Service Area: UCC Services

Unsecured Creditors in Retail Bankruptcy Lose Out

Posted on July 16, 2018 by Kiwi - Credit Risk Management, Mechanic's Liens & Bond Claims, UCC Financing Statements

The Importance of Being a Secured Creditor in Today’s Retail Climate

In today’s highly credit-based economy, the looming threat of debtor bankruptcy is more prominent than ever. A number of well-known retailers, such as Bon Ton, Toys R Us, Nine West and Winn Dixie, have recently succumbed to insolvency, leaving their creditors in a vulnerable position.

As a creditor, it is important to ask yourself “In what ways can our company mitigate risk in today’s volatile credit environment?” To answer this, let’s tackle two key questions:

What is the difference between a secured & an unsecured creditor?
Do secured creditors actually get paid more in the event of customer bankruptcy?

Secured vs Unsecured

It’s essential to start by understanding the fundamentals; specifically, the difference between a secured and unsecured creditor.

A secured creditor has a security interest over some or all the assets of its debtor. A security interest can be obtained through prominent credit tools such as Mechanic’s Liens, Bond Claims and UCCs (just to highlight a few). In the event of the debtor’s bankruptcy or default, secured creditors:

Have payment priority over their unsecured counterparts
Are in the best possible position for getting paid

An unsecured creditor is a party who extends credit without a collateral security. If the debtor files for bankruptcy, it’s only after the claims of secured creditors are satisfied that the unsecured creditor will receive payment. Oftentimes, those who fall under the unsecured creditor group collect very little money, if any, from the distribution of assets.

While the bankruptcy code is fairly complex, and insolvencies vary case by case, here is payout priority in its simplest form:

Payout Priority in Chapter 11 Bankruptcy

Secured Creditors (e. creditors who have a perfected security interest)
Administrative Expenses (e. costs associated with filing & processing the bankruptcy)
Unsecured Creditors (e. creditors without a security interest)

Secured Creditor Success Stories!

In recent bankruptcy news, Rue21, inc. ET AL., a specialty fashion retailer of girls’ and boys’ apparel, filed for protection under Chapter 11 of the U.S. Bankruptcy code. This was largely attributed to a challenging commerce environment characterized by increased pressure from competitors, changing consumer tastes, and an under-performing online presence.

When Rue21 filed for bankruptcy protection on May 15, 2017, it had just over $300,000,000 in assets, and nearly $700,000,000 in liabilities. Obviously, there were not enough funds to pay all creditors their owed amounts, however, in this case and many others, the secured creditors were first to get paid. With this particular example, under the Rue21’s reorganization plan, secured creditors recovered 100 percent of the allowed claims while the unsecured creditors only recovered about 3 percent.

We see a similar scenario play out with Katy Industries, a leading manufacturer, importer, and distributor of commercial cleaning and consumer storage products, who filed for bankruptcy on May 14, 2017. The company was unable to meet the obligations of its creditors, with nearly $56 million of debt! In this case, secured creditors recovered the total amount of allowed claims (100 percent) while unsecured creditors faced a recovery rate of only 9.6 percent.

As with many other things in life, when it comes to debtor bankruptcy, not much is guaranteed. However, case after case we see secured creditors having payment priority and receiving greater funds than unsecured creditors. Simply speaking, the bankruptcy laws require that secured creditors are paid first; take the steps needed to secure your rights!

UCC Filing Collateral Descriptions and Interpreting “And All”

Posted on July 9, 2018 by wpengine - UCC Financing Statements

UCC Filing Collateral Descriptions and Interpreting “And All” – With a Dab of Fixture Filings

The U.S. Bankruptcy Court in Missouri recently determined a creditor’s priority in collateral at one address and priority in a blast booth installed on another property, based on the creditor’s properly perfected security interest. Bonus? The Court also reviewed whether a blast booth meets the 3 parameters of a fixture.

