Lintz West Side Lumber, Inc., Matter of

• Citation: 655 F.2d 786,8 B.C.D. 231
• Decision Date: 28 July 1981
• Docket Number: No. 80-2710,80-2710
• Parties: , 32 UCC Rep.Serv. 1288 In the Matter of LINTZ WEST SIDE LUMBER, INC., a/k/a West Side Lumber, John R. Lintz, President, Bankrupt. Appeal of the FARMERS & MERCHANTS BANK OF FORT BRANCH, INDIANA.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 786

655 F.2d 786

8 Bankr.Ct.Dec. 231, 32 UCC Rep.Serv. 1288

In the Matter of LINTZ WEST SIDE LUMBER, INC., a/k/a West Side Lumber, John R. Lintz, President, Bankrupt Appeal of the FARMERS & MERCHANTS BANK OF FORT BRANCH, INDIANA.

No. 80-2710.

United States Court of Appeals Seventh Circuit.

Argued April 28, 1981.

Decided July 28, 1981.

R. Stephen LaPlante, Evansville, Ind., for appellant.

David R. Joest, Bowers, Harrison & Kent; Evansville, Ind., for appellee.

Before CUMMINGS, ^* Chief Judge, CUDAHY, Circuit Judge, and WYATT, Senior District Judge. ^**

CUDAHY, Circuit Judge.

The Farmers & Merchants Bank of Fort Branch, Indiana seeks review of an order entered October 10, 1980, by the Honorable Gene E. Brooks, a United States District Judge, acting as a Judge of the Bankruptcy Court. This order granted the petition of J. Robert Duvall, trustee in bankruptcy for the estate of Lintz West Side Lumber, Inc., to set aside an earlier order entered by Judge Brooks, which authorized the abandonment of certain assets of the bankrupt. We affirm.

I.

Lintz West Side Lumber, Inc. ("Lintz Lumber" or the "bankrupt") was indebted to the Farmers & Merchants Bank (the "Bank") on two promissory notes totalling $90,000. To secure the indebtedness, the Bank obtained a security interest in the bankrupt's inventory and accounts receivable. The parties executed a security agreement to this effect, and the Bank prepared a financing statement which listed the debtor as:

Lintz, John Richard

Lintz, Mayella

2 Red Bank Road

Fort Branch, Indiana

The Bank filed the financing statement at the office of the Indiana Secretary of State and at the office of the Recorder of Gibson County, Indiana. By so filing, the Bank entertained the belief that it held a perfected security interest in the described property of Lintz Lumber.

On May 7, 1979, Lintz Lumber filed a voluntary petition in bankruptcy. ¹ The proceedings were referred to Bankruptcy Judge Gene E. Brooks, and a trustee was appointed for the estate. On July 18, 1979, the trustee applied for and received authorization to abandon certain property of the bankrupt to several secured creditors. This property included the inventory and accounts receivable purportedly subject to the security interest of the Bank.

Several months later, however, the trustee petitioned the court to set aside the order of abandonment on the grounds that the trustee had discovered an apparent defect in the Bank's financing statement. The trustee argued that the statement, filed under the names of John and Mayella Lintz, rather than Lintz West Side Lumber, Inc., was insufficient to perfect the Bank's security interest because the difference in names would seriously mislead other creditors. Judge Brooks (now a United States District Judge) reviewed the briefs and stipulations of facts submitted by the parties and heard oral argument on the issue. On October 10, 1980, he entered an order vacating that portion of the July 18 order which approved the abandonment of the property to the Bank.

The Bank subsequently instituted this appeal.

II.

The Bank initially contends that the district court lacked the power to modify the July 18 abandonment order. This argument is based primarily on the provisions of Section 39(c) of the Bankruptcy Act, 11 U.S.C. § 67(c) (1978), which prescribe the procedures for district court review of an order entered by a bankruptcy judge. Section 39(c) requires the aggrieved party to file a petition for review within 10 days of the entry of the order or within a judicially approved extension of that period. ² Since more than three months elapsed between the entry of the abandonment order and the filing of the petition for review in the instant case, the Bank maintains that the petition is untimely and that the district court lacked the power to grant the relief requested.

We believe that the Bank has misconstrued the nature of the review afforded by Section 39(c). This statute was intended to provide a mechanism for appealing the decisions of a bankruptcy judge to the district court. The facts of the instant case indicate, however, that the trustee's petition to set aside the July 18 abandonment order was not an attempt to initiate an appeal of that decision to the district court. The trustee did not have the authority to appeal an order which granted his own application, and Judge Brooks could not sit as a district judge on a case which he had decided as a bankruptcy judge. Thus, the provisions of Section 39(c) governing appeals from the bankruptcy court to the district court are inapplicable.

