In The Matter of Charles O. Cooley, Jr. and Patricia Cooley, Bankrupts. Michael J. Clare, Trustee-Appellant v. First National Bank of Louisville, 624 F.2d 55, 1st Cir. (1980)
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Scribd Government DocsIn The Matter of Charles O. Cooley, Jr. and Patricia Cooley, Bankrupts. Michael J. Clare, Trustee-Appellant v. First National Bank of Louisville, 624 F.2d 55, 1st Cir. (1980)
Uploaded by
Scribd Government Docs624 F.
2d 55
29 UCC Rep.Serv. 1415
In the Matter of Charles O. COOLEY, Jr. and Patricia Cooley,
Bankrupts.
Michael J. CLARE, Trustee-Appellant,
v.
FIRST NATIONAL BANK OF LOUISVILLE, Appellee.
No. 77-3337.
United States Court of Appeals,
Sixth Circuit.
Argued June 18, 1980.
Decided July 7, 1980.
Michael J. Clare, Louisville, Ky., for trustee-appellant.
Patrick E. Morgan, Morgan & Pottinger, David W. Harper, Louisville,
Ky., for appellee.
Before LIVELY and BROWN, Circuit Judges, and PHILLIPS, Senior
Circuit Judge.
LIVELY, Circuit Judge.
The trustee in bankruptcy appeals from the judgment of the district court
affirming a decision of the bankruptcy judge. Before the bankruptcy judge, the
trustee asserted that the security instruments did not create a valid security
interest in certain collateral in favor of the creditor, First National Bank of
Louisville.
The record contains the following written instruments: A Loan and Security
Agreement dated April 9, 1974, given "to secure the payment and performance
of all liabilities of the Borrower (Charles O. Cooley, Jr., dba Cooley's Lawn
Service) to the Bank . . . ," A Financing Statement bearing the same date, and a
promissory note from Charles O. Cooley, Jr. and Patricia E. Cooley, his wife,
to the bank for $10,000 base amount plus a finance charge of $4,301.60, dated
November 7, 1974. The bankruptcy judge conducted a hearing and made a
finding of fact that the bankrupts executed and delivered to the bank on April 9,
1974, a promissory note for $3,000 and that the security agreement of that date
granted the bank a security interest in collateral which included the personal
property of Cooley's Lawn Service that is in dispute. A second mortgage on real
estate was given by the bankrupts as collateral for the November 7th note. The
bankruptcy judge held that this mortgage merely provided additional security
for the total indebtedness.
3
The trustee contends, first, that the bank failed to prove that a $3,000 loan was
made on April 9, 1974. This argument is based on the fact that no promissory
note for $3,000 is included in the record. However, the bankruptcy judge heard
proof and made a specific finding that such a note was executed. The trustee
has not provided a transcript of the hearing. Under the "concurrent findings
rule," this finding by the bankruptcy judge, concurred in by the district court, is
conclusive in the absence of a clear demonstration of mistake. In re Nelson &
Sons, Inc., 426 F.2d 235 (6th Cir. 1969), cert. denied, 397 U.S. 1038, 90 S.Ct.
1359, 25 L.Ed.2d 650 (1970). There was no showing that the finding was
clearly erroneous or based upon a mistake.
The trustee also argues that the security agreement of April 9th was insufficient
because it did not disclose the amount of the loan or the maturity date. The
Uniform Commercial Code (UCC), as adopted by Kentucky, sets forth the
requirements of a valid security agreement. Kentucky Revised Statutes (K.R.S.)
355.9-203. There is no requirement that the amount secured or the date of
maturity be shown. These are essential contents of the underlying debt
instrument (the promissory note) but not of the security agreement. The
security agreement here specifically provided for future advances. The
flexibility intended by the UCC would be severely limited by a requirement that
a security agreement state a fixed amount and maturity date. We know of no
authority for the appellant's position.