Parties Involved & a Bit of Background

To make it a bit easier to understand a somewhat confusing case, here’s a breakdown of the parties involved:

Primary Lender: Bancorpsouth Banc (BB)
Debtor 1: 8760 Service Group, LLC (8760), sole managing member is Buck Barnes
Debtor 2: Pelham Property, LLC (Pelham), sole managing member is 8760
Surety issued performance & payment bonds to 8760: Hudson Insurance Company (Hudson)
Bankruptcy Trustee (Trustee)

BB was the primary lender for debtors 8760 and Pelham. According to the Court, Pelham was the obligor on the loan from BB, and 8760 was the guarantor. In consideration for the loan, debtors granted BB a security interest in inventory, equipment and A/R. BB filed a UCC to perfect its security interest. The initial UCC was filed in 2014, and a subsequent amendment was filed in 2015.

Hudson issued a performance & payment bond for 8760, and as collateral for the bonds, 8760 granted a security interest in its inventory, equipment and A/R. Hudson filed a UCC to perfect its security interest in 2017.

Both creditors, BB in 2015 & Hudson in 2017, were granted a security interest in the debtor’s inventory, equipment and A/R. So, who has priority? Based simply on “first in time, first in right,” BB would have priority. However, if BB’s collateral description makes its UCC seriously misleading, Hudson jumps to the front of the line.

BB’s Collateral Description, too Vague?

The primary issue was whether BB’s collateral description was sufficient, or if its UCC was seriously misleading. Hudson, 8760 and Pelham argued that because BB’s collateral description included a street address, it was restricted to only collateral located at that address.

Collateral Description from 2015 UCC:

“All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301.”

and included an additional page with:

“the above collateral, whether now owned or hereafter acquired, together with all supporting obligations, proceeds, products, software, accessories and accessions, including, but not limited to the items listed…”

As you can see, the collateral description includes a street address. What you may not see, and I admittedly did not see initially, is the collateral description can be interpreted one of two ways, depending on how you understand the words “and” and “all.”

Hudson argued the collateral description was limited to A/R, inventory, equipment and business assets ONLY located at 1803 W. Main Street.

Whereas, BB argued the collateral description included ALL accounts receivable, inventory, equipment AND ALL business assets located 1803 W. Main Street.

Fortunately for BB, the court was persuaded by its argument. BB’s collateral description should have prompted Hudson to further investigate, when Hudson went to file its UCC 2 years after BB.

“The ‘and’ in the collateral description between ‘[a]ll Accounts Receivable, Inventory, equipment’ and ‘all business assets, located at 1803 W. Main Street, Sedalia, MO 65301’ could at least have given Hudson an indication that all assets were covered by a prior lien and cause it to inquire into the collateral description contained in the security agreement.”

The result? BB has priority.

“Thus, [BB’s] collateral description in the financing statement was not seriously misleading and was sufficient to put Hudson on notice that it should inquire into the extent of [BB’s] lien. Because [BB] indisputably filed prior to Hudson, it holds a first priority security interest in 8760’s non-office equipment and inventory.”

Blast Booth Bonus: is it a Fixture?

8760/Pelham’s assets included a blast booth. Hudson argued the booth should be considered equipment and not a fixture. While the argument is moot because BB has already been granted priority in all assets, the court did review whether the booth is equipment or fixture.

In its opinion, the court cites the 3 requirements, set forth by Missouri Supreme Court, an item must meet to be deemed a fixture: annexation, adaption, and intent of the annexor.

The court advised an item is annexed if it is, in some way, physically attached to the real property. Adaptation exists, if the building was designed specifically to accommodate the item or if the “alleged fixture was necessary for the particular use to which the premises are devoted.” And lastly, intent of the annexor, is whether the intention existed for the item to become an integral part of the real property.

