In Re: Varsity

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
3-13-1998
In Re: Varsity
Precedential or Non-Precedential:
Docket 96-7643
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Recommended Citation
"In Re: Varsity" (1998). 1998 Decisions. Paper 47.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/47
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Filed March 13, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 96-7643
IN RE:
VARSITY SODDING SERVICE,
Debtor
PNC BANK, NATIONAL ASSOCIATION
f/k/a FIRST EASTERN BANK, N.A.;
JOHN J. THOMAS, Judge;
GREGORY R. LYONS,
v.
VARSITY SODDING SERVICE
PNC Bank, National Association,
s/b/m/t First Eastern Bank, N.A.,
Appellant
On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. No. 96-CV-00250)
Argued June 23, 1997
BEFORE: GREENBERG, McKEE, and WELLFORD,*
Circuit Judges
(Filed: March 13, 1998)
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* Honorable Harry W. Wellford, Senior Judge of the United States
Court of Appeals for the Sixth Circuit, sitting by designation.
Richard K. Hodges (argued)
O'Malley & Harris, P.C.
345 Wyoming Avenue
Scranton, PA 18503
Attorney for Appellant.
Eugene C. Kelley (argued)
Hoegen, Hoegen & Kelley
152 South Franklin Street
Wilkes-Barre, PA 18701
Attorney for Debtor.
OPINION OF THE COURT
WELLFORD, Senior Circuit Judge.
Varsity Sodding Service, Inc. ("Varsity"), incorporated in
1978, was engaged in the landscaping and nursery
businesses. In 1990, First Eastern Bank, N.A. ("the Bank"),1
in Wilkes-Barre, Pennsylvania, financed the purchase of
various pieces of landscaping equipment by Varsity, the
now bankrupt debtor, for some $450,000. Varsity agreed to
keep its records with regard to the loan at its principal
office in Swoyersville, Pennsylvania. In connection with the
loan, Varsity executed financing statements and granted
the Bank a lien on "inventory machinery and equipment
and furniture and fixtures."2 The security agreement was to
be construed under Pennsylvania law, and it provided that
Varsity would promptly notify the Bank of a change in the
location of the subject collateral. The financing statements
were continued in force through 1993 by filing in Luzerne
County, Pennsylvania, and in the office of the Secretary of
State of Pennsylvania.
The machinery and equipment purchased by Varsity
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1. PNC Bank is the successor by merger to First Eastern Bank.
2. Other collateral for the loan consisted of accounts receivable and
assignment of life insurance. The later modification agreement added as
collateral a mortgage on real estate in Carbon and Luzerne Counties,
Pennsylvania.
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included backhoes, loaders, a mulch spreader, a trencher,
landscape rakes, a vibrator plow, and hydro-seeders. The
total financing arrangement between the parties involved
notes totaling in excess of $500,000. The machinery and
equipment are the only collateral at issue in this
proceeding, and the parties have stipulated that it is worth
only $82,600. See In re: Varsity Sodding Service, Inc., 191
B.R. 306 (Bankr. M.D. Pa. 1996).
After 1990, Varsity transported the equipment to
Maryland and then to New Jersey. On December 1, 1993,
Varsity filed for bankruptcy protection under Chapter 11, at
a time when the equipment was still in New Jersey. Varsity
never filed financing statements in New Jersey.
In the bankruptcy proceeding, the Bank filed a proof of
claim as a secured creditor in an amount exceeding
$500,000, and also filed a motion for a stay with respect to
its claimed security interests. The chief officer of Varsity,
John Yarosz, intervened opposing the Bank's claim, as did
the bankruptcy trustee. The bankruptcy court held that,
because the Bank failed to file the required financing
statements in New Jersey, it "lost its perfected security
interest in equipment and in the proceeds therefrom." The
Bank appealed that ruling to the district court, because it
stood to receive nothing from the sale or value of the
equipment. In an order dated August 30, 1996, the district
court denied the Bank relief and affirmed the bankruptcy
court's decision. The Bank filed a timely appeal to this
court.
The district court below determined that the singular
issue before it "was whether certain earth-moving
equipment constitutes `mobile goods' for filing purposes
under the [applicable provision of the] Uniform Commercial
Code." If the collateral were deemed to be "mobile," then the
transporting of the collateral to another state would have
no effect on the Bank's perfected security interest in
Pennsylvania under U.C.C. S 9-103(3). The district court
agreed with the bankruptcy court that the equipment in
question was not "mobile goods:"
The equipment consists of various items identified in
Yarosz' Exhibit No. 1. They are generally described as
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items used in the landscaping business including
backhoes, loaders, mulch spreader, trencher, landscape
rakes, vibrator plow, hydro-seeders, etc. None of these
items could be used over the roads. All of them would
have to be "trailered" or chained onto a flat-bed trailer
for movement from one area to another. While the
equipment is used to move earth in landscaping
operations, none of it is of a large-scale nature such as
what exists with regard to excavation equipment.
