Pearson v. Salina Coffee House, Inc.

• Decision Date: 20 October 1987
• Docket Number: No. 86-1987,86-1987
• Citation: 831 F.2d 1531
• Parties: 4 UCC Rep.Serv.2d 1225 John K. PEARSON, Trustee, Plaintiff/Appellee, v. SALINA COFFEE HOUSE, INC., Defendant/Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1531

831 F.2d 1531

4 UCC Rep.Serv.2d 1225

John K. PEARSON, Trustee, Plaintiff/Appellee, v. SALINA COFFEE HOUSE, INC., Defendant/Appellant.

No. 86-1987.

United States Court of Appeals Tenth Circuit.

Oct. 20, 1987.

William H. Zimmerman, Jr. and Barbara J. Coen of Wallace, Dewey & Zimmerman, Wichita, Kan., for plaintiff/appellee.

Norman R. Kelly of Norton, Wasserman, Jones & Kelly, Salina, Kan., for defendant/appellant.

Before ANDERSON, and BARRETT, Circuit Judges, and THOMPSON, ^* District Judge.

STEPHEN H. ANDERSON, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Cir. R. 34.1.8(c) and 27.1.2. The cause is therefore ordered submitted without oral argument.

This is an appeal from the district court's reversal of an order by the bankruptcy court. The sole issue is whether the UCC-1 financing statements, filed by the appellant, Salina Coffee House ("SCH"), which listed the debtor, Beacon Realty Investment Company of Salina, d/b/a Hilton Inn ("Beacon"), under its trade name rather than under its legal name, are effective to protect SCH's security interest against a challenge by the debtor's trustee in bankruptcy. The district court, reversing the bankruptcy court, held that SCH's security interest was unperfected. We affirm.

SCH sold furnishings and kitchen equipment on credit to the debtor, Beacon, on several different occasions. On each occasion, SCH filed a financing statement covering the furnishings and equipment as required under Kan.Stat.Ann. Sec. 84-9-402, except that it filed only in the debtor's trade name "Hilton Inn" and not in the debtor's partnership name, Beacon Realty Investment Company of Salina.

The parties stipulated to the facts. Under these facts, there is no evidence that Beacon ever did business in the partnership name or any trade name other than Hilton Inn. SCH was unaware of the existence of the partnership and assumed that Hilton Inn was a legal entity. All of the sales contracts and loan documentation between SCH and Beacon listed the purchaser/debtor as "Hilton Inn" and were signed by the hotel manager.

From 1981 until 1983, Beacon made payments, as Hilton Inn, to SCH in accordance with the sales contract. On December 8, 1983, Beacon filed a Chapter 11 bankruptcy petition which was later voluntarily converted to a Chapter 7 proceeding. John Pearson, the appointed trustee, filed a complaint challenging the validity of SCH's lien covering the equipment and furnishings sold to the Hilton Inn. Pearson claimed that the security interest held by SCH was unperfected because the financing statements listed Beacon's trade name without including the partnership's legal name. Pearson argued that since SCH's interest was unperfected, his statutory rights as trustee were superior to SCH's.

SCH responded that even if a creditor must generally file in the debtor's legal name, Kan.Stat.Ann. Sec. 84-9-402(8) permits "minor errors which are not seriously misleading." It argued that the Hilton Inn trade name filing was not "seriously misleading" because Beacon had consistently and exclusively held itself out to the public under that trade name.

The bankruptcy court ruled that, under the conditions of this case, it was sufficient to file only in the trade name since "in an equity sense it seems extremely harsh to penalize Salina Coffee for failing to file in the undisclosed and unknown name of the partnership." Pearson v. Salina Coffee House, Inc. (In re Beacon Realty Inv. Co.), 44 B.R. 875, 879 (Bankr.D.Kan.1984), rev'd, 61 B.R. 538 (D.Kan.1986). The district court reversed, holding that allowing a creditor to file only in a trade name would place an impermissible burden "upon potential creditors to ascertain and search any number of trade names that may be used by a single debtor." Pearson v. Salina Coffee House, Inc., 61 B.R. 538, 541 (D.Kan.1986). The district court further held that the fact that no creditors were actually misled was not determinative since the trustee in bankruptcy is treated as an ideal hypothetical lien claimant as of the date of the bankruptcy and has priority over any unperfected interest.

