Opinion ID: 423659
Heading Depth: 3
Heading Rank: 1

Heading: Perfection: National Bank

Text: 16 In assessing whether a security interest may validly attach to assets of the estate in bankruptcy, the trustee is considered to be a hypothetical lien creditor. Unless a creditor's interest is perfected, as against the trustee in this hypothetical position, its asserted interest in collateral is not effective. 17 In the immediate, and usual case, perfection of a security interest is sought by filing a U.C.C.-1 financing statement. For perfection to be achieved, the filing must comply with the requirements of the Uniform Commercial Code, as adopted in Texas. Tex.Bus. & Comm.Code Ann. § 9.402 (Vernon Supp.1982-1983). The framers of the Code envisioned a simplified notice filing system to avoid the rigid technicalities which might otherwise pose unnecessary pitfalls in the path to perfection. As we have previously stated, in analyzing the Code as similarly adopted in another jurisdiction: 18 The purpose of the filing system is to give notice to creditors and other interested parties that a security interest exists in property of the debtor. Owen v. McKesson & Robbins Drug Co., 349 F.Supp. 1327, 1334 (N.D.Fla.1972). Perfect accuracy, however, is not required as long as the financing statement contains sufficient information to put any searcher on inquiry. In re Excel Stores, Inc., 341 F.2d 961, 963 (2d Cir.1965). See also In re Fowler, 407 F.Supp. 799, 802 (W.D.Okla.1975). The emphasis of the Uniform Commercial Code is thus on commercial realities rather than on corporate technicalities. Siljeg v. National Bank of Commerce, 509 F.2d 1009, 1012 (9th Cir.1975). Section 9-402(5) reflects this emphasis by providing: A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading. Fla.Stat.Ann. § 679.9-402(5) (1966). See generally In re Hammons, 614 F.2d 399, 405-406 (5th Cir.1980). 19 In re Glasco, Inc., 642 F.2d 793, 795 (5th Cir.1981). Therefore, the critical inquiry in assessing whether a security interest is perfected is whether a reasonably prudent subsequent creditor would have discovered the prior security interest. 20 The bankruptcy court held that National Bank's filing in the name of Oak Hill Gun Shop was insufficient to perfect its security interest, reasoning that use of a trade name was seriously misleading under Section 9.402(g) of the Code. The court concluded that since the shop was a sole proprietorship, the Code required filing in the individual, rather than in the business, name. We recognize that in most cases of individual ownership, filing under a trade name will be seriously misleading and thus insufficient to perfect a security interest. Similarly, we agree that the Code recognizes this norm in Section 9.402(g). We disagree, however, with the court's presumption that this general rule is absolute and is to be applied rigidly without reference to the Code's overriding goal of sufficient notice. Rather, in some cases filing under a trade name would not be seriously misleading and would provide creditors with equal, if not superior, notice of prior security interests. The immediate case, we find, constitutes such an exception to the rule. National Bank's filing under Oak Hill Gun Shop to secure business collateral should reasonably have been discovered by a subsequent creditor securing the same collateral, held in the same business name. In accordance with the analysis which follows then, we find that National Bank held a perfected security interest. 21 Section 9.402(g) provides that [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. Thus, where the debtor is an individual or partnership, the Code provides that it is sufficient to file under the respective individual or partnership name, and omit the assumed (d/b/a) name under which the business entity may be known. The Code, however, does not address the converse proposition of whether filing under the assumed name is sufficient. The section says only that filings in the actual individual or partnership name are sufficient, not that such filings are 'necessary and sufficient.'  J. White & R. Summers, Uniform Commercial Code 959 (2d ed. 1980). It is this converse proposition, neither addressed directly in the Code nor resolved by the Texas courts, that is here at issue. Specifically, was National Bank's filing in the assumed name Oak Hill Gun Shop sufficient? 22 We must first dispose of the possibility of Colley and McBee having been in partnership, or having created a partnership by estoppel. Further, if a partnership by estoppel had been created, of what significance would it be in this case? 23 If Oak Hill Gun Shop were a partnership, filing under its business name alone would have been sufficient under § 9.402(g). As found by the bankruptcy court, however, the gun shop was not a partnership. Rather, it was a sole proprietorship owned by Colley until its sale on May 5, 1980, to McBee. National Bank does not dispute this finding on appeal in spite of McBee calling herself a partner in the loan application and both parties later referring to a partnership when Colley sold the business to McBee. 