The district court added:
[L]andscaping is not an activity that takes place over
such a large area that the equipment would be
expected to be in more than one state during the
course of a week.
Perfection of a security interest ordinarily requires filing
in a location in which the secured collateral is located.
Pennsylvania law, however, provides for a four month
period of protection for a security holder after a change in
location from one county to another.
(c) Effect of change in location of debtor or coll ateral.--
A filing which is made in the proper county continues
effective for four months after a change to another
county of the residence of the debtor or place of
business or the location of the collateral, whichever
controlled the original filing. It becomes ineffective
thereafter unless a copy of the financing statement
signed by the secured party is filed in the new county
within said period. The security interest may also be
perfected in the new county after the expiration of the
four month period; in such case, perfection dates from
the time of perfection in the new county. A change in
the use of the collateral does not impair the
effectiveness of the original filing.
13 PA. CONS. STAT. ANN. S 9401(c). The purpose of this
provision "is to put future creditors and subsequent
purchasers of the collateral on notice of the lien." General
Elec. Credit Corp. v. Nardulli & Sons, Inc., 836 F.2d 184,
190 (3d Cir. 1988) (citing Industrial Packaging Prods. Co. v.
Fort Pitt Packaging Int'l, 399 Pa. 643, 648, 161 A.2d 19, 21
4
(1960), and Casterline v. Gen. Motors Accept. Corp., 195 Pa.
Super. Ct. 344, 351, 171 A.2d 813, 814 (1961)).
Both the bankruptcy court and the district court relied
upon In the Matter of Dennis Mitchell Industries, 419 F.2d
349 (3d Cir. 1969), for its holding that the chattels and
equipment involved were not "mobile" goods within the
meaning of S 9-103(2) of the U.C.C. (13 PA. CONS. STAT. ANN.
S 9103(b)). We note first several distinguishing
characteristics of Dennis Mitchell from the facts of this case:
1. In Dennis Mitchell the debtor filed the requisite
financing statements in Pennsylvania, but the
collateral was never located in that state.
2. The collateral bought in New York was taken
directly to debtor's plant in New Jersey, and
remained at this location despite debtor's
agreement to send and keep it in Pennsylvania.
3. The receiver in bankruptcy sought to sell this
equipment to another secured creditor; the
lienholder in Pennsylvania asserted priority.
4. The collateral involved was industrial (plant)
equipment.
The court stated in Dennis Mitchell:
Had the machinery been taken to Mitchell's
Philadelphia plant within 30 days after the security
interest had attached, it is clear that Pennsylvania law
would control, and Schwabe's Pennsylvania filing
would have perfected its security interest as the parties
intended that the property be kept in Pennsylvania (see
S 9-103(3). . .).
Dennis Mitchell, 419 F.2d at 357 (footnote omitted). The
court went further, however, to hold that the secured
creditor's interest was imperfected after the secured
property had been in New Jersey more than four months,
even though the creditor had no knowledge that the
property was not in Pennsylvania.3 Id. at 358. As a
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3. The court cited no Pennsylvania law for this proposition, but
mentioned the decision of a referee in In re Welker, 2 U.C.C. Reporting
Serv. 169 (W.D. Pa. 1964).
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consequence, the court in Dennis Mitchell concluded that
the creditor's interest was subordinate to the rights of the
bankruptcy trustee under the circumstances unless the
machinery was of the type described in S 9-103(2). Id.
The court then addressed whether the collateral
constituted "goods of a type which are normally used in
more than one jurisdiction," i.e., "mobile goods," under
section, S 9-103(2). The court reasoned that the
enumeration of certain types of goods was not intended to
be all inclusive, and that the type of goods involved, not
their actual use, is the key to resolving the issue. Id. The
fact that "the goods may be and are easily transported from
state to state" is not dispositive. Id. The court concluded,
without elaboration, that "the industrial equipment [plant
machinery] of the type involved here may not be
characterized as mobile goods within the meaning of that
section." Id. (emphasis added).
In footnote 31, the Dennis Mitchell court cited to a
comment following U.C.C. S 9-103(2), which emphasizes
that the rule applicable to mobile goods may apply
"whether the particular collateral in question is in fact
mobile or not;" the real question is "whether the collateral
is of a type normally used in more than one jurisdiction."
Id. at 358, n.31 (quoting U.C.C. S 9-103(2), Comment 3. In
the instant case, the bankruptcy court conceded, we believe
correctly, that inherent characteristics of landscaping
equipment suggest that its usefulness would be quite
limited if it could not be relocated from site to site.4 Varsity
Sodding, 191 B.R. at 308. The bankruptcy court added,
moreover, that "the language of the UCC quite naturally
lends itself to defining the normal use as focusing `. . . on
the inherent qualities of the collateral and the uses to
which such collateral would normally be put.' " Id. (quoting
Konkel v. Golden Plains Credit Union, 778 P.2d 660, 663
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4. Golden Plains Credit Union v. Konkel, 759 P.2d 788, 5 UCC Rep.
