Service Area: UCC Services

Do Your Collateral Descriptions Comply with Article 9?

It’s Hard to be Specific without Being Too Specific.

Collateral Descriptions Are Tricky! We know strict compliance with Article 9 is vital in perfecting your security interest. Collateral descriptions can be a tricky business; don’t be too specific or too vague. Fortunately for one creditor, a bankruptcy judge deemed its collateral description as “sufficient”, even though it included a specific address.

What Makes a Collateral Description Sufficient?

According to Article 9-108, a collateral description is “sufficient” if it reasonably identifies the collateral. Whether the collateral is identified by specific listing, category, quantity, or “computational or allocational formula,” it doesn’t have to be perfect, if it’s enough to put other creditors on notice.

“What? It doesn’t have to be perfect?”

Gosh, it’s tough when speaking in terms of perfection. So, I’m calling on author Francis Buckley, Jr. to help me out –

“Fortunately, the policy behind the law governing secured transactions under the UCC explains financing statements are meant to simply provide notice of the transaction and give enough information to subsequent potential creditors that the debtor’s property may be covered by a prior creditor’s security interest. Essentially, a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.”

Oooooh, I like that! “…a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.”

Yes, ideally your Financing Statement should be perfect. But mistakes do happen and while some mistakes are costly, others are forgiven, as is the case in the 8760 Service Group case.

In 8760 Service Group, the secured creditor added what Buckley referred to as an “address restricter,” essentially adding the address to its collateral description:

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

A subsequent creditor argued the inclusion of an address left the Financing Statement seriously misleading and the security interest unperfected. But Judge Dow disagreed with the subsequent creditor. According to Judge Dow the “UCC does not require a perfect collateral description… only an ‘indication’ of such coverage…”

Here’s an excerpt from Francis Buckley Jr.’s It May Be Foul, But There Is No Harm: Not All Mistakes Have Dire Consequences Under UCC Article 9:

“In an interesting twist, Judge Dow found that the existence of an ambiguity in the collateral description of the financing statement did not prejudice the prior-filed creditor, but instead provided sufficient notice to the subsequent-filed creditor to impose a duty of further inquiry into the nature of the secured transaction covered under the financing statement. Judge Dow pointed out that the court does not employ traditional means of statutory construction in analyzing an ambiguous financing statement because the court does not proceed to interpret the language. Instead, the court inquires whether the financing statement sufficiently describes the collateral such that ‘the subsequent creditor should have been on notice to inquire further into the collateral.’”

Best Practice? Take Your Time & Draft Carefully

Frequently I see collateral descriptions that tend to be a bit more general: “…in all payment intangibles, accounts, accounts receivable owed to ABC Company…” (Unless, of course, it is related to a specific piece of equipment where serial numbers come into play.)

My advice is be careful when drafting the collateral description. Understand that if you include an address, it may be deemed as seriously misleading. Not to mention the potential catastrophe: what if there is no collateral at that address?! If you do include an address, keep tabs on your customer – make sure they don’t move the collateral to another location.

Consignment Creditors, Give Back the Money

Sports Authority Consignment Creditors, Give Back the Money!

Consignment creditors in the Sports Authority bankruptcy have been dealt a crushing blow with the Court’s recent decision: Sports Authority was not “substantially engaged” in consignment sales. What does the decision mean? The non-UCC-filing-creditors who relied on the argument that Sports Authority commonly engages in consignment sales are now unsecured creditors.

*womp womp*

Quick Back Story

When Sports Authority filed for bankruptcy protection in 2016, big name creditors (e.g. Nike & Under Armour) with big dollar credit lines (e.g. $40M+) didn’t seem overly concerned with the lack of UCC filings to secure the credit lines.

Two reasons the creditors may have been lulled into a false sense of security:

  1. A classic case of “too big to fail” and
  2. Some experts believed these creditors would successfully retain rights to collateral or proceeds, based on the argument that Sports Authority is commonly known to participate in consignment sales.

We now know, of course, that Sports Authority was certainly not too big to fail. And thanks to the recent bankruptcy court decision, we also know that Sports Authority was not commonly engaged in consignment sales.

What the Bankruptcy Court Said

In its recent decision, the bankruptcy court conceded there is no bright-line rule for determining whether a business is substantially engaged in consignment. However, in previous cases, courts have held that 20% or more of the business’s inventory must be consigned goods.

