a "statement of release." Crestar contends that the release it filed cannot be considered a termination statement within the meaning of § 8.9-404 because that section requires that such a statement be filed after there is no outstanding secured obligation and upon written demand of the debtor. These prerequisites to a valid termination statement, Crestar points out, are absent.

Neither the bankruptcy court nor the district court adopted Crestar's argument, and we are not persuaded. Crestar designed the form it filed. The form provided a space for inserting the file number of the original financing statement. Crestar complied. The form then directs: "Check the box indicating the kind of statement. Check only one box." The form contained a box for "PARTIAL RELEASE OF COLLATERAL." Crestar did not check this box.

Crestar checked the box marked TERMINATION, indicating in accordance with the language of the form that this was a termination statement, not a partial release. Contrary to Crestar's argument, a filing specifically described as a termination statement, for which provision is made in § 8.9-404, is not the kind of partial release contemplated by § 8.9-406.

Crestar cannot prevail by its argument that its filing could not be a termination statement because it had not been preceded by payment of the debt and a demand by the debtor as specified in § 8.9-404(1). These provisions are for the benefit of the debtor. When the conditions for their application are met, the creditor must file a termination statement. Failure to do so imposes liability for damages under § 8.9-404(1). But nothing in the statute prevents the creditor from filing a termination statement on its own volition without awaiting demand. Under Crestar's theory a potential creditor could not rely upon a termination statement without inquiring whether the debtor had paid his obligation and made demand. Acceptance of Crestar's reasoning would defeat the utility of § 8.9-404.

There is no merit in Crestar's argument that its filing is ineffective as a termination statement because it does not recite that the secured party "no longer claims a security interest under the financing statement." This language, Crestar contends, is required by § 8.9-404. Crestar has misread the statute. There is no requirement that a termination statement must contain the text Crestar quotes. The only requirement is that the termination statement be "to the effect" that the secured party no longer claims a security interest. A check in the TERMINATION box on Crestar's form in conjunction with the printed language of the form discloses that the filing is a termination statement. This is all that § 8.9-404 requires. Crestar's argument would invalidate every termination statement it has filed on its own printed form and place in jeopardy liens acquired by other creditors in reliance on Crestar's termination statements.

Crestar's second ground for retaining its security interest is also based on a misreading of the statute. Crestar relies on § 8.9-402(8): "A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not...