IV Sportsplex LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
IV SPORTSPLEX LLC
DEBTOR
CASE NO.
05-02207-5-ATS
ORDER ALLOWING OBJECTION TO CLAIM
The matter before the court is the debtor's objection to the claim
filed by Sportsplex Ventures, LLC. A hearing took place in Raleigh,
North Carolina on March 2, 2006.
IV Sportsplex LLC filed a petition for relief under chapter 11 of
the Bankruptcy Code on May 25, 2005. Sportsplex Ventures filed a proof
of claim, Claim No. 21, on July 18, 2005, asserting a secured claim in
the amount of $100,000. The debtor objected to the claim, contending
that the security interest was not properly perfected and the claim
should be allowed as unsecured.
Sportsplex Ventures' claim arises out of its sale of assets to the
debtor in 2003. IV Sportsplex purchased the assets for a total sale
price of $300,000, with $200,000 paid in cash and the remainder
represented by a note in the amount of $100,000. According to
Sportsplex Ventures, the debtor was to have recorded the financing
statement to perfect its lien on the assets; however, the financing
statement was never recorded. Though the debtor originally scheduled
its debt to Sportsplex Ventures as secured, it amended its schedules on
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July 12, 2005, to show the debt as unsecured, and it treated the claim
as unsecured in its confirmed plan.
Sportsplex Ventures contends that its claim should be treated as
secured based on equitable principles, because the debtor agreed to
record the financing statement and it should not benefit from its
failure to do so. The debtor contends that there is no admissible
evidence that the debtor agreed to record the financing statement, that
equity will not allow the court to create a perfected security interest
where none exists, and that Sportsplex Ventures is collaterally
estopped from contesting the terms of the confirmed plan.
In support of its position, Sportsplex Ventures relies on
Associates Commercial Corp. v. Green (In re Humphries), 1 B.R. 82
(Bankr. D. Utah 1979). In that case, the court relied on Commerce
Bank v. Chambers, 519 F.2d 356 (10th Cir. 1975), and found that where
a debtor had the exclusive control over the registration of a
certificate of title reflecting a creditor's lien, and the creditor had
done all that was required of it to perfect the lien, the creditor
should not be penalized for the debtor's failure to comply with his
statutory responsibility. Humphries, 1 B.R. at 83-84. The Humphries
court also noted that in cases with similar facts in which the creditor
failed to take steps available to it to perfect its lien, the claim was
found to be unsecured. 1 B.R. at 83, citing Lentz v. Bank of
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1In this instance, the court could not use its equitable powers
to reach the creditor's requested result. "[T]he equitable powers that
a bankruptcy court possesses 'are not a license . . . to disregard the
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Independence, 598 F.2d 1206 (10th Cir. 1979); In re Van Wyck, Nos. B-
78-00324 and B-78-00325 (Bankr. D. Utah 1979).
This case is clearly distinguishable from Humphries. Even
accepting Sportsplex Ventures' assertion that the debtor agreed to file
the financing statement, which the debtor denies, there was nothing
that prevented Sportsplex Ventures from filing the financing statement.
In fact, North Carolina General Statute § 25-9-509 specifically
provides that a debtor's becoming bound as a debtor by a security
agreement authorizes the filing of the financing statement with respect
to the collateral in the security agreement. N.C. Gen. Stat. § 25-9-
509(a) and (b). Had Sportsplex Ventures been prudent, it would have
timely discovered the debtor's failure to file the financing statement
and taken steps to record it itself. It is also noteworthy that in
Humphries, the court observed that no third party would be prejudiced
by allowing the creditor's secured claim. In this case, a party
searching the public records could not have determined that Sportsplex
Ventures claimed a security interest in the collateral, and it cannot
be said that no third party was prejudiced by the failure to file the
financing statement. This set of facts does not move the court to
invoke its equitable powers to perfect a security interest that is
otherwise unperfected.1
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clear language and meaning of the bankruptcy statutes and rules.'"