In this case, it was determined Sports Authority’s inventory was comprised of only 14% of consigned goods.

“…the Debtors never “substantially engaged” in consignment transactions. WSFS and the Debtors stipulated that at no point, pre-or-post petition, did the Debtors’ total inventory include more than 14% of consigned goods.”

“…the threshold for substantial engagement is met only if consigned goods comprise “20% or more” of the value of the Debtors’ inventory.”

“Be a Good Sport and Give ‘Em Back!”

So, What Happens to The Funds Given to Those Consignment Creditors? “Be a Good Sport and Give ‘Em Back!”

OK, sportsmanship isn’t driving this decision, the court order is. In their review of the court’s decision, authors Michael Shiner and Maribeth Thomas, in Protecting a Consignor’s Interests in Retail Bankruptcy, advised that the court ordered the consignors to repay the funds.

“Judge Mary F. Walrath issued an opinion…that requires a consignor of goods to disgorge payments [i.e. repay] received from the debtor after the commencement of its chapter 11 bankruptcy case, with the disgorged funds to be paid to the secured lender.”

Consignment & UCC Article 9

Are you required to file a UCC when selling on consignment? Required, no. Recommended, yes.

Before you opt out of filing a UCC, you should understand what constitutes a consignment under Article 9. Here’s the definition of consignment under Article 9-102:

Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and:

(A) the merchant:

(i) deals in goods of that kind under a name other than the name of the person making delivery;
(ii) is not an auctioneer; and
(iii) is not generally known by its creditors to be substantially engaged in selling the goods of others;

(B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery;
(C) the goods are not consumer goods immediately before delivery; and
(D) the transaction does not create a security interest that secures an obligation.

Does your transaction not meet Article 9’s definition of consignment?

“If a consignment does not satisfy the requirements of Section 9-102(a)(20), the relationship between the consignor and consignee is governed by common law and the interest of the consignment seller would prevail over the interest of secured creditors.” – Authors Michael Shiner and Maribeth Thomas

Why File a UCC if Selling on Consignment?

Because the law allows you to secure your goods! A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your debtor defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided to the debtor.

If the debtor files for bankruptcy protection, the inventory the debtor has on hand is gathered up and sold off to pay creditors (secured creditors first and then the unsecured creditors). Without the UCC filing identifying you as a secured creditor and specifically identifying your goods, the inventory you supplied automatically becomes property of the estate.

Get Your Head in the Game: File a UCC

If selling on consignment,

  • execute a security agreement and
  • ensure it includes clear identification of inventory,
  • search for existing secured creditors & notify those creditors of your security interest,
  • file the UCC-1 in the appropriate jurisdiction(s) – if possible, and
  • file the UCC prior to the debtor taking possession of the inventory.

We’re here to help!

Digital Assets a General Intangible under Wyoming’s UCC

Digital Assets Now a General Intangible under Wyoming’s UCC

Wyoming is the first and only state to enact blockchain-enabling laws. It is also the first state to clarify the treatment of digital assets (bitcoin) under the Uniform Commercial Code. The virtual currency is considered a general intangible and the new law authorizes the granting of a security interest.

“AN ACT relating to property; classifying digital assets within existing laws; specifying that digital assets are property within the Uniform Commercial Code; authorizing security interests in digital assets; establishing an opt-in framework for banks to provide custodial services for digital asset property as custodians; specifying standards and procedures for custodial services under this act; clarifying the jurisdiction of Wyoming courts relating to digital assets; authorizing a supervision fee; making an appropriation; authorizing positions; specifying applicability; authorizing the promulgation of rules; and providing for an effective date.” – Text from the Sixty-Fifth Legislature of the State of Wyoming, 2019 General Session 

Uniform Law Commission & American Law Institute Have Created a Committee

Although Wyoming is the first state to enact this legislation, other states are in the process of reviewing and drafting legislation of their own. However, the Uniform Law Commission (ULC) recommends states hold off on changes for the time being.

According to The Uniform Commercial Code and Digital Assets: Legislative Initiatives by Edwin Smith, the ULC and the American Law Institute have created a study committee to “…examine whether any amendments to the Uniform Commercial Code (the “UCC”), enacted in all states and the District of Columbia, are needed to accommodate emerging technological developments including digital assets.”

Maintain Uniformity

To maintain the “uniform” aspect of the Uniform Commercial Code, some critical issues need to be addressed. In his article, Smith identifies 3 keys: choice of law, substantive law, and ease of understanding and accessibility.

