In Re Greenbelt Co-Op Inc 124 B.R. 465

8/8/2019 In Re Greenbelt Co-Op Inc 124 B.R. 465

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United States Bankruptcy Court,D. Maryland.

In re GREENBELT COOPERATIVE, INC., Debt-or.

GREENBELT COOPERATIVE, INC., Plaintiff,v.

WERRES CORPORATION and Raymond LeasingCorporation, Defendants.

Bankruptcy No. 88-5-3199-SD.Adv. No. A89-0186-SD.

Feb. 12, 1991.

Chapter 11 debtor filed complaint to avoid lien of secured creditor and certain equipment and pro-ceeds. The Bankruptcy Court, E. Stephen Derb y, J.,held that: (1) financing statements filed by securedcreditor under debtor's trade name were not suffi-cient to perfect its security interest in debtor's assetsagainst claims of others, and (2) debtor-in-possession's use of trustee's power to avoid cred-itor's unperfected security interest, after confirma-tion of Chapter 11 case, would promote success of reorganization plan, rather than merely benefitingdebtor, and thus, strong arm provision could be ap-plied by debtor-in-possession postconfirmation.

So ordered.

West Headnotes

[1] Secured Transactions 349A 92.1

349A Secured Transactions349AI I Perfection of Security Interest

349Ak 92 Finan cing Statement349Ak92.1 k. In General. Most Cited

Cases(Formerly 349Ak92)

No per se rule under Maryland law precludes filingof financing statement under trade name of debtor,as opposed to its legal name, from being sufficient

to perfect security interest; however, filing of finan-cing statement under trade name of debtor is suffi-cient to perfect security interest of creditor only inlimited situations where legal name of debtor andtrade or other name under which financing state-ment is filed are sufficiently similar to subsequentcreditor searching records with reference to debtor'slegal name would find financing statement or in-formation which would put creditor on notice thatmore thorough search should be conducted.Md.Code, Commercial Law, 9-401 (1) , 9-402 ,9-402(8) , 9-402 comment.

[2] Secured Transactions 349A 92.1349A Secured Transactions

349AI I Perfection of Security Interest349Ak 92 Finan cing Statement

349Ak92.1 k. In General. Most CitedCases

(Formerly 349Ak92)Where filing of defective financing statement is notmisleading, it may be effective to perfect securityinterest under Maryland law. Md.Code, Commer -cial Law, 9-402(8 ).





Financing statements filed by secured creditor un-der debtor's trade name were not sufficient to per-fect its security interest in debtor's assets against

claims of others, under Maryland law; trade namewas not remotely similar to legal name, so that fil-ing under trade name would be found by thoselooking for security interests in debtor's legal name.Md.Code, Commercial Law, 9-401 (1) , 9-402 ,9-402(8) , 9-402 comment.

Page 1124 B.R. 465, Bankr. L. Rep. P 73,853, 14 UCC Rep.Serv.2d 920(Cite as: 124 B.R. 465)

2010 Thomson Reuters. No Claim to Orig. US Gov. Works.
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[4] Bankruptcy 51 2705

51 Bankruptcy51V The Estate

51V(H ) Avoid ance Rights51V(H)1 In General

51k2705 k. Bona Fid e Purchasers andRights Thereof. Most Cited Case sChapter 11 debtor's actual knowledge of securedcreditor's security interest, which was not perfectedunder Maryland law because secured creditor filedfinancing statement under debtor's trade namerather than legal name, was not imputed to debtor-in-possession so as to defeat avoidance power of debtor-in-possession, as hypothetical judicial lien

creditor. Bankr.Code, 11 U.S.C.A. 544(a )(1);Md.Code, Commercial Law, 9-3 01(1)(b) ,9-401(1) , 9-402 ; 9-301(1)(b) (1979 ).

[5] Bankruptcy 51 2722

51 Bankruptcy51V The Estate

51V(H ) Avoid ance Rights51V(H)2 Proceedings

51k2722 k. Time Lim itations; Compu-tation. Most Cited Cases

Debtor-in-possession's use of trustee's power toavoid creditor's unperfected security interest, afterconfirmation of Chapter 11 case, would promotesuccess of reorganization plan, rather than merelybenefiting debtor, and thus, strong arm provisioncould be applied by debtor-in-possession postcon-firmation; recovery by debtor would improve debt-or's financial health to extent of recovery, increas-ing likelihood that debtor's reorganization would besuccessful and that debtor would be able to makedeferred plan payments. Bankr.Code, 11 U.S.C.A. 544(a)(1 ), 1107(a ).





