Court Opinion

ID: 1008087
Source: CourtListenerOpinion
Date Created: 2013-07-04 19:35:02.378442+00
Date Added: 2024-06-11T15:27:04.731651
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

In Re: BONDS DISTRIBUTING              
COMPANY, INCORPORATED,
                            Debtor.

BRUCE MAGERS, Trustee for Bonds
Distributing Company, Incorporated,
                 Plaintiff-Appellee,
                and
WILLIAM L. MILLS, III, d/b/a The
Mills Law Firm,                           No. 01-2025
    Third Party Defendant-Appellee,
                 v.
BONDS, INCORPORATED,
              Defendant-Appellant,
                and
DONALD R. BONDS,
 Defendant & Third Party Plaintiff-
                        Appellant.
                                       
2               IN RE: BONDS DISTRIBUTING COMPANY

In Re: BONDS DISTRIBUTING              
COMPANY, INCORPORATED,
                            Debtor.

WILLIAM L. MILLS, III, d/b/a The
Mills Law Firm,
   Third Party Defendant-Appellant,
                and
BRUCE MAGERS, Trustee for Bonds
Distributing Company, Incorporated,           No. 01-2503
                          Plaintiff,
                 v.
BONDS, INCORPORATED,
               Defendant-Appellee,
                and
DONALD R. BONDS,
 Defendant & Third Party Plaintiff-
                         Appellee.
                                       
           Appeals from the United States District Court
       for the Middle District of North Carolina, at Durham.
               Frank W. Bullock, Jr., District Judge.
                (CA-01-80-1, BK-97-52130C-7W)

                      Argued: May 7, 2002

                      Decided: July 15, 2002

      Before WIDENER and MICHAEL, Circuit Judges, and
           C. Arlen BEAM, Senior Circuit Judge of the
      United States Court of Appeals for the Eighth Circuit,
                     sitting by designation.
                 IN RE: BONDS DISTRIBUTING COMPANY                   3
Reversed and remanded by unpublished per curiam opinion.

                             COUNSEL

ARGUED: Richard Stewart Gordon, Charlotte, North Carolina, for
Appellants. Grover Gray Wilson, WILSON & ISEMAN, L.L.P.,
Winston-Salem, North Carolina; Thomas William Waldrep, Jr.,
BELL, DAVIS & PITT, P.A., Winston-Salem, North Carolina, for
Appellees.

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

                             OPINION

PER CURIAM:

   Donald R. Bonds (Bonds), Bonds, Inc. and William L. Mills III
(Mills) appeal from an order of the district court affirming a decision
by the bankruptcy court which held that the absence of a creditor’s
address on a North Carolina UCC-1 financing statement prevented the
perfection of a security interest. For the reasons outlined below, we
reverse.

                                  I.

   Bonds owned and operated a distributor of small engine parts,
Bonds Distributing Company, Inc. (BDI), for approximately nineteen
years. In 1995, Bonds sold BDI to Steve Young, and Mills served as
Bonds’ attorney for the transaction. It is undisputed that the agree-
ment between Bonds and Young provided that at the closing of the
sale on November 7, 1995, Young would pay Bonds $150,000 for ten
percent of the outstanding shares of BDI. The remaining shares,
minus a single share which Bonds retained, were to be redeemed by
BDI. The redemption was seller-financed, meaning Bonds accepted a
4                 IN RE: BONDS DISTRIBUTING COMPANY
Stock Purchase Note from BDI in the amount of $1,451,000 (the net
asset value of the remaining stock) for the surrender of his shares.

   The Stock Purchase Note was secured by an agreement under
which BDI granted Bonds a security interest in all of its assets. To
perfect Bonds’ security interest, UCC-1 financing statements were
prepared and signed at the closing. Pursuant to the law then in effect,
these financing statements were filed with the North Carolina Secre-
tary of State and at the Office of the Register of Deeds for Cabarrus
County. N.C. Gen. Stat. § 25-9-401(a)(c) (repealed 2001). The state-
ment filed with the Secretary of State1 failed to provide an address for
Bonds as the secured party; however, the document was accepted and
filed by the Secretary.

   In July 1997, BDI defaulted on its payments to Bonds under the
Stock Purchase Note. On August 21, 1997, Bonds proceeded to reac-
quire the assets of BDI through a foreclosure sale permitted by the
agreement. The lone bid at the sale was made by Bonds, Inc., a sepa-
rate company that Bonds formed, in the amount of $1,484,391.11.

