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In re Varsity Sodding Service

March 13, 1998


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

The opinion of the court was delivered by: Wellford, Senior Circuit Judge.

(Filed: March 13, 1998)


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"),*fn1 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."*fn2 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 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. § 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 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:

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 ...

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