“[T]he Blast Booth was bolted into the concrete floor of the 5105 Pelham Drive building and the building was specifically designed to incorporate the Blast Booth by installing special trenches for augers in the concrete floor. He testified that if the Blast Booth was removed the trenches would have to be covered or filled with concrete and the bolts would have to be cut off flush with the floor and driven down into the concrete floor to repair the area where the Blast Booth was located. Further, he testified that when Debtors installed the Blast Booth in the building he did not intend for the Blast Booth to ever be removed.”

Therefore, the blast booth met the parameters: it was affixed to the property, the building was built to accommodate it, there was no intention for it to be removed.

Blasting Booth = Fixture

Note: This case was rather interesting, and it wasn’t limited to the items discussed above. You can read the full text here: IN RE 8760 SERVICE GROUP, LLC, Bankr. Court, WD Missouri 2018

Secretary of State Errors and Your Security Interest

Posted on June 18, 2018 by wpengine - UCC Financing Statements

Do You File UCCs? What Happens to a Security Interest When the Secretary of State Makes an Error?

Compliance with Article 9 of the Uniform Commercial Code is critical to perfect your security interest. But, what happens if you comply with Article 9 and take the proper steps to perfect your security interest, only to have the Secretary of State incorrectly index your filing? Errors and mistakes happen.

“The Secretary of State does make mistakes occasionally…and either the searcher or the filer must suffer the consequences in priority based upon those mistakes.”

Read today’s post to learn more about indexing errors and how Article 9 protects creditors when the recording office makes a mistake.

The Bankruptcy Case of The Feed Store, LLC

The Feed Store, LLC (Debtor) obtained a loan from Peoples Bank, N.A. (Bank) and in consideration of the loan, the parties executed a promissory note and security agreement. Within the security agreement, Debtor granted Bank a security interest in “all inventory, chattel paper, accounts, equipment and general intangibles, together with all proceeds, accessions, additions, replacements and substitutions related thereto.”

April 23, 2012, Bank filed a UCC-1 with the West Virginia Secretary of State (WV SOS) to perfect its security interest. Unfortunately, WV SOS incorrectly indexed Bank’s UCC filing, by assigning the same instrument number to two different documents, one of which was Bank’s UCC filing.

The indexing error went unnoticed until March 14, 2017, when WV SOS entered a statement that it issued one instrument number to two different filings and would issue a new instrument number for Bank’s filing. Then, April 12, 2017, Bank filed a continuation, within the 5 year period.

Meanwhile, in December 2016, Debtor filed for bankruptcy protection under Chapter 7.

In March 2017, the bankruptcy trustee filed a complaint, alleging Bank’s security interest was seriously misleading, because the filing did not appear in a search via WV SOS database. Further, the trustee argued the constitutionality of “West Virginia Code § 46-9-517, which ‘imposes the risk of filing-office error on those who search the files rather than on those who file.’”

Someone Has to “Suffer the Consequences”

According to the court opinion, “The Trustee alleges that the effect of West Virginia Code § 46-9-517 deprives him, as a judicial lien creditor, of priority over Peoples Bank’s lien without constitutionally-sufficient notice…” I won’t dwell on the constitutionality of the law, but as the legal opinion states someone must “suffer the consequences.” In other words, someone wins & someone loses.

In this case, the filing did not appear in the search, because WV SOS incorrectly indexed the filing, not because Bank failed to properly complete its filing. It would, of course, have been different if Bank incorrectly identified Debtor on its Financing Statement.

Mistakes & errors exist, and fortunately Article § 9-517 accounts for indexing errors: “The failure of the filing office to index a record correctly does not affect the effectiveness of the filed record.”

Although the trustee doesn’t believe it should suffer for the indexing errors of WV SOS, the court was not persuaded by trustee’s argument that it be the filer’s responsibility to catch these errors.

The court stated that based on trustee’s logic, filers would have to routinely run searches on their various filings, and “Even if the filer maintained their statement with diligence, a searcher may obtain a windfall if it were to look for prior liens at a time when the filer’s financing statement was mis-indexed and before the filer caught the mistake and corrected it.”