   Approximately two months after the foreclosure sale, an involun-
tary petition under Chapter 7 of the Bankruptcy Code was filed
against BDI. An order for relief was entered in the bankruptcy court
and Bruce Magers was named as Trustee. On August 14, 1998, the
Trustee filed an adversary proceeding in the bankruptcy court assert-
ing, among other things, that Bonds never acquired a perfected secur-
ity interest in BDI’s assets as a result of his failure to include an
address on the UCC-1 financing statement filed with the Secretary of
State. In addition to denying the Trustee’s claim, Bonds filed a third-
party complaint seeking indemnification from his attorney, Mills,
based on a malpractice theory, for his failure to include the address
on the financing statement.
    1
   The evidence establishes that Bonds decided not to use his residence
address on business-related documents so he rented a post office box the
day after the closing. This new address was placed on the County filing
by Mills and forwarded to Young’s attorney for inclusion on the State fil-
ing. This was never done.
                  IN RE: BONDS DISTRIBUTING COMPANY                    5
   Various motions for summary judgment were filed by the parties.
The bankruptcy court entered an order granting partial summary judg-
ment in favor of the Trustee on the defective security interest claim,
finding as a matter of law that Bonds’ security interest was invalid as
a result of the omitted address. The bankruptcy court denied Mills’
motion for summary judgment. The district court affirmed in all
respects.

   The bankruptcy court also determined that Bonds had a right to
have a jury resolve the remaining issues in the case, many of which
are not relevant to this appeal. The district court withdrew the bank-
ruptcy reference so that a jury trial could proceed. A trial was held
to determine, among other things, what damages were due to BDI
from Bonds on the security interest claim. In addition, Bonds’ third-
party malpractice-indemnity claim against Mills was submitted to the
jury. The jury found that Bonds owed the Trustee $1,400,000 in dam-
ages. The jury assessed an identical amount against Mills under
Bonds’ malpractice claim. Mills filed several post-trial motions, all of
which were denied.

   Bonds appeals from the bankruptcy court’s partial summary judg-
ment order, affirmed by the district court, holding that the omission
of an address from a financing statement prevents the perfection of a
security interest. Mills also appeals that order, and, in addition,
appeals from the denial of his post-trial motions on the malpractice
claim. Because we conclude that the courts below erred in holding
that Bonds failed to perfect his security interest, it is unnecessary for
us to reach the merits of Mills’ malpractice appeal.

                                   II.

   As indicated, the courts ruled as a matter of law that Bonds’ secur-
ity interest was invalid because his address did not appear on his
UCC-1 financing statement filed with the Secretary of State. We
review conclusions of law de novo. In re Deutchman, 192 F.3d 457,
459 (4th Cir. 1999).

   The issue of whether North Carolina requires the address of a cred-
itor to appear on a UCC-1 financing statement in order for it to per-
fect a security interest is a matter determined solely by looking to
6                   IN RE: BONDS DISTRIBUTING COMPANY
North Carolina law. See Butner v. United States, 440 U.S. 48, 54
(1978). It appears, however, that the North Carolina courts have never
faced this precise issue. In the absence of controlling state law, our
function is to predict how the Supreme Court of North Carolina
would decide the matter. McNair v. Lend Lease Trucks, Inc., 95 F.3d
325, 328 (4th Cir. 1996).

  The North Carolina statute that was in effect when the facts of this
case unfolded2 read, in pertinent part, as follows:

        (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 informa-
        tion concerning the security interest may be obtained, gives
        a mailing address of the debtor and contains a statement
        indicating the types, or describing the items, of collateral
        . . . . (8) A financing statement substantially complying with
        the requirements of this section is effective even though it
        contains minor errors which are not seriously misleading.

N.C. Gen. Stat. § 25-9-402.

    The bankruptcy court concluded that Bonds’ financing statement
failed to meet the statutory requirement that the creditor provide an
address. Bonds concedes this point, as he must, at least as to the state
filing. In addition, the bankruptcy court reasoned that because Bonds’
address was completely omitted, he did not substantially comply with
the requirements of the statute and the omission could not be passed
off as a "minor error." To support these conclusions, the bankruptcy
court embarked on a thorough review of cases across the country
interpreting similar statutory provisions, and predicted that the North
Carolina Supreme Court would reject Bonds’ financing statement.
However, the bankruptcy court discussed only two North Carolina
cases, Evans v. Everett, 183 S.E.2d 109 (N.C. Ct. 1971), and E-B
Grain Co. v. Denton, 325 S.E.2d 522 (N.C. App. 1985).
    2
    North Carolina revised the statutory requirements for filing financing
statements, effective July 1, 2001. N.C. Gen. Stat. § 25-9-702(c).
                  IN RE: BONDS DISTRIBUTING COMPANY                     7
   As the bankruptcy court noted, Evans recognized that section 25-9-
402 of the General Statutes of North Carolina "adopts a system of
notice filing," and the substantial compliance language in the statute
reflects the notice function of the filing. 183 S.E.2d at 112.

