Wegner v. Grunewaldt

• Decision Date: 30 July 1987
• Docket Number: No. 86-5224,86-5224
• Citation: 821 F.2d 1317
• Parties: Bankr. L. Rep. P 71,860, 3 UCC Rep.Serv.2d 1700 Thomas E. WEGNER, Appellee, v. Cecelia GRUNEWALDT, Trustee; Valley National Bank, a National Banking Corporation; and The South Dakota Department of Revenue, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1317

821 F.2d 1317

Bankr. L. Rep. P 71,860, 3 UCC Rep.Serv.2d 1700

Thomas E. WEGNER, Appellee, v. Cecelia GRUNEWALDT, Trustee; Valley National Bank, a National Banking Corporation; and The South Dakota Department of Revenue, Appellants.

No. 86-5224.

United States Court of Appeals,

Eighth Circuit.

Submitted March 9, 1987.

Decided June 29, 1987.

Rehearing Denied July 30, 1987.

Edward J. Leahy, Sioux Falls, S.D., for appellants.

Michael B. Crew, Sioux Falls, S.D., for appellee.

Before LAY, Chief Judge, JOHN R. GIBSON, Circuit Judge, and HANSON, ^* Senior District Judge.

JOHN R. GIBSON, Circuit Judge.

Valley National Bank appeals from the district court's ¹ judgment reversing the bankruptcy court's order and declaring Thomas E. Wegner's security interest superior to Valley National's security interest in a liquor license that BLT, Ltd., initially owned and later sold to BLT II, Ltd. Valley National argues that the district court erroneously held that Wegner did not relinquish his security interest under section 9-306(2) of South Dakota's Uniform Commercial Code because his consent to sell the liquor license was conditioned upon retention of his security interest. S.D. Codified Laws Ann. Sec. 57A-9-306(2) (Supp.1986). We agree with the district court that under South Dakota law a secured party may retain a security interest by conditioning the authorization to sell the secured property upon the continuance of the security interest. The bankruptcy court's order does not decide, however, the factual question of whether Wegner conditioned his authorization upon the retention of his security interest. We thus remand this action to the bankruptcy court for this factual determination. Valley National also argues that the district court erred in holding that Wegner's security interest should not be equitably subordinated to Valley National's. We affirm this portion of the district court's judgment.

Robert Larson and Thomas Wegner were the sole shareholders of BLT, Ltd., a corporation formed in 1975 for the purpose of operating a restaurant in Sioux Falls, South Dakota. Larson owned 250 shares of BLT stock and served as a BLT director, its president, and its manager. Wegner owned 125 shares and served as a BLT director, its vice-president, and its secretary.

In the fall of 1981, Larson approached Wegner about investing in a new business venture, a bar and dance hall in Sioux Falls, South Dakota. Larson proposed that BLT sell its retail liquor license to the new corporation to be formed for the new business venture. Wegner was not interested in the new business venture. He and Larson agreed that it would be best for Wegner to redeem his BLT stock since Larson desired to sell the liquor license owned by BLT to the new corporation. Larson then formed this new corporation, BLT II, Ltd., and became its sole stockholder.

Larson and Wegner agreed to redeem Wegner's BLT stock for $40,000. Legal counsel prepared a stock redemption agreement which Larson, acting as president of BLT, and Wegner executed around February 1, 1982. That same day BLT paid Wegner $10,000 in partial payment for the stock redemption.

When they executed the redemption agreement, BLT and Wegner also signed a security agreement granting Wegner a security interest in all of BLT's assets, including BLT's retail liquor license. The parties also signed a financing statement pertaining to the security agreement. Wegner filed this financing statement with the South Dakota Secretary of State on March 3, 1982.

Previously, in December 1981 or January 1982, Larson had approached Valley National regarding financing for the business venture contemplated for BLT II. Wegner knew of these discussions. BLT had an established banking relationship with Valley National, and Wegner anticipated that the bank would be BLT II's financing source for its business venture. Furthermore, Wegner anticipated that the bank would obtain a security interest in all of BLT II's assets, including the liquor license to be transferred from BLT to BLT II.

In late February 1982, Valley National prepared the documents for a loan to BLT and BLT II, with a security interest in specified assets of BLT II, including its retail liquor license. The bank notified Larson during the last week of February 1982 that the loan documents were ready for execution. A bank employee also searched the state records at this time and found no filed financing statement claiming a security interest in the liquor license then owned by BLT. A few days later, on March 3, 1982, Wegner filed a financing statement claiming a security interest in BLT's liquor license. The next day, March 4, Larson, acting on behalf of BLT and BLT II, and the bank signed the loan agreement, the security agreement, and the financing statements. The bank was unaware of Wegner's previously filed financing statement when it filed its financing statements on March 8, claiming a security interest in the liquor license. On March 22, 1982, BLT sold its retail liquor license to BLT II for $60,000.