Even if reservation of title in lease, which was in-tended as security agreement, were security in-terest, financing statement would still be required inorder to perfect creditor's security interest underMaryland law. Md.Code, Commercial Law, 201(37), 9-402 .*466 James A. Vidmar, Jr. , Silver Spring, Md.,Lawrence D. Coppe l, and Jonathan N. Portner, Gor-don, Feinblatt, Rothman, Hoffberger & Hollander,Baltimore, Md., for debtor.

Lawrence F. Regan, Jr. , Garza and Regan, P.A.,Rockville, Md., for defendants.

*467 MEMORANDUM OF DECISION

E. STEPHEN DERBY , Bankruptcy Judge.

The issues raised by this adversary proceeding in-volve the effect on perfection of a security interestin equipment, vis a vis the debtor-in-possession, of a UCC financing statement filed under a trade nameof the debtor.

The Debtor, Greenbelt Cooperative, Inc., has filed acomplaint under 11 U.S.C. 544(a ) to avoid a lienof defendant Raymond Leasing Corporation(Raymond) in certain equipment, and proceedsthereof. Debtor contends the lien was not perfectedprepetition and is therefore void against Debtor, asrepresentative of its bankruptcy estate. Raymondoffers several defenses in the alternative:

First, the filing of a UCC financing statement undera principal trade name of the Debtor can operate toperfect a security interest under Maryland law;

Second, the Debtor's actual knowledge of the secur-ity interest is imputed to the debtor-in-possessionand defeats Debtor's avoidance power under 11U.S.C. 544(a );

Third, since Debtor's reorganization plan has been


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confirmed, avoidance of Raymond's security in-terest would create a windfall for Debtor and wouldnot benefit creditors. Therefore, Raymond's secur-ity interest should be enforced as between Ray-mond and Debtor; and

Fourth, reservation of title in the lease agreementwith Debtor was sufficient to establish an enforce-able security interest.

I.

Findings of Fact

At all times in 1987 and 1988 prior to filing its peti-tion initiating this case, Debtor was a consumerowned cooperative engaged in the retail furniturebusiness with 15 stores and 3 warehouses. It en-gaged in business under the trade name of SCAN,and it was well known among consumers by thename SCAN. Debtor's written promotional materialidentified it as SCAN, a division of Greenbelt Co-operative, Inc. Its order forms, stationery, and busi-ness cards, as well as the name on its headquartersbuilding in Savage, Maryland, carried similar dual

identification. Checks used to pay vendors carriedthe name Greenbelt Cooperative, Inc., and the tele-phones were answered by operators who recitedGreenbelt Cooperative. Debtor's annual report for1987 identified it as Greenbelt Cooperative, Inc.and contained text references to SCAN's activities.This report was circulated to all 115,000 of Debt-or's members and any vendors who requested it.

Under date of May 4, 1987, Debtor executed a con-tract denominated an equipment lease with defend-ant Werres Corporation (Werres). At the conclu-

sion of the lease term, Debtor could purchase theequipment, which consisted of forklifts, rackingand related items, for $1.00. The court has previ-ously granted partial summary judgment for Debtorthat this contract was intended as a security agree-ment for the purchase price, and it was not a truelease. On July 6, 1987 a financing statement was

filed with the proper office, namely, the MarylandState Department of Assessments and Taxation, infavor of Werres as secured party and Raymond asassignee. Werres has duly assigned the contract toRaymond, and in fact originally entered into theagreement for Raymond and with Raymond's ap-proval.

The contract forwarded to Debtor by Werres for ex-ecution identified the lessee on the heading and sig-nature line as Scan Furniture. Likewise, on the fin-ancing statement Scan Furniture was listed as thedebtor. When the signature lines on an addendum tothe lease and on the financing statement were com-pleted, it appears someone at Debtor's offices typed

in SCAN Furniture, Inc., since the type face is dif-ferent and these portions had not been completedwhen the documents were forwarded to Debtor forsignature.

Apparently, Raymond and then Werres becameconcerned about what entity was responsible for thedebt. Raymond's credit department reported intern-ally that it had no financial information other thansales *468 figures on Scan Furniture, and thus itwould require individual financials on Scan Fur-niture or a guarantee from Greenbelt Cooperative,

which it described as the parent company. At therequest of Werres, by letter dated June 16, 1987,Debtor confirmed to Werres that Greenbelt Co-operative, Inc. is responsible for the obligations of Scan Furniture as related to the Raymond LeasingAgreement. Thereafter, the financing statementwas filed listing Scan Furniture as the debtor, andthere was never an additional filing which in anyway identified Greenbelt Cooperative, Inc. as thedebtor.