   In E-B Grain Co., the debtor listed its mailing address on the
financing statement as "Whitakers, N.C. 27891." 325 S.E.2d at 527.
The court held that although the information for the address was
incomplete, the address was not misleading and did not "interfere
with the notice function of the filing." Id. (emphasis added). The bank-
ruptcy court concluded E-B Grain Co. is different from the instant
case because Bonds’ financing statement provided no information
regarding his address. The bankruptcy court reasoned that the com-
plete omission of an address cannot be considered substantial compli-
ance or a minor error because it fails to comply with an express
statutory requirement. We disagree.

   While the bankruptcy court is correct that Bonds’ complete omis-
sion of his address cannot be considered substantial compliance with
the single clause in the statute that requires the inclusion of the credi-
tor’s address, we think this takes too narrow a view of substantial
compliance with the statutory section as a whole. Substantial compli-
ance needs to be evaluated through the prism of the North Carolina
Supreme Court’s language in Evans that the purpose of the filing stat-
ute is to provide notice. Here, the financing statement complied with
virtually all of the stated requirements. It included the names of the
debtor and the secured party, it was signed by the debtor, it provided
a mailing address for the debtor, and it contained a statement indicat-
ing the type of collateral that was involved. Taken together, we think
the information in the financing statement substantially complied with
the statutory requirements. We have found no authority for the propo-
sition implicitly advanced by the bankruptcy court that in every
instance there must be substantial compliance with each separate
clause of the filing statute, although we agree that some omissions, in
some situations, may be fatal to the validity of the document.

  Most importantly, the filed financing statement put future creditors
on notice that Bonds had a security interest in BDI’s assets. If an
existing or potential creditor wanted to obtain more information con-
cerning the secured transaction from the secured party, it could take
8                 IN RE: BONDS DISTRIBUTING COMPANY
the unremarkable step of tracking down Bonds, a man who had been
in business in Cabarrus County for decades. The bankruptcy court
reasoned that the omission of Bonds’ address "prevents the financing
statement from serving one of the purposes expressly stated in the
statute, i.e., giving the location of the source from which ‘information
concerning the security interest may be obtained.’" In re Bonds Dis-
tributing Co., No. 97-52130C-7W, 2000 WL 33673768, at *11
(Bankr. M.D.N.C. Mar. 31, 2000) (citation omitted). This statement,
however, is factually incorrect. The omission of an address does not
"prevent" a person from ascertaining information about Bonds; the
omission simply obligates the inquirer to go through an additional
step. That was precisely what the North Carolina Court of Appeals
authorized in E-B Grain Co. The debtor provided only a city, state
and zip code. The creditor had to either track down a more complete
address or make a different inquiry about the interests shown on the
UCC filing. In this case, a telephone call to the Office of the Register
of Deeds for Cabarrus County would have been sufficient.3 A slightly
more sophisticated researcher could have used existing databases for
a name only search. Nothing more would have been necessary. This
point is dramatized by noting that under the new North Carolina law
a creditor’s address is no longer a threshold requirement for the effec-
tiveness of a financing statement. See supra note 2 and N.C. Gen.
Stat. § 25-9-502. Professors White and Summers state that "[t]he
omission of addresses from [revised Article 9] is a statement of the
drafters that 9 times out of 10, or perhaps 999 out of 1000, no diligent
searcher needs this information." 4 James J. White & Robert S. Sum-
mers, Uniform Commercial Code 114 (4th ed. Supp. 2000). There-
fore, from the perspective of providing notice, E-B Grain Co. is
virtually indistinguishable from the case at bar.

   We think the recent changes in North Carolina’s version of UCC
Article 9 provide additional support for Bonds’ position. The new
statute does not require an address for either the debtor or the secured
    3
   It is worth noting that counsel for the Trustee admitted at oral argu-
ment that if he were advising a client and discovered Bonds’ name on the
financing statement without an address, he would attempt to find it. As
part of this investigation, counsel conceded that he would look to the
County filing. This relatively painless inquiry would have turned up
Bonds’ address.
                  IN RE: BONDS DISTRIBUTING COMPANY                       9
party as a condition precedent to the sufficiency of the financing
statement. While the filing office may reject a statement that does not
provide an address, if the office accepts the financing statement, it is,
nonetheless, effective. To reiterate, under current law, if Bonds ten-
dered a financing statement containing no address and the filing
office, as in this case, accepted it for filing, the security interest would
be perfected.