Article 9 is designed to protect creditors who take proper steps to perfect a security interest.

Bank is the Winner & Reflective Searches Are a Best Practice

Ultimately, Bank complied with the requirements of Article 9 and its security interest remained properly perfected, much to Trustee’s dismay.

As a best practice, creditors should always conduct a reflective search after filing a UCC. It’s easy for mistakes to occur, and if caught early, the mistakes can be corrected, potentially alleviating disputes such as today’s case.

What is a reflective UCC search? “A reflective UCC search confirms that a UCC filing was recorded. The reflective search returns a jurisdictional report by debtor name reflecting all UCC filings through the date of your recorded UCC filing. This search also lists previous secured creditors by filing date to help determine your filing position.” – Conduct a Reflective Search After Every UCC Filing

Security Interests in Liquor Licenses OK in Pennsylvania

Posted on May 21, 2018 by wpengine - UCC Financing Statements

Security Interests (UCC Filings) in Liquor Licenses OK in Pennsylvania

Yes, creditors can take a secured interest in a debtor’s liquor license in Pennsylvania, according to one recent Bankruptcy Court decision.

The Case

In 2014, M&T Bank (M&T) loaned B&M Hospitality (B&M) $85,000. In consideration of the loan, M&T executed a Security Agreement and filed a UCC-1, identifying the collateral as B&M’s liquor license.

In 2017, B&M filed for bankruptcy protection under Chapter 7 and, subsequently, a Bankruptcy Trustee (Trustee) was assigned to the case.

In bankruptcy proceedings, the essential role of the Trustee is to take charge of the debtor’s estate. Some responsibilities include managing the liquidation of the debtor’s assets and ensuring proper distribution of the proceeds to the various creditors.

In this case, the Trustee filed a motion to liquidate B&M’s assets and the Trustee stated there were no liens on the liquor license. As you can imagine, M&T piped up and provided proof of its security interest in B&M’s liquor license.

Eventually, the Trustee and M&T agreed the liquor license would be sold for $175,000. However, until the court confirmed whether M&T’s security interest was valid, the Trustee would escrow the amount owed to M&T ($55,166.54) from the proceeds of the sale.

Arguments Before the Court: Can a Security Interest in a Liquor License Exist?

The two primary questions brought before the court were whether Pennsylvania law permitted the granting of a security interest in a liquor license and whether M&T properly perfected its security interest.

First, can a liquor license be collateral for a security interest?

The Trustee believed no security interest exists, because prior to the 1987 amendments, the Pennsylvania Liquor Code provided “…that liquor licenses constitute a privilege and not property.”

Unfortunately for the Trustee’s argument, in 1987 there was an amendment to the Pennsylvania Liquor Code, which defined a liquor license as “property between third parties and the licensee.” This amendment has not changed, and the Liquor Code still identifies a liquor license as property.

“The plain language of the 1987 amendment characterizes a liquor license as property between a licensee and a third party and as a privilege between a licensee and the Board. 47 P.S. § 4-468(d)… based solely upon the text of the 1987 amendment, the Court concludes that, as between a licensee and a third party, a liquor license constitutes property under Pennsylvania law.”

And, as we know, UCCs are all about perfecting a security interest in personal property!

Second, is a security interest valid if the collateral description on the Financing Statement is different than the collateral description on the Security Agreement?

Next the Trustee argued that M&T failed to properly perfect its security interest, because M&T didn’t specifically call out the liquor license in the collateral description on the UCC Financing Statement. Although, M&T did call out the liquor license in its Security Agreement.

Let’s look at the collateral descriptions on the UCC and the Security Agreement:

UCC Financing Statement

“all assets of the debtor, whether now existing or hereafter acquired or arising, wherever located”

Executed Security Agreement

“general intangibles limited to that certain restaurant liquor license number R-1140 issued by the Pennsylvania Liquor Control Board” and “all proceeds of collateral of every kind and nature in whatever form, including, without limitation, both cash and noncash proceeds resulting or arising from the sale or other disposition by the Borrower of the collateral.”