Two gentlemen with extensive experience in equip-

ment leasing, William Single, Esquire, for Debtorand George L. Beck, for defendants, were in sub-stantial agreement. Each testified that his practicein searching liens was to obtain a debtor/lessee'slegal name and to check both the legal name andknown trade names. Mr. Single testified further thathis practice was to file financing statements under




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both the legal and trade names of a lessee. Werresand Raymond knew an entity known as GreenbeltCooperative, Inc. was involved in the subject trans-action and that Scan Furniture was lacking finan-cials. The court concludes that a careful lessorwould have inquired as to the legal name of the en-tity with which it was dealing and would have fileda financing statement in that name. Defendants didnot exercise the degree of care in documenting thistransaction which is recommended by experiencedequipment lessors.

As between the parties, Greenbelt Cooperative, Inc.knew it had by agreement pledged the equipment tosecure payment of a debt to Raymond. There were

no intervening claimants prepetition, and Raymondcould have enforced its security interest in theequipment as against a claim of Greenbelt Cooper-ative, Inc. prior to the filing of the petition institut-ing this case. The questions raised here involve theeffect of the bankruptcy filing on Raymond's secur-ity interest, which was perfected in the name of Scan Furniture and not in the name of GreenbeltCooperative, Inc., the legal entity.

The Debtor filed this case on November 4, 1988.After filing Debtor and Raymond agreed to sell the

equipment at public auction and to hold the pro-ceeds in escrow. The sale was on February 22,1989. Thereafter, on June 2, 1989 Debtor filed thiscomplaint under 11 U.S.C. 544( a) seeking a de-termination, inter alia, that the recorded financingstatement in a trade name was not sufficient to cre-ate a perfected lien or security interest in the equip-ment as against the debtor-in-possession, as trusteeof the bankruptcy estate. On November 20, 1989Debtor's Second Amended Joint Plan, as interlin-eated, which had been filed on September 26, 1989,was confirmed.

II.

Conclusions of Law

A.

[1] Greenbelt Cooperative, Inc. argues that a finan-

cing statement filed under the trade name of a debt-or, as opposed to its legal name, can never be suffi-cient to perfect a security interest under Marylandlaw. Such a conclusion would amount to a per serule, and it is not accepted by this court as an accur-ate statement of the rule which Maryland courtswould apply. This court envisions limited situationsin which the filing of a financing statement underthe trade name of a debtor may perfect the securityinterest of a creditor. These occasions, however,would be limited to situations where the legal nameof a debtor and the trade or other name under whichthe financing statement is filed are sufficiently sim-ilar that a subsequent creditor searching with refer-ence to the debtor's legal name would find the fin-ancing statement or information which would putthe creditor on notice that a more thorough searchshould be conducted.

The provision of the Uniform Commercial Codewhich describes financing statements is ambiguousand left to the courts to construe. Maryland Com-mercial Law Code Ann. 9-40 2 (1990 Cum.Supp.),

which recites the formal requisites of a financingstatement and was in effect at all times applicable,states in part:

*469 (1) A financing statement is sufficient if it gives the names of the debtor and the secured party, is signed by the debtor, gives an address of the secured party from which information con-cerning the security interest may be obtained,gives a mailing address of the debtor and con-tains a statement indicating the types, or describ-ing the items, of collateral.

* * * * * *

(8) A financing statement substantially comply-ing with the requirements of this section is effect-ive even though it contains minor errors whichare not seriously misleading. (Emphasis sup-


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plied.)

Section 9-401(1 ) says explicitly only what is suffi-cient, and not what is necessary, to perfect a secur-ity interest. See, e.g., Note, Trade Name Filing:Should It Be Sufficient to Perfect A Security Interest Under U.C.C. Section 9-402 ?, 35 CaseW.Res.L.Rev. 51 (1984 ). This court is not aware of reported Maryland cases which have addressed thespecific issue presented here.

