Close Call with Terminated UCC Filing
In a recent bankruptcy case, one creditor squeaked by and maintained its secured position despite accidentally terminating its UCC filing.
Accidental UCC Termination
This tale may sound familiar. It was just a few years ago JP Morgan Chase Bank (JP Morgan) made a similar mistake, which cost it over $1.5 billion. Fortunately in TRINITY 83 DEVELOPMENT, LLC v. COLFIN MIDWEST FUNDING, LLC, Court of Appeals, 7th Circuit 2019, the creditor caught the termination error before it was too late!
Here’s a quick look at the key parties and key dates of the case:
– Creditor: ColFin Midwest Funding, LLC (ColFin)
– Debtor: Trinity 83 Development, LLC (Trinity)
Approximate Timeline of Events
– 2006 Trinity borrows $2 million from a bank
– 2011 the bank sells the loan to ColFin
– 2013 the bank recorded a UCC-3, terminating the security
– 2015 ColFin discovers the UCC was terminated by bank in error and records a document cancelling the termination
– 2016 Trinity filed for bankruptcy protection
During the bankruptcy proceedings, Trinity argued ColFin’s security interest was not perfected, because the UCC filing had been terminated. Unsurprisingly, Trinity backed their argument with the JP Morgan case. The argument didn’t seem unreasonable, after all, there is a clear parallel between JP Morgan and ColFin = terminated UCC filing.
However, the court didn’t agree with Trinity’s argument. Unlike JP Morgan, ColFin caught the termination mistake and rectified the mistake prior to Trinity filing for bankruptcy protection. The law firm Thompson Coburn LLP represented ColFin during these proceedings and summarized in a recent article:
“Here, the lender caught the mistake prior to the bankruptcy filing, unlike the General Motors case, and corrected the mistake. Since ColFin corrected the error prior to the filing date of Trinity 83’ s bankruptcy case… ColFin maintained its first position lien when Trinity 83 went into bankruptcy.”
In addition to correcting the mistake before the bankruptcy filing, no other creditors had filed a UCC during the time between the filing of the termination and the correction.
Did You Know?
Although Article 9 is relatively the same throughout the country, there are nuances in some states. In this case, for example, Illinois law offers an additional protection to the lender. According to the court opinion, “Illinois treats a mistaken release of a mortgage as ineffective between the mortgagor and mortgagee.”
Parting advice from Thompson Coburn LLP, “If a secured creditor mistakenly releases its lien, it should correct the error as soon as possible. If it is diligent, the secured creditor may not be harmed by the inadvertent release, even if the borrower files for bankruptcy.”