Can Subsequent Creditors Rely Upon the Accuracy of Existing UCC-1 Financing Statements?
Collateral descriptions in Uniform Commercial Code (“UCC”) financing statements have been the genesis of numerous conflicts between creditors. The purpose of a financing statement is to give notice to subsequent creditors of a prior security interest in personal property . In order to achieve these objectives the financing statement must accurately describe the collateral. However, a subsequent creditor may be required to do more than simply review active UCC-1 financing statements to determine whether a given debtor has already encumbered its personal property assets, and ambiguities may only serve to impose additional duties of inquiry on the subsequent creditor.
This was the subject of a dispute recently decided in the United States Bankruptcy Court for the Western District of Missouri in In re: 8760 Service Group, LLC (In re 8760 Service Group, LLC, 65 Bankr. Ct. Dec. (CRR) 170, (Bankr. W.D. Mo. 2018)).
In In re: 8760 Service Group, LLC, the debtor, 8760 Service Group, LLC (“Debtor”), operated a custom industrial construction and fabrication business with its office located at 1803 W. Main Street, Sedalia, Missouri. (“Main Street Property”). The creditor, Bancorpsouth Bank (“BCS”) , made a number of loans to Debtor and Pelham Property, LLC (“Pelham”), a single purpose entity formed to own the real property located at 5105 Pelham Drive, Sedalia, Missouri (“Pelham Property”), from which Debtor operated its fabrication facility. Debtor was the only member of Pelham. To secure these loans, Pelham executed and recorded a deed of trust and fixture filing on the Pelham Property in favor of BCS, and Debtor granted BCS a personal property security interest in collateral described in BCS’s UCC-1 financing statement as “all accounts receivable, inventory, equipment, and all business assets located at [the Main Street Property]”. Subsequently, a blast booth was installed in the building located at the Pelham Property. It was funded by proceeds from Pelham’s construction loan from BCS. However, the construction contract and the invoices for the blast booth’s construction were in the name of Debtor.
Subsequently, Hudson Insurance Company (“Hudson”) provided payment and performance bonds for the account of the Debtor. To secure Debtor’s repayment obligations to Hudson in connection with the bonds, Debtor granted security interests to Hudson in substantially all of Debtor’s property. Hudson filed a UCC-1 financing statement with respect to Debtor’s inventory, equipment and accounts.
The Debtor and Pelham subsequently filed Bankruptcy, and a dispute arose between BCS and Hudson as to the existence and priority of their respective and competing security interests in the inventory and equipment of the Debtor, including the blast booth located on the Pelham Property.
BCS contended that the collateral description in its UCC-1 financing statement filed against the Debtor could reasonably be interpreted two ways: (1) that the address restricts all described collateral to only that which is located on the Main Street Property, OR (2) that the commas separating out the various types of collateral, and addition of the second “all” (i.e., “and all business assets located at…”(emphasis added)) serve to limit the effect of the reference to a specific property address only to the business assets of the Debtor, and that BCS’s security interests in “…all accounts receivable, inventory, equipment…” mean precisely that; all accounts receivable, inventory, equipment, wherever they may be located, including equipment (i.e., the blast booth) located on the Pelham Property. BCS went further in asserting that since there were two reasonable interpretations then its financing statements were not seriously misleading and triggered a duty to further investigate the extent of BCS’s security interest. The Court agreed with BCS. The Court reiterated that it views the validity of a financing statement in terms of whether “it provides notice that a person may have a security interest in the collateral claimed.” Further, the Court noted that the UCC recognizes further inquiry may be necessary and that therefore, errors or omissions in the description of the collateral do not render financing statements ineffective unless they are seriously misleading. Based upon that reasoning, the Court held that Hudson’s claim in the Debtor’s equipment (including the blast booth) was subordinate to BCS’s.
This case should serve to remind creditors that if the collateral description in a pre-existing UCC-1 financing statement is ambiguous or subject to multiple interpretations, it is incumbent upon the subsequent creditor to reach out to the existing creditor(s) to clarify and/or confirm the nature and extent of any pre-existing liens on the collateral.
By Christopher Gravell
Associate at Frandzel Robins Bloom & Csato, L.C.