In construing the statute, the court should be sensit-ive to its intended purpose and administration. Thepurpose of the statute is to give notice to thirdparties of a security interest held by a creditor inthe assets of a particular debtor. Official CommentNo. 2, Md.Com.Law Code Ann. 9-402 (19 75) ;Plemens v. Didde-Glaser, 244 Md. 556, 563, 2 24A.2d 464 (1966 ). If a filing fails of this purpose,then it should not be effective. However, if a filingunder a trade name actually would put a creditor onnotice of a security interest in the assets of the debt-or, then that filing, having fulfilled its purpose un-der the statute, may be effective. Thus, courts haveheld that a filing under a trade name, if sufficient toput a reasonably diligent creditor on notice of a se-curity interest, may be effective, although it other-

wise would not be. For example, in the case of In rePlatt, 257 F.Supp. 478 (E.D.Pa.19 66) , the legalname was the personal name of the debtor, HenryPlatt. Mr. Platt used two trade names, Platt Fur Co.and Kenwell Fur Novelty Co. Id. at 482. The courtdistinguished between the two trade names, notingthat:

The use of Kenwell as the debtor would clearlyhave left F.C.A. without a perfected security in-terest. However, the name Platt Fur Co. is suffi-ciently related to the name of the debtor, Henry

Platt, to require those who search the records tomake further investigation. Furthermore, the Ref-eree found that the name was not seriously mis-leading, the criterion for effectiveness under 9-402(5) .

Id.

[2] Maryland's version of the Uniform CommercialCode is consistent when it incorporates a substan-tial compliance test for financing statements.Md.Com.Law Code Ann. 9-402(8 ), quoted above.Thus, where a filing is not misleading, it may be ef-fective to perfect a security interest. Cf., Plemens ,244 Md. at 566, 224 A.2d 4 64 (where Maryland'sCourt of Appeals, in rejecting the challenge of atrustee for the benefit of creditors to a financingstatement claiming the signature was ineffective,stated: There is nothing in the evidence to indicatethat any one searching the records would be misledby the fact that the signature did not relate to therepresentative capacity of Mr. Slatkoff.)

While there is authority that where a business hasbeen conducted in a community consistently undera trade name for an extended period, a financingstatement filed under that trade name is sufficient toperfect a security interest, see In re McBee, 714F.2d 1316 (5th Cir.1983 ), the weight of authority isthat a financing statement must be filed under thelegal name of the debtor to be sufficient, unless thenames are so close that a filing under the tradename of the debtor is a minor error. See In re Leichter, 471 F.2d 785 (2nd Cir.197 2) (where thecourt held that, since Leichter and not Landman

was the legal debtor, omitting to file under Leichterwas not simply a minor error within 9-402(5 ));and In re Hill, 363 F.Supp. 1205 (N.D.Miss.197 3)(holding that although a store had been doing busi-ness under the same trade name in the same loca-tion for two years prior to bankruptcy, a financingstatement which was filed only *470 under thedebtor's trade name rendered the creditor's claimunenforceable against the trustee).

Raymond urges the court to follow Matter o f Glasco, Inc., 642 F.2d 793 (5th Cir.1 981) . Thestandard adopted by the court in Glasco was ...whether potential creditors would have been misledas a result of the name the debtor was listed by inthe bank's financing statement. Id. at 796.However, the court imposed a further requirementthat potential creditors also be reasonably prudent.


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In Glasco, the court held that where a debtor helditself out to creditors as Elite Boats, Division of Glasco, Inc. reasonably prudent creditors would berequired to search under the trade name, EliteBoats in addition to its legal name, Glasco, Inc. Id.

A rule such as that articulated by the Fifth Circuitin Glasco, and followed in McBee, would introduceuncertainty into commercial transactions. A securedcreditor, to be assured of protection for its securityinterest priority, would be at risk to identify andsearch under all trade names by which a corporateentity might be known. This is a particularly oner-ous and unrealistic for nonlocal financial institu-

tions, such as Raymond in this case, which are notfamiliar with the conduct of local businesses.

Considering ease of administration of the statute, itwould appear much more efficient and certain to re-quire all concerned parties to operate with referenceto the legal name of the debtor. If a creditor is al-lowed to file the financing statement under a tradename of the debtor, then each subsequent creditorwill need to determine and check under both thetrade name, perhaps more than one, and the legalname of a debtor. It would be more straight forward

for the original creditor and each subsequent credit-or to determine the legal name of the debtor and fileand search under that one name.

This court concludes a Maryland court would applya rule which requires, for it to be effective, that afinancing statement be filed either under the legalname of the debtor or under a name which is sub-stantially similar to the legal name of the debtor, sothat it would not mislead a reasonably diligent cred-itor searching the financing records. A creditorshould only be required to search under the legal

name of a debtor to obtain notice of a security in-terest or to be put on notice to inquire further. Sucha rule follows the weight of authority, it makescommercial sense, it promotes uniformity, and it issufficiently flexible to accommodate minor errorsand oversights which are not misleading.