24 National Bank does, however, contend that the bankruptcy court erred in concluding that the gun shop was not a partnership by estoppel, citing Tex.Rev.Civ.Stat. Ann. art. 6132b § 16 (Vernon 1968). This provision, adopted from the Uniform Partnership Act, states in relevant part: 25 Sec. 16. (1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made: 26 (a) When a partnership liability results, he is liable as though he were an actual member of the partnership; 27 (b) When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately. 28 (2) When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. Where all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation. 29 The bankruptcy court considered this section and concluded that the evidenced conduct and representations did not establish a partnership by estoppel, so the U.C.C.-1 had to comply with the individual owner name requirement. We reach the same result, but on the basis that whether or not there was a partnership by estoppel is irrelevant in resolving this dispute. 30 The estoppel provision is limited in scope, equitably imposing liability for misrepresentations of partnership upon those who hold themselves out as partners. The provision, as set out above, is carefully and unambiguously directed at defining the liabilities of the partners alone. This narrow coverage estops individuals from denying their purported relationship to those relying upon the misrepresentations. It does not create partners of those who misrepresent partnership to third persons who were not parties to the representation of partnership. 31 In the immediate case, even assuming that McBee and Colley's actions amounted to a partnership by estoppel, the holding out was directed towards National Bank. The trustee in bankruptcy, as a hypothetical lien creditor, would certainly not be affected by the operation of § 16 in creating a partnership by estoppel. That section would make Colley and McBee liable to National Bank, but does not affect the rights and liabilities of National vis-a-vis the trustee as a hypothetical creditor, not a party to the misrepresentation. The statute therefore does provide National Bank with recourse towards the offending parties alone, McBee and Colley, and does not reach out to bind the trustee, as an unknowing third party, to representations to which he was not privy. See also Tex.Rev.Civ.Stat.Ann. art. 6132b § 7(1) (Vernon 1968) (Except as provided by Section 16 persons who are not partners as to each other are not partners as to third persons). Accordingly, since the statute does not reach the situation at issue, we find that the Oak Hill Gun Shop must be considered as a sole proprietorship. In so concluding, we do not pass upon the court's factual determination that no partnership by estoppel was shown inasmuch as it was not necessary for the court to reach that issue. 32 Having ruled out the justification of the listing of the Oak Hill Gun Shop as adequate because of partnership, we now evaluate the adequacy of the filing when the debtor was an individual vis-a-vis the bankruptcy trustee. The Official Comment to Section 9.402(g) provides: 33 In the case of individuals, [this section] 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. 34 Tex.Bus. & Comm.Code § 9.402(g) official comment 7 (Vernon Supp.1982-1983). Clearly, this comment enunciates the general rule that in the case of an individual proprietorship, filing under a trade name is insufficient. This principle, however, cannot be applied blindly without reference to the overriding purpose it seeks to serve. Specifically, the Code's drafters voiced concern that trade names would be too uncertain and too likely not to be known to the secured party or person searching the record. This concern merely echoes the overriding Code theme of notice filing. The comment to the Code reflects a belief that, as a general matter, notice cannot sufficiently be assured through filing under trade names where an individual is the debtor. Yet, as the facts of the immediate case demonstrate, situations may arise in which equal, if not superior, notice may be achieved through filing in the trade, rather than individual, name. 35 National Bank could, potentially, have filed under three names: Joe Ben Colley, Cynthia McBee, or Oak Hill Gun Shop. Assume first that it had filed under the actual owner's name, Joe Ben Colley. The Code, as conceded by RepublicBank, states that this filing would have been sufficient. Yet prior security interests filed under Colley would have provided little possibility of notice to one of McBee's creditors. 