BLT and BLT II filed Chapter 11 bankruptcy proceedings on January 1, 1983. Pursuant to the application of the trustee of the BLT II estate, the bankruptcy court entered an order on August 6, 1984, confirming the trustee's sale of BLT II's liquor license for $75,000, directing the transfer of that liquor license free and clear of all liens, and ordering that the liens claimed by Valley National and Wegner on the liquor license attach to the $75,000 in proceeds. The dispute before the bankruptcy court concerned whether Valley National or Wegner has priority to these proceeds. The bankruptcy court ruled for Valley National. Citing section 9-306 of South Dakota's U.C.C., the court first concluded that "because the transfer was authorized and consented to by Wegner," the liquor license was transferred to BLT II free of the security interest given by BLT to Wegner. Wegner v. Grunewaldt (In re BLT II, Ltd.), Case No. 483-00002, Adv. No. 485-0005, slip op. at 11 (Bankr.S.D. July 22, 1985). The court also ruled that because Wegner filed his financing statement one day before Valley National executed its security agreement and financing statement with BLT and BLT II and because Wegner, an officer and director of BLT, never informed Valley National of his security interest, principles of equitable subordination dictate that Wegner's interest be subordinated to Valley National's. Id. at 12-13.

The district court rejected both of these rulings. First, it concluded that Wegner premised his authorization to sell the liquor license on the condition that he retain his security interest, and under section 9-306, such conditional authorization allows the security interest to continue in the transferred asset. Wegner v. Grunewaldt, Civ. No. 85-4268, slip op. at 6-7 (D.S.D. May 6, 1986). Second, the court concluded as a matter of law that Wegner's interest cannot be equitably subordinated merely on the basis of the bankruptcy court's factual findings that Wegner filed his financing statement one day before the bank obtained a security interest from BLT II and that Wegner failed to inform the bank of his interest. Id. at 7-10.

I.

When a district court reviews a bankruptcy court's judgment, it acts as an appellate court. As with most appellate proceedings, the district court may review the bankruptcy court's legal conclusions de novo, but the bankruptcy court's findings of fact shall not be set aside unless clearly erroneous. Bankr.R. 8013; see, e.g., In re Hunter, 771 F.2d 1126, 1129 n. 3 (8th Cir.1985); In re Martin, 761 F.2d 472, 474 (8th Cir.1985); see also Bankr.R. 7052 (Federal Rule of Civil Procedure 52 applies in adversary bankruptcy proceedings). Furthermore, the district court may not make its own independent factual findings. If the bankruptcy court's factual findings are silent or ambiguous as to an outcome determinative factual question, the district court may not engage in its own factfinding but, instead, must remand the case to the bankruptcy court for the necessary factual determination. E.g., In re Walker, 726 F.2d 452, 454-55 (8th Cir.1984); In re Neis, 723 F.2d 584, 588-90 (7th Cir.1983). In In re Walker, the district court concluded that a debtor-principal knew or should have known of his agent's fraudulent activities. The district court made this finding even though this factual question "was not expressly decided by the bankruptcy court," and the evidence on the issue was "conflicting." Id. at 454. In response to the argument that the district court acted improperly, we concluded:

Since the record evidence is subject to differing interpretations and the findings of the bankruptcy court, as indicated, are not presently acceptable as decisive of the basic issue, we believe that the district court erred in finding a want of showing that [the principal] knew, or should have known, of his [agent's] fraud. The question is one of fact to be decided in the first instance by the bankruptcy court, and we find a remand to the bankruptcy court for further findings of fact and conclusions of law is required.

Id. at 454-55.

Of course, we too may not make an independent factual finding when the bankruptcy court's decision is silent or ambiguous as to a crucial factual issue. Id. As the second court of review, however, we review the district court's factual and legal conclusions entirely on a de novo basis. In essence, we conduct an independent review of the bankruptcy court's judgment, asking whether the bankruptcy court's legal conclusions are correct and whether its factual findings are clearly erroneous. See, e.g., Clay v. Traders Bank, 708 F.2d 1347, 1350-51 (8th Cir.1983); In re Burley, 738 F.2d 981, 986 (9th Cir.1984). We review Valley National's contentions based on these standards of review.

II.

Section 9-306(2) of South Dakota's U.C.C. states:

Except where this chapter otherwise provides, a security interest continues in collateral...