The conclusion here is consistent with dictum of the Court of Appeals for the Fourth Circuit in therecent case of In re Bumper Sales, Inc., 907 F.2 d1430 (4th Cir.1990 ) where the court held under Vir-ginia law that the secured creditor's use of its tradename on the financing statement was not seriouslymisleading. Id. at 1435. After quoting from Sec-tions 9-402(1) and 9-402(8) of Virginia's UniformCommercial Code, which are worded identically tothe comparable Maryland sections quoted above, inconsidering the name used by the secured party thecourt explained:

The issue is whether or not a reasonably dili-gent searcher would be misled by the irregular-

ity. In re Bosson, 432 F.Supp. 1013, 1 017(D.Conn.1977) (quoting J. White & R. Summers, Handbook of the Law Under The Uniform Com-mercial Code 839 (1972)). This is determined ona case by case basis. The rationale for this min-imal threshold is that the financing statement isdesigned to indicate[ ] merely that the securedparty who has filed may have a security interestin the collateral described. Further inquiry fromthe parties concerned will be necessary to dis-close the complete state of affairs. OfficialComment # 2, Va.Code 8.9-40 2. See also In reVarney Wood Prods., Inc., 458 F.2d 435 ( 4thCir.1972) ; Hixon v. Credit Alliance Corp., 235Va. 466, 369 S.E.2d 169 (1988) .

Some courts have found that the use of thedebtor's trade name on the financing statementis seriously misleading and not minor er-ror. See, e.g., Pearson v. Salina Coffee House, Inc., 831 F.2d 1531 (10th Cir.1987 ); In *471 reThomas, 466 F.2d 51 (9th Cir.1972 ); and Greg Restaurant Equipment & Supplies, Inc. v. Va l-way, 144 Vt. 59, 472 A.2d 1241 (1984) .However, others have upheld the use of a debt-or's trade name. See, e.g., In re Glasco, Inc. ,642 F.2d 793 (5th Cir.198 1). The court's con-cern is understandable, because a prospectivecreditor checking to see if a financing state-ment has been filed may look only under the


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debtor's real name, not the debtor's tradename, and thereby miss the filing altogether.However, the use of the secured party's (as op-posed to the debtor's) trade name is much lesstroubling, in part because the financing state-ment still gives notice that the debtor's assetsmay be encumbered and that further inquiry iswarranted.

Id. at 1434-1435. (Emphasis supplied.)

[3] Although courts, under Maryland law, may onsome occasions accept a filing under a variation ona debtor's legal name which would put a reasonablydiligent creditor on inquiry notice of a possible se-curity interest, a filing under SCAN would not befound by those looking for security interests in theassets of Greenbelt Cooperative, Inc. Consequently,Raymond's financing statement was not sufficientto perfect its security interest in Debtor's assetsagainst the claims of others.

B.

[4] The Debtor's actual knowledge of Raymond'ssecurity interest is not imputed to the debtor-in-possession and does not defeat the avoidancepower of Greenbelt Cooperative, Inc., as debtor-in-possession, under 11 U.S.C. 544(a) (1) . Thecontrary position asserted by Raymond is squarelyin conflict with the language of Section 544(a ):

(a) The trustee shall have, as of the commence-ment of the case, and without regard to anyknowledge of the trustee or of any creditor, therights and powers of, or may avoid any transferof property of the debtor or any obligation in-curred by the debtor that is voidable by-

(1) a creditor that extends credit to the debtor atthe time of the commencement of the case, andthat obtains, at such time and with respect tosuch credit, a judicial lien on all property onwhich a creditor on a simple contract couldhave obtained such a judicial lien, whether ornot such a creditor exists; .... (Emphasis sup-

plied.)

Pursuant to 11 U.S.C. 1107(a) , the debtor-in-possession has all the rights and powers, andshall perform all the functions and duties of a trust-ee, with certain exceptions not material here.

Section 544(a ) is often referred to as the strong armclause. The reason for this term is that the trustee inbankruptcy stands in the shoes of a hypothetical ju-dicial lien creditor.