Does the collateral description, in either document, meet the three keys? The judge reviewed the case against these three requirements:

(1) value has been given,

(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party, and

(3) the debtor has authenticated a security agreement which provides a description of the collateral

Has value been given? Yes!

Does the debtor have rights to the collateral? According to PA law, yes!

Does the Security Agreement identify the collateral? Indeed, it does!

The Court Says: Drink Up!

M&T took the proper steps and perfected its security interest, and the court determined M&T should be paid with the proceeds of the sale of the debtor’s assets.

“Ultimately, Pennsylvania law clearly allows third parties to create security interests in Liquor Licenses. M&T followed all the requirements to create and perfect a lien on the Liquor License and is entitled to proceeds from its sale in the amount of its secured claim.”

UCCs and Liens Make Your Company a Payment Priority

Posted on May 14, 2018 by wpengine - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

Use UCC Filings and Mechanic’s Liens to Make Your Company a Payment Priority

Businesses prioritize how, when and which vendors are paid and often pay secured creditors ahead of unsecured creditors. But why? In this article, we will review how you, as a trade creditor, can use secured transactions to ensure you are a payment priority for your customers and how you can avail yourself of legal protections, should your customer default or file for bankruptcy protection.

How Does Your Debtor Prioritize Payments?

If your debtor decides to pay 3 of its 10 creditors this month, how or why does the debtor choose which three they are going pay?

Perhaps it’s because the creditor provides a product or service that is vital to the day-to-day operation of the debtor’s business. It could be the debtor has a longstanding relationship with the creditor, so the debtor ensures they are always paid timely. Or, maybe it is because the creditor has security, either through the filing of a UCC or the service of a preliminary notice to protect mechanic’s lien rights.

Why does security make a creditor a priority? Debtors tend to pay secured creditors first, because failing to pay may result in significant consequences.

For example, if a creditor has properly perfected a security interest through a UCC filing, the creditor could leverage the UCC to repossess the goods or collect money directly from third parties. And, the service of a preliminary notice or filing of a mechanic’s lien alerts all parties involved that there is a payment issue. Once the issue is known, it’s hard to hide from it.

Payment Priority | The Leverage of UCC Filings

Article 9 of the Uniform Commercial Code was created to promote commerce. UCCs provide trade creditors the opportunity to secure goods and/or accounts receivable by using the debtor’s personal property/assets as collateral. To create a security interest, you must have a signed security agreement, record the Financing Statement to make the security interest public record and notify the prior secured creditors to establish priority in inventory.

There are two primary types of UCC filings: Blanket and Purchase Money Security Interest (PMSI).

A Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

A PMSI filing provides the same benefits as the blanket filing, with the addition of the priority of repossession of specific identifiable goods, primarily inventory or equipment that your company would provide.

In the event the debtor defaults on payment or files for bankruptcy protection, the type of UCC filing in place dictates the next steps available to the creditor.

For example, if you filed a PMSI, you would first determine whether you would like your equipment/inventory back. If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets. If you want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace. If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

In addition to the security of the UCC filing, the Security Agreement can be used as leverage for breach of contract. Payment terms are written into every Security Agreement. Therefore, if your customer defaults, they are breaching the terms of a signed agreement.

It’s also worth mentioning that a UCC filing program has widespread benefits. Not only will a sound UCC filing program make you a payment priority, it will also minimize financial risk, reduce DSO, improve cash flow and increase sales. UCCs aren’t solely used for reducing risk; it’s about the opportunity to expand your market, by providing you with the security needed to sell to marginal accounts and by providing the added security needed to increase existing clients’ credit lines.