36 Consider, then, a filing under the name of McBee. This filing would have provided notice to McBee's future creditors. It would not, however, accurately have reflected the true ownership of the gun shop collateral. Although, fortuitously, an intervening sale would have corrected the inaccurate designation of ownership, the Code does not sanction a filing system premised on false representations of ownership. 37 Finally, we turn to the notice provided by the actual filing made, Oak Hill Gun Shop. This name was consistently, and exclusively, used to reference the business first owned by Colley and subsequently by McBee. Any creditor, seeking to ascertain prior encumbrances on the business collateral here at issue, could assuredly discover pre-existing security interests by virtue of a filing in the name of the gun shop. RepublicBank could have done so if it had looked. This is not the case of a personal loan; there a creditor might not reasonably be expected to know or search under a business name. Here, a reasonably prudent creditor--as we assume for purposes of the law is the trustee--certainly should have searched under the name Oak Hill Gun Shop before extending a loan related to that business and collateralized by property of that business. 6 Further compelling this conclusion is the fact that McBee had only recently acquired the gun shop, a fact that any reasonably prudent creditor should have uncovered. With this knowledge, a creditor should have considered the possibility, if not probability, that prior security interests would be filed in names other than McBee's. Cf. Tex.Bus. & Comm.Code § 9.402(g) official comment 8 (any person searching the condition of ownership of a debtor must make inquiry as to the debtor's source of title, and must search in the name of a former owner if circumstances seem to require it). The agreement evidencing McBee's source of title, regardless of its veracity, 7 provided that Colley sold to McBee all ... title, and interest in and to any partnership interest in the gun shop. Any creditor, reasonably discovering this purported prior partnership interest should have searched under the gun shop's name. 8 38 The U.C.C. seeks to maximize the probability of notice and, simultaneously, to minimize the possibility that a security interest will be defeated by formal and rigid technicalities. Together with a number of other courts this Court has considered these overriding goals and rejected any automatic rule that perfection is defeated by a filing in an inaccurate name. See, e.g., In re Glasco, 642 F.2d 793 (5th Cir.1981) (filing under trade name, Elite Boats, Division of Glasco, Inc. rather than legal name Glasco, Inc. effective if not seriously misleading); Siljeg v. National Bank of Commerce, 509 F.2d 1009 (9th Cir.1975) (question was not whether true name of corporation was Empire or Henry House Packing Co., Inc. but whether filing was seriously misleading to other creditors). Other courts have favored a more automatic rule, that trade names are inherently misleading. See, e.g., In re Leichter, 471 F.2d 785 (2d Cir.1972); In re Thomas, 466 F.2d 51 (9th Cir.1972). We find the former, flexible approach the proper one under the U.C.C. See Tex.Bus. & Comm.Code § 9.402(h) & official comment 9 (errors which are not seriously misleading do not make financing statement ineffective; this provision was designed to discourage the fanatical and impossibly refined reading of such statutory requirements in which courts have occasionally indulged themselves). See also J. White & R. Summers, Uniform Commercial Code 957-58 (2d ed. 1980) (proper approach is to focus on whether a reasonably diligent searcher would likely discover a financing statement indexed under the incorrect name). 39 In the immediate case it is clear that a filing under the name Oak Hill Gun Shop was not seriously misleading. As concluded above, any reasonably diligent searcher would probably have been more likely to discover this filing than one in either individual's name. It is undisputed that the trade name was consistently used and well known to all creditors, unlike the individual names, and the loans were extended for business rather than personal needs and explicitly collateralized Oak Hill Gun Shop property. The sale of the gun shop as evidenced by an agreement referencing a partnership particularly raised the possibility, if not probability, of alternative filings. In light of these particular facts, we find that National Bank's filing was not seriously misleading, Citizens Bank v. Ansley, 467 F.Supp. 51, 55 (M.D.Ga.), aff'd without opinion, 604 F.2d 669 (5th Cir.1979); and hence was effective against the trustee in bankruptcy.