The reason for the trustee's enhanced position isdue to the trustee's unique position as the caretakerof the estate and the trustee's responsibility to pre-serve the estate's assets for the benefit of all credit-ors. See In re Ozark Restaurant Equipment C o., Inc., 816 F.2d 1222 (8th Cir.1987 ), cert. denied subnom. Jacoway v. Anderson, 484 U.S. 848, 108 S.Ct.147, 98 L.Ed.2d 102 (1987 ). The trustee is thus giv-en the power and ability to avoid all unperfected se-curity interests. The trustee is an entity distinctfrom the debtor, even where the debtor, as debtor-in-possession, is acting as trustee and the debtorhad actual knowledge of an unperfected security in-terest. If a case concludes unsuccessfully with adismissal, so that the avoidance of a transfer is no

longer beneficial to creditors, but only to the debt-or, a transfer avoided under Section 544(a ) is rein-stated. 11 U.S.C. 349(b)(1)( B). This prevents awindfall for a debtor outside a bankruptcy case.

Raymond's reliance on In re Hartman Paving, Inc. ,745 F.2d 307 (4th Cir.1984 ) (Winter, C.J., dissent-ing) is misplaced because the issues in Hartman in-volved: (1) avoidance powers of a bona fide pur-chaser under Section 544(a)(3 ); and (2) intricaciesof West Virginia real property conveyance law. See*472 In re Millerburg, 61 B.R. 125, 127-28

(Bankr.E.D.N.C.1986) . Contra Hartman Paving,see In re Probasco, 839 F.2d 1352, 1354-55 n. 2(9th Cir.198 8). This adversary proceeding wasbrought pursuant to Section 544(a)(1 ), and it con-cerns the status of a hypothetical judicial lien cred-itor on the petition date. Under Maryland law a ju-dicial lien creditor would have priority over an un-


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perfected security interest in personal property, andknowledge is not a factor. Md.Com.Law Code Ann. 9-301(1) (b) (1990 Cum.Supp.). CompareMd.Com.Law Code Ann. 9-301(1)(b) (1975 ), be-fore it was amended by Md.Laws 1980, Ch. 824 todelete the phrase without knowledge of the secur-ity interest.

C.

[5] Raymond's third argument is that the trustee'spower of avoidance may not be used by a debtor-in-possession under 11 U.S.C. 1107(a ) to glean awindfall for the debtor, but it should only be usedin furtherance of equitable distribution of the debt-or's assets among creditors. A leading case support-ing this proposition is Matter of Vintero Corp., 735F.2d 740 (2nd Cir.198 4), cert. denied 469 U.S .1087, 105 S.Ct. 592, 83 L.Ed.2d 702 (1984 ), whichinvolved a filing lapse under Maryland law of acreditor's security interest in a ship.

In Vintero, the court began with the premise that adebtor-in-possession under the former BankruptcyAct was given the right of an ideal judicial liencreditor to avoid an unperfected security interest. Id. at 741-42. However, the purpose of this powerwas to benefit third party creditors, not to create awindfall for the debtor itself. Id. at 742. The SecondCircuit held that a nonrecourse secured creditor'sfailure to file a financing statement in Maryland,after the debtor, Vintero, moved a ship in which thecreditor had a security interest to Maryland, did notpreclude the creditor from making a claim in the es-tate of the Chapter XI debtor. Although [w]henVintero assumed the status of a debtor-in-possession, it became vested with the rights andpowers of a trustee, and had all the rights that an

ideal judicial lien creditor would have as of the fil-ing of Vintero's petition, Vintero was not itself anideal judicial lien creditor, although it could exer-cise the rights of one. 735 F.2d at 741-7 42. Thecourt reasoned that [f]iling requirements are forthe benefit of third parties, not the debtor. U.C.C. 9-301 . Id. at 742.

The court continued, quoting Clark, The Law of Se-cured Transactions Under the Uniform CommercialCode Paragraph 3.2[2], at 3-8 (1980): The secur-ity interest need not be perfected to be enforceableagainst the debtor; perfection is important only in-sofar as adverse third parties have entered the pic-ture. Id. at 742. The analysis of the court is setforth below:

Vintero was given the right to avoid CVF's secur-ity interest in order to protect such third parties,not to create a windfall for Vintero itself. SeeWhiteford Plastics Co. v. Chase Nat'l Bank, 179F.2d 582, 584 (2d. Cir.1950 ). Vintero suffered noprejudice because of the lapse in filing, and we

see no reason why it should benefit from suchlapse. See In re Fried Furniture Corp., 293F.Supp. 92, 93 (E.D.N.Y.196 8), aff'd, 407 F.2d360 (2d. Cir.196 9) (per curiam). To the extentthat other creditors of Vintero are not affected ad-versely by enforcement of CVF's security in-terest, there is no reason why such interest shouldnot be enforced. Whiteford Plastics Co. v. Chas e Nat'l Bank, supra, 179 F.2d at 584 .