Payment Priority | Using the Mechanic’s Lien Process

Payment cycles in the construction industry are painfully slow. It’s all too common to see invoices age 60-90 days, and still be considered “average payment terms.” Fortunately, in construction, creditors can leverage the mechanic’s lien process to reduce DSO. More specifically, NCS clients with a sound preliminary notice program have experienced an average of a 25% reduction in DSO, with some clients experiencing reductions as high as 50%.

Much like Article 9, mechanic’s lien laws were created to promote commerce and provide creditors, who furnish to the improvement of real property, credit security. However, unlike Article 9, there is very little that is uniform about mechanic’s lien laws, as each state has its own statute.

Become familiar with the mechanics lien statute for the state in which your project is located. It’s important to know the deadlines for each action in advance, to allow ample time to follow the state’s requirements & to take advantage of every opportunity to protect your receivables.

Implementing a mechanic’s lien process is one of the greatest securities available to the construction credit professional. To leverage your position as a secured creditor, you must have a solid foundation for your mechanic’s lien process, which may include a properly drafted, executed & served preliminary notice.

A preliminary notice is a low-cost, proactive alternative to the high-cost & high-stress, reactive remedy of a collections placement. Serving preliminary notices regularly reduces the need to file a mechanic’s lien or proceed with suit actions.

— 97.3% of the time, serving a notice will get you paid.

— 99% of the time a notice and mechanic’s lien will get you paid.

— Only 1% of the time will a project go to suit.

A 97.3% success rate is HUGE and the primary driver behind that success is that everyone within the contractual chain knows you are supplying to the project and taking steps to secure your rights as a creditor – there is transparency.

Don’t be afraid! Too often, companies are led to believe that by protecting their rights to get paid, they will jeopardize projects and relationships. UCC Article 9 and Mechanic’s Lien and Bond Claim laws are there to protect creditors.

Be a payment priority; implement secured transactions.

Lien Should Be Filed by Registered Entity

Posted on May 4, 2018 by wpengine - In Other Commercial Credit News

A Lien is Only Valid if it is Filed by a Registered Entity

A construction lien can be invalidated if the lien claimant doesn’t exist. Well… wait. Of course, a non-existent entity can’t file a lien! In this case, “doesn’t exist” = “not registered” with the Secretary of State or comparable agency.

Registered Name, Not Just for UCCs

Frequently, when referring to the importance of an entity’s name and its standing with the Secretary of State, we are discussing UCC filings. After all, Article 9 dictates the debtor’s name should appear on the Financing Statement as it appears on the public organic record. Not to mention, if an entity isn’t in good standing with the Secretary of State, it’s often an early warning sign of bigger issues.

‘Know Thyself”

Ryan P. Krushelnitzky reviewed an Alberta court decision in his article, Contractor Know Thyself: If you don’t, you may lose your lien.

Essentially, the lien claimant registered its lien under the name Advantage Custom Homes Inc. However, Advantage Custom Homes Inc. was not a registered entity at the time the lien was registered. The business was transitioning from 7083335 Canada Inc. to Advantage Custom Homes Inc., and while a public announcement was made about the upcoming changes, the changes were not yet in effect.

Ultimately, the property owners contested the lien and argued the lien was invalid because “a non-existing company is not a person that can register a lien.”

The judge relied on section 6 of the Builder’s Lien Act, specifically the word “person.”

Builders’ Lien Act, RSA 2000, c B-7, s 6(1)

Creation of lien

6(1) Subject to subsection (2), a person who

(a) does or causes to be done any work on or in respect of an improvement, or

(b) furnishes any material to be used in or in respect of an improvement,

for an owner, contractor or subcontractor has, for so much of the price of the work or material as remains due to the person, a lien on the estate or interest of the owner in the land in respect of which the improvement is being made.

According to Krushelnitzky, “Justice Khullar explained that in order to determine who might be a “person” for the purposes of Section 6(1), the critical issue was to determine “who did the work,” because “the party doing the work is entitled to file a builders’ lien.”