The Bankruptcy Code confers on a trustee in bankruptcy the same rights that an ideal hypothetical lien claimant without notice possesses as of the date the bankruptcy petition is filed. 11 U.S.C. Sec. 544(a). Section 544(a) allows the trustee to avoid any unperfected liens on property belonging to the bankruptcy estate. Under this provision, SCH will be an unsecured creditor in the debtor's bankruptcy unless its security interest in the debtor's furnishings and equipment was properly perfected.

Although the rights of the trustee as a lien creditor are governed by federal law, our determination of whether SCH possesses a perfected security interest which has priority over the trustee as a lien creditor is controlled by Kansas state law. In re Chaseley's Foods, Inc., 726 F.2d 303, 307 (7th Cir.1983); see also Havee v. Belk, 775 F.2d 1209, 1218-19 (4th Cir.1985). Kansas has adopted the UCC which requires that SCH file a financing statement to perfect its security interest in the furniture and equipment it sold to Beacon. The formal requirements concerning the contents of a financing statement are set forth in Kan.Stat.Ann. Sec. 84-9-402. Subsection (7) provides:

A financing statement sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or the names of partners.

SCH correctly argues that this provision does not expressly answer whether filing solely in the debtor's trade name may also be sufficient under some circumstances. ¹ The Official UCC Comment suggests that a trade name is not sufficient:

Subsection (7) undertakes to deal with some of the problems as to who is the debtor. In the case of individuals, it contemplates filing only in the individual name, not in a trade name. In the case of partnerships it contemplates filing in the partnership name, not in the names of any of the partners, and not in any other trade names. Trade names are deemed to be too uncertain and too likely not to be known to the secured party or person searching the record, to form the basis for a filing system. ²

Kan.Stat.Ann. Sec. 84-9-402 Official Comment 7 (1983). SCH argues that the Official Comment sets forth the general rule to which there are exceptions. The 1983 Kansas Comment ³ to subsection (7) does not specifically mention partnerships, but it expressly rejects the sole use of the trade names of individuals and corporations:

Perhaps the most important rule found in this subsection [ (7) ] is that a financing statement must be indexed in the name of the individual, not the trade name, when a sole proprietorship is involved.... Adding a trade name is neither necessary nor sufficient for perfection. If a corporate debtor is involved, the financing statement should show the corporate name. For example, if the debtor is the Carruthers Catfish Division of Associated Industries, Inc., the name should be shown as "Associated Industries, Inc." with an indexing following that name. See Official Comment 7. On the other hand, if a division or trade name is quite similar to the corporate name, use of the trade name in the financing statement might not be "seriously misleading" under 84-9-402(8) and thus might pass muster. So it was in Records & Tapes, Inc. v. Argus, Inc., 8 K.A.2d 255 (1982)....

Kan.Stat.Ann. Sec. 84-9-402, Kansas Comment 7. Although the Kansas Comment does not discuss partnerships specifically, there is no reason to believe that the rule would be different than that for sole proprietors and corporations. In each case, the name of the individual(s) or entity legally responsible for the debt must be used in the financing statement.

SCH argues that filing in the trade name, even if technically improper, is acceptable in this case under the provisions of subsection 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 seriously misleading. ⁴

Kan.Stat.Ann. Sec. 84-9-402(8). Since the debtor has never held itself out to the public in any other name than "Hilton Inn," SCH argues that it was not seriously misleading under subsection (8) to file the financing statement in the trade name.

There are no rulings by the Kansas Supreme Court on subsections (7) and (8). The Kansas Court of Appeals has considered these sections under circumstances where the debtor's trade name, which was similar to its corporate name, was incorrectly listed on a financing statement. See Records & Tapes, Inc. v. Argus, Inc., 8 Kan.App.2d 255, 655 P.2d 133 (1982). In Records & Tapes, the debtor's corporate name was "Argus, Inc." Two financing statements were filed and each was secured, at least in part, by the same inventory. The first statement was filed under the debtor's trade name, "Argus Tapes and Records." The second statement was filed two months later under the name of "Argus, Inc. d/b/a Argus Tapes and Records." The court held that the first financing statement, filed in the trade name, was sufficient to perfect the creditor's interest. The court based its decision on the "minor errors" exception of subsection (8):

If plaintiff had searched the record, it could not reasonably have been misled, and plaintiff does not claim it searched the record and was misled. The thrust of plaintiff's argument is that since [the creditor] did not precisely list the debtor's exact legal name, [the creditor] had not perfected its lien and therefore plaintiff has priority. This is an oversimplification of the UCC, and we cannot agree.

Id. at 134. See also Kan.Stat.Ann. Sec. 84-9-402, Kansas Comment 9 (1983). In Records and...