We’ve previously discussed the importance of governing law within your security agreements, right? Well, that is in line with issue 1: choice of law. Because digital assets don’t have a physical jurisdiction (unless the cloud is a jurisdiction?) who (where?) will determine jurisdiction?

“Addressing the commercial law rules for digital assets requires the formulation of uniform choice of law rules among all states.  Otherwise, results among the states may differ depending on the state in which a dispute arises.  Differing results leads to forum shopping and general commercial uncertainty, creating greater risks among transacting parties, discouraging some transactions, and in any event increasing transaction costs.

Also, is it better to create new legislation or improve existing legislation? This falls under number 2 on his list: substantive law. The legislation should reduce confusion, not create confusion.

“Providing new legislation where existing law is already adequate may lead to confusion and uncertainty.  Improving existing law will require a deliberative process that integrates the new legal rules into the system without disrupting the rules that have worked well for decades.”

Which goes hand in hand with ease of understanding and accessibility.

“Digital asset legislation that has the effect of modifying the rules of the UCC as, for example, by providing new rules for perfection or priority of security interests in digital assets, will be more difficult for practitioners to find and consider if the new rules are not integrated into the UCC itself.”

Stay Tuned! You may also find a Statement from the Uniform Law Commission, shared via ULC’s Twitter account, to be of interest.

Back to Basics: Two Primary Types of UCC Filings

Two Primary Types of UCC Filings: Blanket & PMSI

In compliance with Article 9 of the Uniform Commercial Code, trade creditors can achieve a properly perfected security interest with a sound security agreement and the proper filing of a UCC-1 Financing Statement.

But, Article 9 can be difficult to digest. So, today we’ll break down the information into bite-sized pieces! Let’s review two basic types of secured transactions Blanket and Purchase Money Security Interest (PMSI)and the benefits of each!

Types of Filings

Blanket

A Blanket Filing gives the creditor a security interest in all its debtor’s assets, on a non-priority basis. This eliminates potential conflict with the customer’s primary lender, such as a bank.

With this type of filing, payout priority is determined by first in time, first in right.

Who uses Blanket Filings? Blanket Filings are most common when a creditor is providing financing, selling services, or when a debtor “consumes” rather than stocks the goods provided. For example, a uniform company selling to hospitals and a factoring business providing financing could both benefit from this type of filing.

Purchase Money Security Interest (PMSI)

A PMSI filing provides similar benefits as the Blanket Filing with the addition of priority in the repossession of specific identifiable goods, such as inventory or equipment.

According to Article 9, a PMSI in Inventory refers to securing collateral that’s defined as “goods, other than farm products,” which fall under one of the following:

– Are leased by a person as lessor;

– Are held by a person for sale or lease or to be furnished under a contract of service;

– Are furnished by a person under a contract of service; OR

– Consist of raw materials, work in process, or materials used or consumed in a business.

PMSI in Inventory is applicable to a creditor supplying goods to a debtor for the purpose of those goods being resold.

Who Uses a PMSI in Inventory? For example, an electronic manufacturer sells wireless headphones to a media retailer who, in turn, sells the headphones to their customers.

PMSI in Equipment refers to securing collateral defined as “goods other than inventory, farm products, or consumer goods.” The equipment provided must be used in the course of the debtor’s business.

Who Uses a PMSI in Equipment? A PMSI in Equipment filing is applicable to a creditor who supplies items such as medical exam tables, printers or commercial refrigerators – equipment your debtor would keep for their own use and not resell to customers.

We’re Here to Help!

In the event of customer bankruptcy or default, it is critical you’ve taken steps to properly perfect your security interest. If you’re interested in learning more about the UCC process or need assistance determining which type of filing best fits your needs, let NCS assist you! Contact us today at 800-826-5256 or email SecureYourTomorrow@NCScredit.com.

Close Call with Terminated UCC Filing

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:

The Parties

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

…And 2019…

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.”

Top 5 Reasons You Should File UCCs

Top 5 Reasons You Should File UCCs

If reducing your DSO, mitigating your risk and improving working capital aren’t reason enough to file UCCs, I’ve compiled a list of a few more reasons.

Five more reasons!

#1. Sell More!

A properly perfected security interest gives you the extra security needed to sell to marginal accounts that were previously off limits.