And in this case, the party that performed the work at the time was 7083335 Canada Inc. not Advantage Custom Homes Inc.

“the issue is simply that the corporate entity of Advantage Custom Homes Inc. did not exist on October 26, 2016 so was not “a person” that could file a lien.” – Justice Khullar

Krushelnitzky’s Take Away

Krushelnitzky reminds claimants, small mistakes matter.

“Builders’ liens can be tricky. Small mistakes at the time of registration can result in the loss of lien rights. Contractors that operate using multiple corporate entities, or that engage in corporate restructuring during the course of a project, need to be particularly mindful that the proper, existing, legal entity is the party registering the lien. The best way to avoid losing a lien is to seek legal advice before the lien is registered.”

NCS Best Practice

When filing a lien, ensure your backup documentation is in line, and confirm you are filing under the correct legal name. The name, as it appears on your contract, should match the name as it appears with the Secretary of State, W-9, etc. If you are in the process of a name change or the transition occurs mid-project, be prepared to provide supporting documentation, such as copies of the Articles of Incorporation or merger documents.

Business names change and registrations/renewals can be overlooked.

If you have any concerns, it’s best to seek legal guidance as soon as possible.

Register Operator’s Liens with a PPSA

Posted on March 23, 2018 by wpengine - In Other Commercial Credit News

Executing an Operator’s Lien? Take Time to Register it with a PPSA

In a recent Alberta court decision, a creditor claimed it had priority in the defunct debtor’s estate, because the creditor and debtor had executed an operator’s lien. The operator’s lien, however, was not registered in compliance with the PPSA. Subsequently, the creditor did not perfect its security interest and did not hold priority.

What Section of the PPSA Governs the Priority of an Operator’s Lien?

In a recent legal decision, the Court of Queen’s Bench of Alberta stated operator’s liens fall under section 35 of the PPSA.

Residual priority rules

35(1) Where this Act provides no other method for determining priority between security interests,

(a) priority between perfected security interests in the same collateral is determined by the order of occurrence of the following:

(i) the registration of a financing statement, without regard to the date of attachment of the security interest,

(ii) possession of the collateral under section 24, without regard to the date of attachment of the security interest, or

(iii) perfection under section 5, 7, 26, 29 or 77, whichever is earlier,

(b) a perfected security interest has priority over an unperfected security interest, and

Essentially? First in time, first in right. Which means, if a Financing Statement isn’t registered, a security interest is unperfected.

Cansearch Resources Ltd v Regent Resources Ltd, 2017 ABQB 535

Cansearch Resources Ltd (Cansearch) was the day-to-day operator and partial owner of the Joffre Gas Battery and Compression Facility. Cansearch entered an operator’s agreement with the now bankrupt Regent Resources Ltd (Regent).

Within the agreement, there was language granting Cansearch an operator’s lien for unpaid expenses. At the time the operating agreement was executed, Cansearch did not perfect its security interest under the PPSA.

The agreement also allowed Regent to mortgage its ownership interest, which it did. Alberta Treasury Branches then loaned Regent $28M and perfected its security interest in compliance with the PPSA.

When Regent filed for bankruptcy protection, Cansearch argued its operator’s lien gave it priority, but the court nixed the argument because Cansearch did not perfect its security interest — the operator’s agreement needed a registered PPSA to be perfected.

It’s worth noting, Cansearch did abandon its claim to priority, because it failed to register the lien under the PPSA, and instead pursued a possessory lien. Unfortunately, the court determined a possessory lien would not apply either.

Never Assume an Agreement is Enough

According to Pantelis Kyriakakis, author of Operator’s Liens and the PPSA Priority Regime, “Generally, operator’s liens that arise under an agreement are consensual security interests that are subject to the framework and priority system set out in PPSA.”

Kyriakakis states operators should register a PPSA to perfect their security interest; however, many simply don’t.

