Court Opinion

ID: 7393306
Source: CourtListenerOpinion
Date Created: 2022-07-29 00:59:33.736849+00
Date Added: 2024-06-11T16:21:43.881715
License: Public Domain

NIEMEYER, Circuit Judge,
dissenting:
The majority opinion interprets an ambiguous check mark entered in a box on a financing statement form to reach a result intended by neither of the parties to the *1250security agreement and directly in conflict with an explanation given for the check mark elsewhere in the same financing statement form. The effect of the court’s interpretation is to reverse the decisions of both the bankruptcy court and the district court and to deprive Crestar Bank of a previously viable secured position in the debtor’s bankruptcy estate.
All parties agree that prior to June 1990, Crestar Bank had, by reason of a properly filed financing statement, a valid and enforceable security interest in the assets of the debtor, which had been acknowledged repeatedly by the parties before then. Only three months earlier, Crestar Bank loaned the debtor $1.2 million in reliance on the viability of the financing statement which secured repayment of the loan. When the debtor fell into difficult financial circumstances, it sought protection from creditors under Chapter 11 of the Bankruptcy Code. At that time the bank was still a secured creditor with a valid and enforceable security interest in the debtor’s real estate, furniture, fixtures, equipment, inventory, accounts receivable, and personal property.
In June 1990, when the debtor was able to sell two cranes, Crestar Bank agreed to release its security interest with respect to them. The arrangement was intended to permit the debtor to convey free title to the cranes to the purchaser and to enable the debtor to reduce the secured loan owed to the bank. Pursuant to the agreement of the parties, the bank filed an executed form document with the Virginia Corporation Commission and with the Clerk of the Circuit Court of Chesapeake, Virginia by which it intended to terminate the security interest on the two cranes while retaining its secured position in the debtor’s remaining property. The form provided a number of boxes which could be checked to indicate the nature of the action being taken in filing the form, including two boxes labeled: “PARTIAL RELEASE OF COLLATERAL” and “TERMINATION.” Because Crestar Bank checked the “TERMINATION” box, the court has interpreted the filing to constitute a waiver of the bank’s entire blanket security interest which theretofore was recognized by all parties, even though the express language of the document limited the termination to two specific items of property as follows:
The following two (2) specific pieces of equipment are to be released under Cres-tar’s blanket security lien:
(1) Crane ID # LC700 SN C19006
(2) Crane ID # LRT220 SN 79055[.]
While the check in the box labeled “TERMINATION” would, absent any further explanation, support the majority’s conclusion, when the text of the explanation is considered, the reasonable interpretation leads to the conclusion, also reached by the bankruptcy court and the district court, that the termination indicated by the check mark applied only to the two specified pieces of equipment.
It is remarkable that none of the parties argues or even suggests that the result imposed by the majority was the intent of the parties, and there is not one shred of evidence that any potential creditors read the document any way other than to constitute a termination only with respect to the two specified pieces of equipment. If the box checked “TERMINATION” was an error, it was one of form which was clarified contemporaneously on the same document. I respectfully submit that we should not be so quick to restructure and restate the affairs of the parties in a manner contrary to their intent on so technical an argument, and the law does not require such a technically derived result.
The bankruptcy court is a court of equity directed to apply Virginia law to determine whether the document is to be interpreted to constitute a total release of the bank’s security interest. The Virginia statute that directs how financing statements are to be prepared and filed to create a valid and enforceable security interest provides that “[a] financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading.” Va.Code Ann. § 8.9-402(8) (Michie 1991). This provision reflects Virginia’s system of “ ‘notice filing’ which contemplates further *1251inquiry in order to determine whether a given asset is covered by a security agreement.” Girard Trust Co. v. Strickler (In re Varney Wood Products, Inc.), 458 F.2d 435, 437 (4th Cir.1972). See also Hixon v. Credit Alliance Corp., 235 Va. 466, 369 S.E.2d 169, 172 (1988). The issue, to be determined on a case by case basis, is whether a “reasonably diligent searcher” would be mislead by the error or irregularity. Unsecured Creditors Comm. v. Marepcon Fin. Corp. (In re Bumper Sales, Inc.), 907 F.2d 1430, 1434-35 (4th Cir.1990).
It can hardly be argued that the check-marking error, if considered as such, is “seriously misleading,” particularly when the descriptive language limits the termination to two specific pieces of equipment which are to be released from “Crestar’s blanket security lien” (emphasis added). The intent of the bank’s action was clearly understood by the debtor and the bank and the only matter to evaluate is whether it had the likely effect of placing a reasonably diligent third-party searcher on notice that particular assets were covered by a security agreement. Because the financing statement at a minimum alerted the searcher to the need for further inquiry, the error must be viewed as “not seriously misleading” under § 8.9-402(8). See Hixon, 369 S.E.2d at 171-72.
Because the language forgiving insubstantial errors is not repeated in every other provision which relates to a financing statement, including the provision for its termination, the majority concludes that the language which relieves the parties of minor errors does not apply to terminations. But see Koehring Co. v. Nolden (In re Pacific Trencher & Equip., Inc.), 735 F.2d 362, 364 (9th Cir.1984) (applying an identical provision of the California Commercial Code to termination statements). If this were the standard for interpretation, an equally technical argument could be applied to support the bank’s position that a termination cannot be effective unless it states in haec verba that the secured party “no longer claims a security interest.” See Va.Code Ann. § 8.9-404. I do not, however, suggest that technical an application either.
While the Ninth Circuit in Pacific Trencher, 735 F.2d at 364-65, interpreted a check mark in a box labeled “TERMINATION” as a waiver of the full scope of the financing statement to which it referred, the conclusion is justified by totally different facts. The termination box checked there was not limited by explanatory language, as is the case here, but rather included the specific statement that “the Secured Party ... no longer claims a security interest under the Financing Statement,” the exact language expressed by the analogous Uniform Commercial Code provision to effect a termination. See Va. Code § 8.9-404. After concluding that this language, when viewed from the standpoint of a potential creditor reviewing the records, was “seriously misleading,” the court determined that the perfection in all the items listed in the financing statement, and not merely those listed in an attachment, was destroyed. Pacific Trencher, 735 F.2d at 364. The language of that case hardly presents an applicable precedent to conclude that the language in this case limiting the termination to two specific pieces of equipment must also effect a release of Crestar’s entire blanket security agreement.
In short, I find that the checked box labeled “TERMINATION” was unambiguously explained by added text to cover only two specified cranes. If the fact that the bank did not instead check the box labeled “PARTIAL RELEASE” constituted an error, the error was “minor” and “not seriously misleading” as excused by Va. Code § 8.9-402(8). In bankruptcy, we must apply equitable principles and hold the trustee to similar principles. The bankruptcy estate received the property of the debtor subject to a valid and enforceable security interest in the debtor’s property. The trustee should not now, by this technical argument, be permitted to avoid this arrangement which was validly agreed to by the parties.
I would affirm the judgment of the district court which affirmed the judgment of *1252the bankruptcy court, and I therefore respectfully dissent.