Coleman v. Community Trust Bank (In re Coleman), 426 F.3d 719, 726 (4th
Cir. 2005) (citations omitted). In Coleman, the debtor sought to avoid
fraudulent transfers that she made to the bank in an effort to hinder
another creditor, and the court held that the transfers were avoidable
in their entirety under the Bankruptcy Code, and could not remain in
effect as between the debtor and the bank. In this case, the Code
clearly gives the debtor the power to treat the unperfected security
interest as unsecured, and the court's equitable powers do not allow it
to disregard the statutory provisions.
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Finally, the court agrees with the debtor that Sportsplex Ventures
is bound by its treatment in the confirmed plan. While it is well
established that liens pass through bankruptcy proceedings unaffected,
see Dewsnup v. Timm, 502 U.S. 410, 417, 112 S. Ct. 773, 778 (1992),
"[a] secured creditor who participates in the reorganization may also
lose its lien by confirmation of a reorganization plan which does not
expressly preserve the lien." Federal Deposit Insurance Corp. v. Union
Entities (In re Be-Mac Transport Co., Inc.), 83 F.3d 1020, 1025 (8th
Cir. 1996). In a case in which the creditor participates, the default
rule is that "unless the plan of reorganization, or the order
confirming the plan, says that a lien is preserved, it is extinguished
by the confirmation." In re Penrod, 50 F.3d 459, 463 (7th Cir. 1995).
Sportsplex Ventures participated in the bankruptcy and received
several notices of the debtor's treatment of its claim as unsecured.
In July 2005, the debtor amended its schedules to reflect the claim as
unsecured; after the amendment, Edward Rosen of Sportsplex Ventures
contacted the debtor's attorney and was advised that the claim was
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2 The plan that was ultimately confirmed was the debtor's amended
plan with two modifications, but the treatment of Sportsplex Ventures
was the same, and the amended plan was not required to be re-balloted.
The order confirming plan states that acceptance of the plan prior to
the modifications shall be deemed to be acceptance of the modified
plan.
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unsecured because the financing statement was not filed. Mr. Rosen was
served with the debtor's Emergency Motion for Authority to Incur Post-
Petition Secured Debt, which was filed on August 18, 2005, and
specifically stated that Sportsplex Ventures held an unperfected lien
on the debtor's personal property. Sportsplex Ventures' attorney filed
a notice of appearance on September 27, 2005. Mr. Rosen was served
with the debtor's motion to sell assets free and clear of liens, which
was filed on October 13, 2005, and also stated that Sportsplex Ventures
failed to perfect its claimed security interest and did not propose to
disburse any funds from the sale to Sportsplex Ventures. Finally, and
most importantly, the ballot report filed by the debtor reflects that
Sportsplex Ventures balloted in favor of the debtor's first plan of
reorganization, which treated its claim as unsecured in the amount of
$100,000.2 The plan was confirmed on January 4, 2006.
In sum, the court concludes that no financing statement was filed,
and no equitable considerations support a finding that Sportsplex
Ventures is secured. Further, Sportsplex Ventures is bound by the
terms of the confirmed plan, to which it not only failed to object, but
voted to accept. See First Union Commercial Corp. v. Nelson, Mullins,
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Riley and Scarborough (In re Varat Enterprises, Inc.), 81 F.3d 1310,
1317 (4th Cir. 1996) ("Under the Bankruptcy Code, a confirmed plan of
reorganization acts like a contract that is binding on all of the
parties, debtor and creditors alike."); Piedmont Trust Bank v. Linkous
(In re Linkous), 990 F.2d 160, 162 (4th Cir. 1993) (bankruptcy court's
order of confirmation is treated as a final judgment with res judicata
effect). Accordingly, the debtor's objection to Sportsplex Ventures'
secured claim is ALLOWED, and the claim shall be treated as unsecured.
SO ORDERED.
DATED: March 9, 2006
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