The case instead involves the bankruptcy judge's "ancient and elementary power to reconsider" his own orders. In re Pottasch Bros. Inc., 79 F.2d 613, 616 (2d Cir. 1935). Long ago, Judge Learned Hand concluded that there was no reason why a referee's orders "should be as immutable as the Twelve Tables, once the ink is dry." Id. It is now well settled that a bankruptcy judge has the power to reexamine and revise an order which he entered during the pendency of bankruptcy proceedings. In re Meter Maid Industries, Inc., 462 F.2d 436 (5th Cir. 1972); Frasch v. Wilson, 413 F.2d 69 (9th Cir. 1969). The fact that Judge Brooks set aside the order after his accession to the federal district bench is of no consequence in this particular circumstance. He still retained the power to exercise his discretion to reconsider his earlier order in light of the trustee's facts and arguments as to the status of the Bank's security interest. And in doing so, he did not abuse his discretion. ³

The Bank also argues that Judge Brooks lacked the power to set aside the July 18 abandonment order because the trustee had been divested of his title to property upon entry of the abandonment order and could not subsequently challenge the Bank's status as a secured creditor without asserting a new claim. We agree that abandonment divests the trustee of his title to the property of the bankrupt. Brown v. O'Keefe, 300 U.S. 598, 57 S.Ct. 543, 81 L.Ed. 827 (1937); Fletcher v. Surprise, 180 F.2d 669 (7th Cir. 1950). Since the trustee is not entitled to benefit from any subsequent unforeseen enhancement in the value of abandoned property, abandonment orders are ordinarily irrevocable. In re Webb, 54 F.2d 1065 (4th Cir. 1932); In re Amm, 130 F.Supp. 73 (E.D.Pa.1955); In re Yalden, 109 F.Supp. 603 (D.Mass.1953). See also Brookhaven Bank & Trust Co. v. Gwin, 253 F.2d 17 (5th Cir. 1958); In re Gravure Paper & Board Corp., 234 F.2d 928 (3d Cir. 1953); In re Polumbo, 271 F.Supp. 640 (W.D.Va.1967). Cf. In re Roberts, 460 F.Supp. 88 (N.D.Ga.1978). ⁴ But most of these cases involved situations in which the revocation of an abandonment order would unduly prejudice the rights of the innocent owner following abandonment of the property. ⁵

In the instant case, however, the trustee is not attempting to reclaim abandoned property which has undergone an unanticipated increase in value or to unfairly prejudice the purported secured party and owner of the property following abandonment. The trustee is merely attempting to correct the erroneous distribution of property by abandonment to a creditor with a security interest which has subsequently been shown to be unperfected throughout. Under these circumstances, where there has been a mistake in the original abandonment and where the purported secured creditor has not been unfairly prejudiced, we do not believe that the bankruptcy judge is precluded from reconsidering the entry of such an order setting aside a prior abandonment order.

There is no indication in the Rules of Bankruptcy Procedure that abandonment orders should be treated differently than other orders by a bankruptcy judge which are subject to reexamination. Moreover, the provisions of Rule 60 of the Federal Rules of Civil Procedure are applicable to bankruptcy practice and would have provided a basis for setting aside the July 18 abandonment order even if the bankruptcy judge had been otherwise specifically prohibited from reconsidering such orders. ⁶ See R.Bankr.P. 924. The absence of an explicit ban on reconsideration of abandonment orders in the Bankruptcy Rules and the availability of alternate relief tend to indicate that abandonment orders remain subject to the "ancient and elementary power (of the bankruptcy judge) to reconsider" his own orders. Pottasch Bros., 79 F.2d at 616. If a mistake has been made, it should be corrected, if the correction is not unfairly prejudicial to innocent parties.

III.

Finally, the Bank claims that the district court erred in concluding that the Bank's security interest was not perfected. The Bank argues that the Uniform Commercial Code's system of "notice filing" was designed to assure that minor errors in the information provided on the financing statement would not defeat the perfection of a security interest. Since the bankrupt here is a close corporation located in a small town, the bank contends that a filing under the name of John and Mayella Lintz, the principal owners, directors and officers of the corporation, was sufficient to provide notice of the Bank's security interest to other creditors in the community.

Judge Brooks concluded, however, that the Bank's failure to include the correct name of the debtor corporation in the financing statement was seriously misleading because subsequent creditors had to depend upon a government official to search state records for the financing statement. See Anderson, Uniform Commercial Code, § 9-402:28 (1971); Ind.Adm.Rules and Reg. §§ 26-1-9-407-1 to 9. As a duly constituted corporation, Lintz West Side Lumber, Inc., is a legal entity separate and distinct from John and Mayella Lintz (whose names appear on the financing statement). A creditor would ordinarily, and could reasonably, assume that corporate assets would not be encumbered by a security interest filed under the names of these individuals despite the similarity in the names. Unless...