The marginal accounts may have included those potential customers that came to you with little to no credit history, your existing customers who are teetering at the edge of a maxed-out credit line, and even the accounts where you couldn’t quite meet the same price as a competitor.

Sometimes it’s not about beating your competitors in price; it’s quite possible your competitor wouldn’t extend enough credit to this entity — if you can extend the credit, you can get the business. File that UCC!

#2. Fewer Write Offs!

It’s simple. Fewer write offs lower the costs associated with your product.

These lower costs mean you can sell your product at a lower price while maintaining effective profit margins.

As you’d imagine, selling at a lower price makes your company more competitive.

If you are more competitive, you have an opportunity to obtain a larger share of the market. Do the math: more sales + stable profit margins = life is good!

#3. Everyone’s Doing It!

Growing up I used to whine “But Mom, everyone else is!” And she would respond with the ever popular “If everyone jumped off a bridge, would you do it too?”

Well, I probably won’t jump off any bridges, but I absolutely would file UCCs.

UCC filings are a common business practice; just as common as completing a credit application. Think about it, your mortgage, your car loan, an equity line of credit, all have security language written in to the documents you sign — banks won’t just throw money at you without security.

#4. Low Costs!

The overall UCC process is generally quite economical.

The fees (except for a few states) are low and the long-term maintenance doesn’t require significant monetary investment.

For 10 cents per day or less, you can secure collateral in agreement with your customer’s promise to pay.

What’s better than low fees for you? No fees to your customer! Filing a UCC doesn’t cost your customer a thing and contrary to popular belief, a UCC does not hurt their credit.

#5. BECAUSE YOU CAN!

It may seem like I’m shouting and that’s because I am: FILE UCCS BECAUSE IT IS YOUR RIGHT TO BE A SECURED CREDITOR!

OK, no more shouting. I just wanted to be sure you heard me: as a creditor, you have the right to take precautions to protect your interests.

In the unlikely event that your customer files for bankruptcy protection or defaults on the terms within your agreement, a properly perfected security interest elevates your company to a secured creditor position.

I needed a #6 so I could say:

#6. Don’t Be Skeptical!

Let’s look at the facts:

  • Fact: In bankruptcy, secured creditors have priority and are paid before unsecured creditors.
  • Fact: In the event of default, a properly perfected security interest provides the right to repossess.
  • Fact: UCCs will not hurt your sales opportunities, in fact, UCCs promote sales opportunities by providing security when selling to marginal accounts.
  • Fact: UCCs will not impair your customer’s credit rating.
  • Fact: UCCs are a common business practice.

Time for Preparation, There’s No Rest Post-Recession

Use this Time as Preparation, There’s No Rest Post-Recession!

FMI has released its 2019 U.S. and Canada Construction Outlooks. The report contains a considerable amount of valuable information, but one topic is forefront: be prepared for the next recession. Today I’ll touch on steps outlined by FMI as well as NCS best practices you can implement to ensure you are prepared for the next economic downturn.

Awesome T-Shirt: “Keep Calm, Stay Focused and Get Ahead of the Next Downturn”

I’m going to emboss it & stick it to my computer as a reminder! The introduction to FMI’s outlook article is titled “Keep Calm, Stay Focused and Get Ahead of the Next Downturn.” Yes, I think it would be a great t-shirt, but more importantly, it’s a reminder that you have an opportunity to ensure you have the working capital and business model to make it through the next downturn.

What did we learn during the Great Recession? Hopefully you learned the value in proactively securing receivables! During the Great Recession, you likely experienced supply chain disruptions, slow pay/no pay customers, depleted liquidity or cash flow issues, and even customer insolvency. What have you done to prevent these experiences going forward?

FMI recommends addressing these 7 hurdles now:

1. Evaluate underperforming departments and employees. If you have been dragging your feet on eliminating a low performing division or a poor performing employee, now is the time to have the conversations. You don’t want this hanging over the business during tough economic times. FMI says, “During the last recession, these types of issues plagued E&C companies for far too long. Leadership that is slow to react and respond can make or break a company.”

2. Be selective in new projects. Select projects within your core competencies. FMI has a saying: “Contractors don’t starve to death; they die from gluttony. They get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash.”

3. Look at the big picture and have a strategy in place. “Living in a reactive mode and not being proactive and taking charge of shaping your own destiny and future can become your biggest detriments.”

I will come back to 4 & 5. Let’s jump to 6 & 7: get your sales game on!