   Comment Five to section 25-9-516 of the General Statutes of North
Carolina explains the need for an address on a financing statement.
It states that the function of the address requirement "is not to identify
the secured party of record but rather to provide an address to which
others can send required notifications, e.g., of a purchase-money
security interest in inventory or of the disposition of collateral." This
comment reveals that the major purpose of the address requirement
is not to protect the interests of those who are dealing with the debtor,
like, for instance, the Trustee here, but, rather, to facilitate the secured
party’s receipt of notice of third-party actions adversely affecting the
collateral. In other words, the address requirement is designed to pro-
tect secured creditors like Bonds.

   Another North Carolina case that may be instructive on the issues
in this litigation is Provident Finance Co. v. Beneficial Finance Co.,
245 S.E.2d 510 (N.C. Ct. App. 1978). In Provident, a husband was
listed as the debtor on a filed financing statement, but the financing
statement was signed by the debtor’s wife. The court held that the
financing statement was ineffective because the debtor did not sign
the statement as required by section 25-9-402. The Trustee argues that
Provident demonstrates that North Carolina courts would take a strict
view of the requirements outlined in the filing statute. The debtor in
Provident argued that the wife who signed the statement was acting
as the husband’s agent. In rejecting that argument, the court reasoned
that "because financing statements only perform a notice function, we
believe that any agency status should be obvious on the face of the
financing statement. In this case, there is no indication of any agency
relationship between [the wife] and [the husband]." Id. at 515. Here,
on the other hand, there is no confusion regarding the identity of the
secured creditor, and any researcher would be certain that Bonds
alone was the secured person. In fact, Provident reenforces the theory
that North Carolina courts view notice as the sine qua non of financ-
10                IN RE: BONDS DISTRIBUTING COMPANY
ing statements. Bonds’ financing statement provides adequate notice
to a researcher that he is a secured creditor.

   Furthermore, a recent bankruptcy court case in this circuit supports
the theory that non-misleading mistakes on the financing statement
should not nullify a security interest when general notice is otherwise
provided. In re Lea Lumber & Plywood L.L.C. involved an adversary
proceeding wherein the trustee claimed that a debtor did not "sign"
the UCC-1 financing statement because the name of the corporate
debtor’s agent was absent and the signature that did appear was not
accompanied by any indication that the signature was affixed in the
capacity of an officer of the debtor’s designated manager. The bank-
ruptcy court, affirmed by the district court, rejected this argument,
reasoning, in part, that "[t]he financing statement places full and accu-
rate notice of [the creditor’s] security interest on the public record,
thereby serving its intended purpose under the Uniform Commercial
Code." 266 B.R. 342, 439 (Bankr. E.D.N.C. 2001), aff’d by Callaway
v. Hudson Untied Bank, N.A., No. 5:01-CV-386-B0(3) (W.D.N.C.
Mar. 29, 2002). In addition, the court concluded that because the
financing statement simply serves a notice function to the universe of
creditors and potential creditors, "[t]his commercial reality tips the
scales against using technical mistakes to undercut the secured credi-
tor’s position." Id. We find this reasoning sound and apply it to the
purported "mistake" at issue here.

                                  III.

   In sum, we think that if the North Carolina courts were faced with
the issue in this case, they would reaffirm their view that UCC financ-
ing statements exist to provide notice that a secured creditor exists.
Viewing Bonds’ financing statement as a whole it is apparent to us
that it placed the world on notice that he was a secured creditor of
BDI, and the absence of his address was a minor error that was not
seriously misleading to any reasonably diligent researcher. "Invalidat-
ing [appellant’s] security interest would create a windfall for the gen-
eral creditors solely because of this slight dereliction. This would be
an unjust result. The failure to include the addresses would, at most,
have inconvenienced a creditor." In re French, 317 F. Supp. 1226,
1228 (E.D. Tenn. 1970) (finding a financing statement valid where
the addresses for both the debtor and the secured party were omitted).
                IN RE: BONDS DISTRIBUTING COMPANY               11
We must reverse the judgment of the district court and remand for
proceedings consistent with this opinion. Accordingly, this case is

                                   REVERSED AND REMANDED.