“It is both possible and advisable for operators to perfect their operator’s lien by registering such security interests in accordance with the PPSA. However, this is not common practice. As a result, operators remain unperfected secured creditors. …in the event an operator does perfect their security interests in an operator’s lien, they will likely be in a subordinate priority position to any prior registered secured creditors.”

Take advantage of the laws that protect you! If you have the security language/granting clause within your agreement, take time to register a PPSA (or file a UCC in the US). Never assume the agreement will be sufficient in proving priority.

Filing a UCC to Perfect Your Security Interest

Posted on March 5, 2018 by wpengine - UCC Financing Statements

Filing a UCC to Perfect Your Security Interest? No Security Exists if the Debtor’s Name is Wrong

Yes, that’s right. It’s yet another case of an unperfected security interest because the creditor failed to comply with Article § 9-503.

In a fight for priority, a creditor claimed “…[T]hey have ‘valid, enforceable, properly-perfected, unavoidable prepetition liens…’” which is senior to the bank’s UCC for debtor-in-possession (DIP) financing.

Unfortunately, the creditor did not have a ‘valid, enforceable, properly-perfected, unavoidable prepetition lien’ because the creditor did not list the debtor’s name on the Financing Statement as the name appears on the public organic record.

The Case: Fishback Nursery, Inc. v. PNC Bank, NA, Dist. Court, ND Texas 2017

The debtor, BFN Operations LLC (BFN) also known as Zelenka Farms, filed for bankruptcy protection. PNC Bank NA (PNC) had a security interest in substantially all BFN’s assets and perfected its security interest by filing a UCC. Fishback Nursery Inc. and Surface Nursery Inc. (collectively “Nurseries”) furnished various agricultural products to BFN, and Nurseries also filed UCCs.

Nurseries filed three UCCs, one in each state where they sold products to BFN: Oregon, Michigan & Tennessee. On all three UCCs, Nurseries identified BFN as “BFN Operations, LLC abn Zelenka Farms.” Unfortunately for Nurseries, the addition of “abn Zelenka Farms” rendered their security interests unperfected. BFN’s name, in the public organic record, is “BFN Operations, LLC” and does not include “abn Zelenka Farms.

Not Saved by the Savings Clause

According to the court opinion, Michigan & Tennessee both offer a “savings clause.” The Michigan “savings clause” can be found under MCL 440.9506(3):

“If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1), the name provided does not make the financing statement seriously misleading.“

Here’s an example of a search in Michigan. PNC would have processed a UCC search by the entity’s correct name, “BFN Operations, LLC” – that search would provide the following results:

A search for the name Nurseries used on their UCC’s, “BFN Operations, LLC abn Zelenka Farms” provides these results:

If you look closely, you will see the File Numbers in both images are different; 6 different UCCs. The search run by PNC, on the debtor’s correct name, does not reveal the filings by Nurseries; Nurseries’ UCCs would only appear in a search of “BFN Operations, LLC abn Zelenka Farms.”

Some may argue that Nurseries’ UCCs should have appeared, because the debtor’s name begins with “BFN Operations, LLC” but as you can see, a UCC search does not operate as a keyword search. If it were a keyword search, it would pick up any/all variations of the entity’s name.

Seriously Misleading, Security Interest Unperfected

Because the UCCs did not comply with Article 9, Nurseries’ security interest was unperfected. Obviously, with an unperfected security interest comes the “parting prize” of unsecured creditor status. PNC properly perfected its security interest; thus, PNC is a secured creditor and its UCC takes priority.

Best Practice: PUBLIC. ORGANIC. RECORD.

Always, always, ALWAYS correctly identify your debtor, in compliance with Article 9, on the UCC Financing Statement. We see issues like this time & time again – avoidable errors that eliminate a creditor’s security. Article 9 sets out specific parameters, and to perfect a security interest, you must comply with each requirement.