Bank Loses Its $7.6 Million Lien Due to Ineffective Financing Statement

September 2018

The UCC-1 financing statement is an innocent-looking form, with just a few boxes to complete and check as part of a secured financing transaction, but it is a critical document that lenders must correctly complete and file. In another reminder of the significance of the financing statement, a bankruptcy court has ruled that a lender’s financing statement designed to perfect a $7.6 million lien against all assets of a business was insufficient, rendering the underlying lien avoidable by the chapter 7 trustee and making the assets available to unsecured creditors. First Midwest Bank v. Jeana K. Reinbold, Chapter 7 Trustee (In re 180 Equipment, LLC), No. 17-81749, Adv. No. 18-8003 (Bankr. C.D. Ill., Aug. 20, 2018).

In this case, the borrower executed a security agreement granting a security interest in 26 categories of collateral, including accounts, chattel paper, equipment, general intangibles, goods, instruments, and inventory. The bank filed its financing statement promptly, describing the collateral as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” The bank did not file the underlying security agreement with the financing statement, nor did the bank file the underlying security agreement separately. After the debtor filed its chapter 7 bankruptcy case, the bank sought a declaratory judgment that its lien was valid; the trustee counterclaimed to assert that the lien was avoidable because the financing statement was insufficient.

The bank argued that its financing statement was adequate under 9-108(b) of the UCC, which allows a description of collateral in the financing statement by methods such as specific listing, category, quantity, or “any other method, if the identity of the collateral is objectively determinable.” The bank contended that the last of these methods applied to the financing statement’s reference to the security agreement and that even though the security agreement was not filed, the financing statement met the requirements and put other lenders on sufficient notice of the bank’s lien. The court disagreed, finding that the statement did not describe the collateral; rather “it attempts to incorporate by reference the description of collateral set forth in a separate document, not attached to the financing statement.” Therefore, the trustee prevailed and the bank’s lien was avoided.

The obvious lesson is that lenders should not take any shortcuts with financing statements, such as seeking to incorporate other documents under the financing statement without filing them with the financing statement. Such omissions are low-hanging fruit for bankruptcy trustees and unsecured creditor committees.

However, recent news for lenders in this area is not all bad. Another bankruptcy court upheld a financing statement describing collateral as “all accounts receivable, inventory, equipment, and all business assets located at 1803 W. Main Street.” The tangible assets actually were located at a different address. The court nevertheless found that the address limitation could be read to apply only to “all business assets,” and in any event, the description was ambiguous such that a reasonably prudent searcher would be put on inquiry notice. In re 8760 Service Group, No. 17-20454-drd-11, 2018 WL 2138282 (Bankr. W.D. Mo. 2018). Another court found that a financing statement listing “equipment,” among other things, was not seriously misleading even though it incorrectly included in the collateral description that “this filing filed as ag lien.” Because the debtor’s name was stated correctly, the incorrect additional “ag lien” language created an ambiguity with the “equipment” description but would not mislead a searcher as to the actual collateral covered. Winfield Solutions, LLC v. Success Grain, Inc., No. 3:17CV00329 JLH, 2018 WL 1595871 (E.D. Ark. Apr. 2, 2018).

The adequacy of financing statements to perfect liens continues to generate substantial litigation. Much of this could be avoided by lenders being careful in the preparation and filing of their perfection documents. The additional time taken at the initial stage to get the financing statement correct can save immense loss at the end stage. If you have questions about or need help with the preparation and filing of these documents, consult a Lewis Rice attorney listed above.

Firm Highlights
Client Alert

DOL Publishes Cybersecurity Guidance for Benefits Plans

More
Client Alert

Missouri Supreme Court Reverses Overtime Wages Judgment Resulting from Employer-Mandated Screenings Under the Portal-to-Portal Act

More
Diversity & Inclusion

Lewis Rice Member Ronald A. Norwood Serves on Missouri Bar’s Special Committee on Lawyers of Color to Establish Diversity, Inclusion Programs

More
News

Jeannine Moentmann Becomes President of St. Louis Paralegal Association for 2021-2022

More
Client Alert

Model COBRA Notices Under the American Rescue Plan Act

More
Client Alert

CROWN Act Legislation on the Verge of Passage in St. Louis City & County

More
Diversity & Inclusion

Law Firm ILN-telligence Podcast Hosts Ronald A. Norwood to Discuss Mentorship, Diversity & Inclusion in the Legal Industry, and the Importance of Equity for All

More
Client Alert

COVID-19 Rescue Plan Act Expands Paid Leave Availability but Does Not Revive Employer Mandates

More
Client Alert

Temporary COBRA Changes Under the American Rescue Plan Act

More
Diversity & Inclusion

Two Lewis Rice Members Selected for Leadership Council on Legal Diversity Programs

More
News

Meghan S. Largent and Lindsay S. C. Brinton Negotiate $700,000 Award to Cobb County, Georgia Landowners in Rails-to-Trails Case

More
Client Alert

Federal Appellate Court Determines a Website Is Not a “Place of Public Accommodation” Under the ADA

More
Client Alert

The Changing Workplace Following the Latest CDC Mask Guidance

More
News

Jeremy P. Brummond Presents at Webinar for Experienced Construction Attorneys

More
News

Brian P. Pezza Gives Advice on Vaccination Acceptance in the Workforce in Society for Human Resource Management Article

More
Client Alert

The New Standard Contractual Clauses: Scope, Impact, and Next Steps

More
Client Alert

Public Access to Electronic Court Records in Missouri

More
Client Alert

Supreme Court Hands Down Unanimous Decision Limiting FTC’s Ability to Seek Monetary Relief

More
News

Lewis Rice Welcomes 2021 Summer Associates

More
Client Alert

EEOC Issues Updated Guidance on COVID Vaccination Policies

More