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General Electric Credit Corp. v. Nardulli & Sons Inc.

filed: January 6, 1988.

GENERAL ELECTRIC CREDIT CORPORATION
v.
NARDULLI & SONS, INC. AND CARLOTA BOHM, TRUSTEE CARLOTA M. BOHM, TRUSTEE OF THE ESTATE OF NARDULLI & SONS, INC. AND NARDULLI & SONS, INC., APPELLANTS; KEYSTONE ACCEPTANCE CORPORATION V. NARDULLI & SONS CO., INC. AND CARLOTA M. BOHM, TRUSTEE CARLOTA M. BOHM, TRUSTEE OF THE ESTATE OF NARDULLI & SONS, INC. AND NARDULLI & SONS, INC. APPELLANTS



On Appeal from the United States District Court for the Western District of Pennsylvania, D.C. Civil Action Nos. 86-2225, 86-2576.

Becker, Scirica, Circuit Judges and Farnan, District Judge*fn*

Author: Scirica

SCIRICA, Circuit Judge.

The primary issue in this appeal is whether the Chapter 11 plan of reorganization of appellant Nardulli and Sons Co., Inc. (Nardulli) divested security interests in equipment, granted by Nardulli to appellees General Electric Credit Corporation (GECC) and Keystone Acceptance Corporation (Keystone). We hold that the plan did not divest GECC or Keystone of their respective security interests; in fact it preserved those security interests.

The second issue that we decide is whether GECC and Keystone lost their secured positions because they did not file financing statements, as required by the Pennsylvania and Indiana Uniform Commercial Codes (U.C.C.), within four months after Butler County, Pennsylvania became Nardulli's sole place of business, or within four months after Nardulli moved to Indiana equipment in which GECC and Keystone had validly perfected security interests. We hold that GECC and Keystone's failure to file financing statement in those states did not divest them of their perfected security interests in the equipment, at least with respect to Nardulli's claim.

Finally, we must decide whether the trustee, as a hypothetical lien holder under 11 U.S.C. § 544, has rights superior to those of GECC and Keystone as lienholders, with respect to equipment in which they had security interests that were perfected prior to the commencement of the bankruptcy proceedings, but for which no continuing statements were properly filed. We hold that the rights of GECC and Keystone as lienholders are superior to those of the trustee as a hypothetical lienholder because the trustee inherited its powers as of the time of the original bankruptcy filing, when the creditors' liens were perfected.

We review the bankruptcy court's findings by the standard the district court was bound to employ. Factual disputes, although none exist here, are governed by the clearly erroneous standard. Our review of the choice, interpretation or application of legal precepts is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981); see also In re McKeesport Steel Castings Co., 799 F.2d 91, 93 (3d Cir. 1986) (quoting Universal Minerals).

I. Facts

In October 1979, GECC loaned Nardulli $448,749.72 and obtained security interests in five pieces of strip mining equipment. Between 1977 and 1979 Nardulli entered into nine similar transactions with L. B. Smith for loans totaling $503,145.43. These transactions were supported by promissor notes and sales-security agreements and later were assigned by Smith to Keystone Acceptance Corporation. Keystone thereby acquired security interest in twenty-one (21) pieces of equipment. Both GECC and Keystone duly perfected their respective security interest by properly filing financing statements pursuant to 13 Pa. Cons. Stat. § § 9302, 9401-03 (1982).

On October 22, 1980, Nardulli filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Pennsylvania.*fn1 In an Order dated July 29, 1981, the bankruptcy court approved a stipulation between Nardulli and GECC that affirmed GECC's validly perfected security interest in the give pieces of equipment and authorized Nardulli to grant GECC a security interest in a sixth piece of equipment. General Electric Credit Corp., Joint Appendix at 125a-28a [hereinafter "GECC J.A."]. GECC then filed the required financing statement for the sixth piece of equipment. Similarly, in an October 7, 1981 order, the bankruptcy court approved a stipulation between Nardulli and Keystone that affirmed the validity of Keystone's perfected security interest in the twenty-one pieces of equipment and authorized Nardulli to grant Keystone security interest in specified additional equipment. Keystone Acceptance Corp., Joint Appendix at 125a-28a [hereinafter "Keystone J.A."]. Keystone did not file financing statements with respect to this additional equipment.*fn2

In March 1982, Nardulli established an office in Butler County, Pennsylvania which is maintained until January, 1986. Between July, 1984 and January, 1986, Butler County was Nardulli's only place of business. In 1983, Nardulli moved some equipment in which GECC and Keystone had security interests to Butler County and moved other equipment in which Keystone has a security interest to Indiana. In 1984, Nardulli also moved some equipment in which GECC had a security interest to Indiana. Neither GECC nor Keystone filed financing statement in Butler County, Pennsylvania or Indiana.

The bankruptcy court, in a November 29, 1983 order, confirmed Nardulli's Chapter 11 plan of reorganization. The plan provided a schedule for payment of the debts owed by Nardulli to GECC and Keystone. It did not expressly divest GECC or Keystone of their respective security interests in the equipment. Indeed, the only references in the plan to these security interests provided that if any assets in which GECC or Keystone had a security interest was sold, the monthly payments due them would be reduced by the same proportion as any sale proceeds they realized borne to the total balance due.

After the plan was confirmed, Nardulli leased the equipment located in Indiana to the Whole Nine Yards Coal Company, which, according to the lease, serviced, maintained and repaired the equipment. The Whole Nine Yards Company also placed an Indiana artisan's lien on the equipment. In June, 1986, the trustee, at a bidding sale, sold the equipment to Whole Nine Yards Co. for $250,000, payments to be made in installments.*fn3

II. Procedural History

1. GECC

Claiming security interests in six pieces of equipment owned by Nardulli, GECC filed a complaint in the United States Bankruptcy Court for reclamation of property, adequate protection and/or relief from stay. (GECC J.A. at 146a). The trustee contested that GECC has validly perfected security interest. (GECC J.A. at 175a). Subsequently, the bankruptcy court held that upon confirmation of the plan, GECC's security interests were divested. (GECC J.A. at 242a). Citing 11 U.S.C. § 1141 (d)(1), the bankruptcy court stated that unless otherwise provided in the plan, confirmation of a reorganization plan discharges the debtor from any debt that arose before the confirmation date.

Alternatively, the bankruptcy court held that even if the plan did not divest GECC of its security interests, GECC's failure to file financing statements in Butler County, Pennsylvania and Indian resulted in the loss of its perfected status. The court found inapplicable the Pennsylvania U.C.C.'s provision exempting secured creditors from filing continuation statements to preserve a perfected security interest during insolvency proceedings.*fn4 The court also held that the insolvency proceedings terminated on December 29, 1983 -- the plan's consummation date. Therefore, under § 9403(b), which grants an exemption from filing during the pendency of insolvency proceedings and up to sixty days thereafter, GECC was required to file continuation statements at the specified intervals after December 29, 1983. Furthermore, the court held that when a debtor moves it place of business to another county or moves collateral to another state, the § 9403(b) exemption is inapplicable even during insolvency proceedings. Consequently, GECC's failure to file financing statements in Butler County resulted in the loss of GECC's security interests.

The bankruptcy court also held that GECC lost its secured status on equipment that Nardulli moved to Indiana, because it failed to file financing statements within four months of the move, as required by the Indiana U.C.C.*fn5

The district court vacated the bankruptcy court's order and rejected its findings of fact as clearly erroneous. The district court held that GECC has perfected security interests in the six pieces of equipment pursuant to ...


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