UCC Terminated without Authorization, Do You Still Have a Perfected Security Interest?
To have your UCC filing terminated without authorization is unfortunate; to have it happen twice? Well, that’s downright frustrating and it’s exactly what happened to one secured party… er, unsecured party. Fortunately for this secured party, the US Bankruptcy Court stepped in. Let’s take a look at the case.
IN RE SMITH, Bankr. Court, WD Tennessee 2020
Farm Credit Services of America, PCA d/b/a AgDirect (AgDirect) financed farm equipment for debtor John H. Smith (Debtor) and AgDirect filed its UCC-1 with the Tennessee Secretary of State. The Security Agreement & UCC specifically identified the collateral as “Geringhoff NS 1230F Corn Head, bearing Serial Nos. 1011206151230F and 10435.”
Two years after Debtor purchased the equipment, the Debtor refinanced his credit through IberiaBank, and granted IberiaBank a security interest in its farm equipment, including the piece of equipment (the Corn Head referenced above) secured by AgDirect’s UCC-1.
About 10 days after IberiaBank filed its UCC-1, AgDirect’s UCC was terminated by an individual named Walter Smith. According to the court opinion, “This termination statement states that it was filed on behalf ‘Farm Credit Services of Mid-America, PCA’.”
Now, you may have not caught it, but the termination was filed on behalf of Farm Credit Services of Mid-America, PCA which is not the same entity as AgDirect (Farm Credit Services of America). The entities are technically related, but Farm Credit Services of Mid-America, PCA has no authority to act on behalf of AgDirect. AgDirect did not know who Walter Smith was and it certainly didn’t authorize the termination of its UCC.
AgDirect only uncovered this mayhem after it learned of Debtor’s bankruptcy filing. Ultimately, Debtor filed for bankruptcy twice, however, the first case was dismissed. In both cases, AgDirect was not listed as a creditor on the bankruptcy filings, and therefore wasn’t notified of either filing. Presumably, AgDirect was not notified because a UCC search would not have produced AgDirect as a secured creditor because its UCC had been terminated.
After the second bankruptcy filing, AgDirect filed a continuation of its original, albeit terminated, UCC-1. (Odd, right?) Shortly after the filing, Debtor and IberiaBank worked out a court-approved sale of various farm equipment (including the equipment AgDirect had interest in). Days later, Iberia Bank’s attorney filed a termination statement on AgDirect’s Continued UCC-1. So, if you’re still with me, although this “continuation” that was filed by AgDirect wasn’t really a continuation, it was still terminated without authorization.
Meanwhile, AgDirect is owed about $35,000 on the equipment and has NO idea that any of this is going on – the bankruptcies, the sale of equipment, the termination of its continued UCC, etc. In fact, the proceeds of $32,500 from the sale of the Corn Head were given to IberiaBank as the first lien creditor. Phew!
I’m going to fast forward past some additional issues in this case. Now AgDirect and IberiaBank are in front of the bankruptcy court. AgDirect argues it should be entitled to the $32,500 in proceeds because it was a priority lien holder in the equipment. IberiaBank argues AgDirect has no interest in the proceeds, because AgDirect’s UCC was terminated.
What Did the Court Say?
The court reviewed cases from other states, including the JP Morgan case from a few years back. (The JP Morgan case was different than the AgDirect case though, because in JP Morgan, several JP Morgan people had reviewed the termination before JP Morgan accidentally terminated its own filing.) After reviewing other cases, the bankruptcy court relied on a few sections of Tenn. Code Ann. including § 47-9-518(c) before rendering its verdict:
Tenn. Code Ann. § 47-9-518(c). The UCC Comments that accompany § 47-9-518 state: Sometimes a person files a termination statement or other record relating to a filed financing statement without being entitled to do so. A secured party of record with respect to the financing statement who believes that such a record has been filed may, but need not, file an information statement indicating that the person that filed the record was not entitled to do so. See subsection (c). An information statement has no legal effect. Its sole purpose is to provide some limited public notice that the efficacy of a filed record is disputed. If the person that filed the record was not entitled to do so, the filed record is ineffective, regardless of whether the secured party of record files an information statement. Likewise, if the person that filed the record was entitled to do so, the filed record is effective, even if the secured party of record files an information statement. See Section 9-510(a), 9-518(e). Because an information statement filed under subsection (c) has no legal effect, a secured party of record—even one who is aware of the unauthorized filing of a record—has no duty to file one. Just as searchers bear the burden of determining whether the filing of initial financing statement was authorized, searchers bear the burden of determining whether the filing of every subsequent record was authorized.
Further, the court stated “…pursuant to TCA §§ 47-9-509(d), 47-9-510(a), 47-9-511(a) and 47-9-513(d), an unauthorized UCC-3 termination statement does not terminate the underlying security interest. Therefore, the termination statements filed in this case were ineffective to terminate AgDirect’s secured interest in the Corn Head. In addition, the continuation statement AgDirect filed on June 19, 2019, sufficiently preserved its secured interest through October 2024.”
The verdict? AgDirect was the rightful recipient of the §363 sale proceeds and IberiaBank was ordered to remit the $32,500 in proceeds to AgDirect.
Could this Mess have been Avoided?
I believe some of this mess could have been avoided, in part. Now, I don’t know that AgDirect could have predicted someone would terminate its UCC filing. However, I do know that AgDirect could have been promptly notified of the termination if it had enrolled in a program like NCS Debtor Monitoring. This notification would have enabled AgDirect to take immediate action, likely saving it precious time and money.