Assuming a valid obligation and a valid security interest were created on April
9th, the trustee next maintains that the November 7th note constituted a
novation between the parties. The November 7th transaction, according to this
theory, cancelled and superseded all obligations under the April documents and
created a new debt which was secured solely by a second mortgage on the
Cooley residence. In concluding that the November 7th note renewed all
obligations of the bankrupts to the bank and furnished additional security, the
bankruptcy judge quoted from the note as follows:
6To secure this note and all other existing and future indebtedness, direct or
contingent, the Maker, pursuant to all terms and provisions of a Security Agreement
of even date herewith, grants to the bank a security interest in all collateral identified
hereon and in all deposits and other property of the Maker now or hereafter held by
the bank.
7
This language makes it clear that all property previously given as collateral, as
well as that "identified hereon" (the mortgaged real estate), was pledged as
security for the total obligation of the bankrupts to the bank. Under Kentucky
law a renewal note, as distinguished from a novation, does not extinguish an
existing obligation. White v. Winchester Land Development Corp., 584 S.W.2d
56, 63 (Ky.App.1979). The determination of whether a later note is a renewal
of an earlier one or a novation depends on the intent of the parties. Id. After
hearing proof, the bankruptcy judge concluded that a novation was not intended
in this case. The district court concurred. No basis has been demonstrated for
setting this finding aside.
Finally, the trustee asserts that the security agreement is invalid because the
description of the collateral is insufficient under Kentucky law. He relies
principally upon the decision in Mammoth Cave P.C.A. v. York, 429 S.W.2d
26 (Ky.1968), where it was held that a security agreement which listed "farm
equipment" as collateral and stated that it included "replacements of and
additions to equipment" was not adequate to perfect a security interest in a
subsequently acquired tractor.
The collateral was described in the security agreement before us as follows:
10
(a) All inventory of the Borrower, now owned or hereafter acquired;
11
(b) All contract rights of the Borrower, now existing or hereafter arising;
12
(c) All accounts receivable of the Borrower, now existing or hereafter arising;
13
(d) All goods, instruments, documents of title, policies and certificates of
insurance, securities, chattel paper, deposits, cash or other property owned by
the Borrower or in which it has an interest which are now or may hereafter be
in the possession of the Bank or as to which the Bank may now or hereafter
control possession by documents of title or otherwise;
14
(e) Proceeds and products of all of the foregoing; (and)
15
(f) All machinery and equipment, including machinery and equipment which
15
(f) All machinery and equipment, including machinery and equipment which
are or will become fixtures, office supplies, furniture, office and store fixtures,
raw materials, work in process, and the proceeds and products of all of the
foregoing.
16
K.R.S. 355.9-110 provides that any description of property is sufficient
"whether or not it is specific if it reasonably identifies what is described."
Construing this requirement in a case where the adequacy of the description of
collateral was challenged, Chief Judge Charles M. Allen wrote in American
Plating & Mfg. Co. v. Liberty National Bank & Trust Co., 468 F.Supp. 103,
105 (W.D.Ky.1979)
17 believe that since the financial statement does accurately describe the type of
We
collateral which the creditor was holding, and since it is obvious from the
description set out in the statement that the debtor was an on-going business whose
various types of assets were being used as security, this was sufficient to suggest
inquiries or means of identification which, if pursued, would disclose the property
which was secured. (citation omitted).
18
In his opinion Judge Allen distinguished Mammoth Cave P. C. A. v. York,
supra, and a case decided by the district court in which the description of
collateral was found to be inadequate. In Re Anselm, 344 F.Supp. 544
(W.D.Ky.1972).
19
We believe Mammoth Cave P. C. A. v. York is distinguishable from the
present case. Here the borrower was a going business, shown in the security
agreement and the recorded financing statement as "Charles O. Cooley, Jr.
DBA Cooley's Lawn Service." The listing of collateral, described by categories,
included all the usual assets of a going business. It would be contrary to the
purpose of the UCC to hold that lawn tending equipment of this borrower was
not sufficiently described by the language used in the security agreement.
20
