In re 8760 Serv. Grp., LLC

Citation: 586 B.R. 44Docket: Case No. 17–20454–drd–11

Court: United States Bankruptcy Court, W.D. Missouri; May 8, 2018; Us Bankruptcy; United States Bankruptcy Court

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The Court, led by Judge Dennis R. Dow, has issued an order regarding the establishment of administrative procedures for determining the validity, priority, and extent of liens on sales proceeds. Bancorpsouth Bank (BCS) is recognized as holding a first-priority security interest in the non-office equipment and inventory of 8760 Service Group, LLC, as well as in a blast booth installed on the property at 5105 Pelham Drive.

The factual background reveals that 8760 Service Group, LLC, operated in custom industrial construction, with Buck Barnes as its sole member. Pelham Property, LLC, was created to own the real estate from which 8760 operated. BCS was the primary lender for both entities, with Pelham being the main borrower for acquiring the land and constructing the facility. 8760 guaranteed the loans and made the payments. BCS holds a deed of trust on the real estate and has a history of financing agreements with 8760, including loans for operations secured by inventory, equipment, and accounts receivable.

The legal dispute primarily concerns the priority of liens on 8760's assets, particularly between BCS and Hudson Insurance Company, which provided bonding for 8760 and subsequently filed their own lien on the same assets. Debtors and Hudson argue that BCS's financing statement restricts its lien to a specific location, rendering it unperfected and thus unsecured. Conversely, BCS asserts that its financing statement includes a blanket description of collateral that is sufficient for perfection and does not limit its lien by location, suggesting that any ambiguity would trigger a duty to further investigate the collateral. The resolution of this dispute hinges on the interpretation of the collateral descriptions in the respective financing statements.

In November 2014, BCS filed a UCC-1 financing statement naming 8760 as the debtor and listing collateral as 'All Accounts Receivable, Inventory and equipment' located at 1534 Redwood Drive, Sedalia, MO. An amended statement in December 2015 expanded the collateral description to include 'all business assets' at a new address, 1803 W. Main Street, Sedalia, MO. The second statement also clarified that the collateral included items now owned or acquired in the future, along with supporting obligations and proceeds.

BCS asserts that its financing statements were not misleading, claiming a duty for others to investigate its security interest further. It cites ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A., where the 8th Circuit addressed inaccuracies in collateral descriptions in financing statements. In that case, the creditor misidentified the issuer of annuity contracts and transposed contract numbers, which led to a lawsuit over the priority of security interests. The 8th Circuit evaluated the sufficiency of financing statements under Missouri law, emphasizing that a statement is adequate if it includes the debtor's name, the secured party's name, and an indication of collateral. A statement can still be effective despite minor errors unless those errors render it seriously misleading, as defined by Missouri Revised Statutes 400.9-502(a) and 400.9-506(a).

The 8th Circuit emphasized the U.C.C.'s purpose of providing notice to parties involved in commercial transactions regarding the status of commodities and the encumbrance of property. A financing statement is deemed valid if it adequately notifies subsequent creditors of a potential security interest in the claimed collateral. Errors or omissions in collateral descriptions do not invalidate financing statements unless they are seriously misleading, as outlined in Mo. Rev. Stat. 400.9-506. In the present case, BCS's description of collateral, which included an address, was challenged by Debtors and Hudson as seriously misleading. However, the court ruled that financing statements covering "all assets" require subsequent creditors to investigate whether specific collateral is covered by a security agreement. The court concluded BCS's financing statements complied with Missouri U.C.C. requirements as they indicated potential coverage of all assets, and inaccuracies were not seriously misleading. Furthermore, if a description is open to multiple reasonable interpretations—one potentially covering the collateral and another not—the notice requirement is satisfied, placing the burden on subsequent creditors to inquire further. BCS's amended financing statement, which listed collateral with an address, could be interpreted in two ways regarding coverage, and prior case law supported the notion that similar descriptions were not seriously misleading, ensuring that a prudent buyer would recognize the need for further inquiry.

In In re VML Co. LLC, 2010 LEXIS 6554, the court examined a financing statement that described collateral at specific addresses along with a broad category of movable assets. The court determined that the inclusion of address-specific language did not mislead creditors regarding the scope of the security interest, which encompassed movable assets currently owned or acquired in the future. The ruling emphasized that a reasonable creditor would recognize an existing security interest and should investigate further. Similarly, in In re Sterling United, Inc., the court upheld this interpretation, indicating that the critical issue was whether the collateral description was misleading.

Debtors and Hudson contended that BCS's financing statement was ineffective for not indicating coverage of "all assets or property," arguing it failed to reasonably identify collateral beyond a specific address. They cited In re Freeman, which ruled that a financing statement with an address restrictor did not cover collateral at other locations. However, BCS distinguished this case, noting that both the financing statement and security agreement had similar address restrictions, a distinction also applicable to Matter of California Pump Mfg. Co. Inc. Hudson further referenced Lankford, which focused on priority based on specific address identification rather than the perfection issue.