* * * * * *

A bankruptcy court has broad equitable powerswhich may be invoked to see that substance willnot give way to form, that technical considera-tions will not prevent substantial justice from be-ing done.

Id. If the lien was avoided, the claim against Vin-tero would have been extinguished in its entiretybecause of its nonrecourse nature. Therefore, whileVintero could assert the rights of an ideal judiciallien creditor to prevent the secured creditor fromobtaining priority of payment over other, unsecured

creditors, the unperfected secured creditor was en-titled to share pro rata with them and the creditor'sclaim was *473 recognized to ... preclude the pos-sibility of Vintero reaping an undeserved windfall. Id. at 743.

While the equitable principles enunciated in Vin-


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tero have not been altered by the Bankruptcy Code,the court does not find them applicable in this case.The controlling standard is not, as Raymond con-tends, whether the avoidance of Raymond's lieneither will result in a greater promised payment toother creditors or is necessary to make promisedplan payments. Rather, the controlling standard iswhether there will be some benefit to creditors fromthe avoidance. The latter standard has been satisfiedhere.

This is a case under Chapter 11, where the acknow-ledged purpose is a successful reorganization. Asstated in the House Report for the Bankruptcy Re-form Act of 1978:

The purpose of a business reorganization case,unlike a liquidation case, is to restructure a busi-ness's finances so that it may continue to operate,provide its employees with jobs, pay its creditors,and produce a return for its stockholders. Thepremise of a business reorganization is that assetsthat are used for production in the industry forwhich they were designed are more valuable thanthose same assets sold for scrap. Often, the returnon assets that a business can produce is inad-equate to compensate those who have invested in

the business. Cash flow problems may develop,and require creditors of the business, both tradecreditors and long-term lenders, to wait for pay-ment of their claims. If the business can extend orreduce its debts, it often can be returned to a vi-able state. It is more economically efficient to re-organize than to liquidate, because it preserves jobs and assets.

H.R.Rep. No. 95-59 5, 95th Cong. 1st Sess., Ch. 5,Pt. I at 220. (1977), U.S.Code Cong. & Ad-min.News 1978, pp. 5787, 6179. Debtor's plan re-

quires deferred payments to certain classes of cred-itors. It also provided substantial cash payments tocreditors on its effective date. A recovery by Debt-or in this proceeding will improve Debtor's finan-cial health to the extent of the recovery. It willthereby increase the likelihood that Debtor's reor-ganization will be successful and that Debtor will

be able to make its deferred plan payments.

Further, the possibility of recovery in this proceed-ing was a factor available to creditors in negotiatingor eliciting more favorable plan terms than Debtormight otherwise have proposed. There was an act-ive committee of creditors, and Debtor's complaintwas filed before the confirmation hearing. Thepostpetition timing of the hearing and decision inthis case should not affect the merits of Debtor'savoidance claim. It is benefit to Debtor's successfulreorganization which is the determinative element.

A case which contains many similarities to the in-stant proceeding is In re Funding Systems As set Management Corp., 111 B.R. 500(Bankr.W.D.Pa.1990) . In Funding Systems, thedebtor equipment lessor sought, under 11 U.S.C. 544(a)(1) , to avoid security interests it had grantedto Chemical in several computer leases becauseChemical had failed to perfect its security interestsas of the petition date. Id. at 502. The adversaryproceeding was commenced before confirmation of Funding Systems' plan, but it was decided afterconfirmation. The court found Chemical had failedto perfect its security interest in most of the leasesprepetition. Therefore, the court held, inter alia,

that Chemical became an unsecured creditor as tothose leases on the petition date because of its fail-ure to perfect; its rights in the leases became subor-dinate to those of Funding Systems; and its securityinterests could be avoided under Section 544(a)(1 ). Id. at 522.

Chemical maintained, nevertheless, that lien avoid-ance should not be permitted where it benefitedonly the debtor and was not necessary for the debt-or to meet its obligations to other creditors. Id. at523. The court in Funding Systems rejected Chem-

ical's contention. Id. Its explanation is applicable inthe instant situation.