Service 1196 (Colo. Ct. App. 1988), discussed the meaning of S 9-103(2)
more fully and was affirmed on this point by the Colorado Supreme
Court, 778 P.2d 660, 663 (Colo. 1989)(en banc). The appellate court cited
cases holding that this section included such items as (1) farm tractors,
(2) heavy construction equipment, (3) excavatio n machinery, and
(4) large earth moving equipment as "mobile goods" or equipment.
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(Colo. 1989)(en banc)). Thus, the precedent relied upon by
the district and bankruptcy courts leads us to a conclusion
different than that of those courts with respect to whether
the collateral in question constitutes "mobile goods" within
the meaning of the U.C.C. as adopted in Pennsylvania.
The district court, however, analyzed another portion of
the bankruptcy court decision. The bankruptcy court found
Varsity to be "engaged in a residential landscaping business
[and] engaged in projects that were outside . . .
Pennsylvania." Varsity was clearly a large-scale commercial
and multiple residency project landscaping operation, and
it utilized very substantial, expensive equipment as it
moved regularly from one site to another.5 The machinery
and equipment in question were admittedly readily
"moveable" by means of a tractor-trailer. Yarosz described
one "Skitsgear loader," as machinery which moved "topsoil"
and grades land. He described the "trenching equipment"
as that which installs "irrigation systems" and trenches for
pipe connection (with four wheels and a "long boom off the
back," a kind of "tractor"). This equipment would be like a
backhoe.6 The equipment generally was capable of
operation on a highway but was hauled instead. The
"grader" equipment was similar to the kind used to "grade
a street." We find such machinery and equipment to be
substantial construction-type equipment akin to "road
building and construction machinery" specifically set out as
examples in 13 PA. CONS. STAT. ANN. S 9103(c)(1).
The remaining equipment at issue was lighter, more
easily moved, and all of the equipment was normally used
in different jobs, at different projects, in various states
during the period of the security agreement. According to
Yarosz's testimony, Varsity utilized the equipment in
question on large commercial and residential housing
project landscaping jobs. The machinery remained on sites
outside of Pennsylvania for more than a year. This
equipment, according to the debtor's brief, "had to be
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5. Varsity's principal officer testified that it "did large landscaping
projects and large trac[t] housing projects."
6. The "vibrator plow" is the same type as the trencher--it "vibrate[s]
the
pipe in instead of trenching."
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dragged or hauled from site to site." We conclude from
these undisputed facts that the "normal" use of such
machinery would take it from state to state. In light of this
fact, the bankruptcy court erred in finding that the
" `normal use' of this equipment [would not] take it from
state to state."7
We find that the Varsity operations, including earth
moving, were sufficiently "large-scale" in nature and akin to
road grading, digging, and general excavation work that the
equipment used meets the requirements and is
characteristic of the mobile goods described in 13 P A. CONS.
STAT. ANN. S 9103(c)(1). See In re Golf Course Builders
Leasing, Inc., 768 F.2d 1167, 1168 (10th Cir. 1168)(golf
course landscaping equipment, which was adaptable to
land mining operations, was considered to be "mobile
goods" under the U.C.C.). It was clear that Yarosz headed
a landscaping company that became much more than a
local residential concern. At least one of its projects
involved $1,000,000. Therefore, the bankruptcy court was
clearly erroneous in finding that "[w]hile the equipment is
used to move earth in landscaping operations, none of it is
of a large-scale nature such as what exists with regard to
excavation equipment." It is immaterial that, generally
speaking, "[l]andscaping is not an activity that takes place
over such a large area that the equipment would be
expected to be in more than one state during the course of
a week." As is explained above, Dennis Mitchell, relied upon
by the district and bankruptcy courts, actually supports
our decision.
In summary, we conclude that the equipment and
machinery at issue constitute "mobile goods," given the
nature of Varsity's landscaping business. The Bank's
financing statements were properly filed in Pennsylvania.
The Bank perfected its security interest and is entitled to
priority status over that of the bankruptcy trustee and
Yarosz personally. The equipment is of the type and
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7. Our holding is consistent with the bankruptcy court's statement that
the investment in this equipment "would require its use over a large
regional area including from one state to another." Varsity Sodding, 191
B.R. at 308.
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inherent quality that its "normal use" would be reasonably
expected to take it from state to state in the business
conducted by Varsity.
We, accordingly, REVERSE the judgment of the district
court and award priority to the Bank in the equipment and
machinery at issue.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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