The Court recognized that while previous cases emphasized address restrictions, it found the reasoning in ProGrowth more relevant. It concluded that BCS's financing statement could be interpreted in two ways, one of which included the collateral in question, thereby placing the onus on Hudson to investigate the potential existing perfected security interest.

The collateral description in the financing statement, which includes "all Accounts Receivable, Inventory, equipment" and "all business assets" located at a specific address, indicated to Hudson that a prior lien might exist and warranted further inquiry into the collateral. The additional details on page 2 of the financing statement reinforced this need for caution. BCS's collateral description was deemed not misleading and sufficient to alert Hudson to BCS’s prior lien, thereby establishing BCS's first priority security interest in 8760's non-office equipment and inventory due to its earlier filing.

The ownership and lien validity concerning the Blast Booth were contested. Hudson contends the Blast Booth belongs to 8760, citing its exclusive use for 8760's contracts and presenting evidence such as vendor proposals and invoices directed to 8760. Hudson claims a first priority interest in 8760's equipment, arguing the Blast Booth is not a fixture but ordinary equipment. Conversely, BCS asserts that Pelham owns the Blast Booth since it was financed through Pelham's credit and argues that it qualifies as a fixture under Missouri law, thereby securing a first priority lien based on its deed of trust from Pelham.

Ultimately, the Court concludes that regardless of ownership disputes, BCS maintains a first priority lien on the Blast Booth, confirming that either scenario presented results in the same outcome. The Court also notes that ownership under Missouri law can be determined by dominion or control over the asset, supporting BCS's position.

In Missouri, the party in possession of an item is presumed to be the owner in the absence of title evidence. Ownership of personal property not covered by a title certificate requires minimal evidence, which can include any competent evidence, such as a bill of sale or oral testimony from knowledgeable witnesses. Ownership can also be established through contract performance or when an item becomes a fixture of real property. 

To determine if an item is a fixture, three elements must be considered: annexation, adaptation, and the intent of the annexor. 

1. **Annexation**: An item is considered annexed when physically attached to real property, even with slight attachment. However, if an item can be removed with minimal damage, it may not qualify as a fixture.

2. **Adaptation**: An item is adapted to the property if it is designed to be an integral part of the building or is necessary for the intended use of the premises. Items that can serve purposes in different locations are generally not deemed peculiarly adapted.

3. **Intent**: The intent of the annexor to make the item a permanent part of the property is critical and is assessed at the time of annexation. 

The Missouri courts emphasize that intent holds the highest significance in determining whether an item has become a fixture.

A court is not obligated to accept subsequent or undisclosed testimony regarding an annexor's intent, as established in Freeman v. Barrs and Bastas v. McCurdy. Instead, the court assesses the actions and conduct of the annexor at the time of annexation to determine intent. Testimony revealed that the Blast Booth was bolted to the concrete floor of the 5105 Pelham Drive building, which was specifically designed to accommodate it, indicating that the annexor did not intend for its removal. Consequently, the court concludes that the Blast Booth qualifies as a fixture under Missouri law, thereby vesting ownership with Pelham, the real estate owner. 

Although documents suggested 8760 as the owner, these were not created by the Debtors and do not substantiate ownership claims. The use of the Blast Booth by 8760 without payment is not decisive, given their operational relationship. Missouri law necessitates minimal evidence to establish ownership, and the court finds that Pelham is the rightful owner. BCS holds a first-priority security interest in both the non-office equipment and the Blast Booth. 

The court notes that no separate motions or objections were before it, and the remaining issues (marshaling, subrogation, and diminution in value) have been resolved by the parties outside of this opinion. The court acknowledges that the burden of proof may shift depending on the context but finds this irrelevant to its conclusions, which would remain unchanged regardless. Although the Debtors sought reliance on a 2015 UCC-1 amendment by BCS, the court determined that this argument did not necessitate further analysis, as its findings would be consistent under any relevant financing statement.

Hudson and Debtors reference three cases: In re Softalk Pub. Co., In re I.A. Durbin, Inc., and In re Northern Beef Packers, L.P. However, these cases are not applicable as they do not address an address restrictor in collateral descriptions. The discussion on 'interpretation' pertains to how subsequent creditors interpret the financing statement language, rather than a court's interpretation. The Court is not required to apply contract or statutory interpretation principles since it is assessing whether the creditor had inquiry notice based on the language used in the financing statement, rather than interpreting the language itself. If the collateral description is found to be ambiguous, the Court concludes that the creditor should have been prompted to investigate further, rather than engaging in language interpretation. The parties have agreed on the amount of BCS's claims.