This is not the appropriate standard for determ-ining whether recovery by *474 Debtor in this in-stance would benefit its unsecured creditors. Thenecessity of such recovery in order for Debtor to


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be able to meet its obligation to unsecured credit-ors is not relevant. What matters is whether unse-cured creditors will receive ... some benefit fromthe recovery of the preferences, even if it is notan increase in the amount the creditors will re-ceive. In re Centennial Industries, Inc., 12 B.R.99, 102 (Bankr.S.D.N.Y.198 1). All that is re-quired is that recovery by Debtor will increase itsassets and improve its financial health to the ex-tent that the likelihood is improved of its beingable to satisfy its obligations to its creditors un-der the Plan. In re Tennesse Wheel & Rubber Co. ,64 B.R. 721, 724 (Bankr.M.D.Tenn.198 6), aff'd mem., 75 B.R. 1 (M.D.Tenn.198 7), citing, In reSouthern Indus. Banking Corp., 59 B.R. 638

(Bankr.E.D.Tenn.1986) .

Id.

The equitable principles applied in the Vintero casewere followed in In re Chapman, 51 B.R. 663(Bankr.D.C.1985) where a Chapter 13 debtor wasnot allowed to apply the strong arm clause of 11U.S.C. 544(a)(3 ) to avoid a third trust lien on thedebtor's residence. The debtor's plan proposed topay the only unsecured creditor just $1.00; but be-cause the unsecured creditor had not filed a claim

before the bar date, it in fact would receive nothing. Id. at 665. Since debtor's plan provided only deminimis benefit, if any, to only one general creditor,and since avoidance of the lien would benefit onlythe debtor, the court found Section 544(a)(3 ) shouldnot be applied to invalidate the third trust. Id. at666. Further, in Chapman, and as the court stated inVintero, 735 F.2d at 74 2, no creditor would be ad-versely affected by enforcement of the unperfectedlien against the debtor. Chapman, 51 B.R. at 666.Another situation where Vintero's equitable prin-ciples might be applicable suggested in In r e Howard's Appliance Corp., 874 F.2d 88, 95 (2 ndCir.1989) is where the debtor is estopped by itsown misconduct from seeking lien avoidance for itsown benefit.

None of these considerations for not applying thestrong arm clause of 11 U.S.C. 544(a)(1 ) are ap-

plicable in the instant proceeding. Rather, permit-ting debtor to exercise its avoidance powers willpromote the success of the reorganization plan.

D.

[6] Raymond argues finally that a reservation of title under a lease is a security interest. MarylandCommercial Law Code Ann. 1-201(37)(Supp.1990) defines the term security interest inpart as:

[A]n agreement that upon compliance with theterms of the lease the lessee shall become or hasthe option to become the owner of the property

for no additional consideration or for a nominalconsideration does make the lease one intendedfor security.

The argument that the lease created a security in-terest does not bolster Raymond's position. Whatthe cases cited by Raymond do not contradict is thatwhere a lease is intended as a security agreement, afinancing statement still must be filed in order toperfect the creditor's security interest.Md.Com.Law Code Ann. 9-4 02. Consequently,the question still remains whether Raymond's se-curity interest was perfected, and for the reasonspreviously set forth, the court finds it was not.

III.

Summary

In summary, Raymond's security interest in theequipment under lease to Greenbelt Cooperative,Inc. is valid against that company, but it was not

perfected under Maryland law against third partycreditors. Therefore, it may be avoided by Debtor,in its capacity as debtor-in-possession, under 11U.S.C. 544(a)(1 ). Since avoidance of Raymond'ssecurity interest will enhance the likelihood of Debtor's successful reorganization, avoidance doesnot constitute a windfall to Debtor without benefit


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to creditors, and equitable principles do not baravoidance. As the assets in which Raymond had anunperfected security interest were sold and the pro-ceeds put in escrow, *475 the proceeds of the es-crow account should be distributed to Debtor.

Counsel for Debtor is requested to submit a form of order to implement this decision.

Bkrtcy.D.Md.,1991.In re Greenbelt Co-op., Inc.124 B.R. 465, Bankr. L. Rep. P 73,853, 14 UCCRep.Serv.2d 920

END OF DOCUMENT




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Westlaw Delivery Summary Report for PATRON ACCESS,-

Date/Time of Request: Tuesday, October 26, 2010 13:08 EasternClient Identifier: PATRON ACCESSDatabase: KEYCITE-HISTCitation Text: 124 B.R. 465Service: KeyCiteLines: 22Documents: 1Images: 0

Chapter 15 Secured Transaction. Priority creditors and perfected security interests

Th