6. & 7. Strengthen existing client relationships, build new relationships, and get your sales folks prepared.

“…educate your people on “how to behave in a recession”—estimators with project selection, field managers with scope management, PMs with cash management, etc. Client interaction across all company levels will increase your presence with clients, give you an inside track and improve collaboration among future leaders.”

4. Know your costs and plan accordingly. “Understanding the total costs for each project and how these costs break down is the first step in knowing where and how you can improve profit margins.”

5. Cash is King! “Conduct a risk analysis on all existing projects slated to complete more than six months out. Identify high-risk projects and how each will be staffed to take to project completion. Leverage and utilize a multiskilled workforce: In-house, self-perform capabilities can mean a difference on margins, time and manpower, while all-around adaptability can make a firm indispensable to satisfied clients.”

And this is where the NCS best practice fits in: implement a UCC and Mechanic’s Lien process.

Supply goods? Renting equipment?

File a UCC, even if it’s “a good, longtime customer” because absolutely no one is safe from insolvency. A properly perfected security interest affords you crucial leverage if your customer defaults, plus, it puts you at the front of the payment line in the event of bankruptcy.

Furnishing to a construction project?

Serve a preliminary notice. Every. Time. The notice is critical when pursuing a mechanic’s lien or bond claim. Many states require the service of a notice in order to proceed with a lien or bond claim. If you fail to serve a notice and you can’t file a lien, you have lost the leverage the law affords – is that a risk you want to take?

Ensuring the process is in place now helps to normalize the process for your internal customers (sales & credit) and your external customers. This is big: NORMALIZE.

UCCs and mechanic’s liens are not to be feared. It is a business practice used by millions and it can be vital to your working capital and subsequent business survival.

Implementing the process now, when economic times are great, helps put a positive spin on UCCs and mechanic’s liens.

It gives you an opportunity to demonstrate to your customers that there is no harm in either process, because everyone is getting paid & happy. Then, when the next downturn comes around, you will spend less time scrambling to secure these rights and battling upset customers – “Why did you send me this prelien notice?!?!” – and more time increasing your sales and, in turn, your working capital.

There’s No Ice Cream in Bankruptcy. Wait, What?!

There’s No Ice Cream in Bankruptcy. Wait, What?!

In bankruptcy, we frequently hear terms like preference payment, claw back, and new value. What do these terms mean? Further, what do these terms have to do with ice cream?

Let me tell you a little story about an ice cream truck and its weekly deliveries to a now insolvent grocery store.

The Ice Cream Truck – Music to My Ears!

Blue Bell Creameries, Inc. (Blue Bell) supplies ice cream and related items to a variety of businesses, including a grocery store chain, Bruno’s Supermarkets, LLC (Bruno’s). Each week, Blue Bell would deliver ice cream to Bruno’s and twice a week Bruno’s would remit payment to Blue Bell.

Soon, Bruno’s payments dropped from twice a week to once a week. Blue Bell continued its routine deliveries, after all, Bruno’s wasn’t paying twice a week, but Bruno’s was still paying within terms. Then Blue Bell began hearing rumors about Bruno’s cash flow problems, even the possibility that Bruno’s was preparing for bankruptcy. Technically, Blue Bell was still receiving timely payment from Bruno’s — what should Blue Bell do?

Blue Bell decided to continue supplying to Bruno’s, all the way to the date of bankruptcy. Soon after Bruno’s bankruptcy filing, Blue Bell found itself scooped into a lawsuit: the bankruptcy trustee wanted to recover ALL payments Blue Bell received from Bruno’s during the 90 days prior to the bankruptcy filing, to the tune of over $500,000.

Ice Cream Break

This period, the 90 days prior to the date of the bankruptcy filing, is also known as the preference period. Payments made during the preference period are often referred to as preference payments. The court opinion defines preference as

“… as defined by § 547(b), a preference occurs when an insolvent debtor transfers money to pay a creditor for a prior debt within 90 days before filing a bankruptcy petition.”

Claw backs and Happy Tracks. One of these is a term for the bankruptcy trustee obtaining preference payments from creditors and the other is a delicious ice cream treat. You guessed it, the act of obtaining these payments is known as claw back. “The trustee will claw back payments from the creditor.” A defense against preference or to alleviate claw backs? New value.

bankruptcy and new value

Back to Blue Bell

Blue Bell recognized and admitted based on 547(b) of the bankruptcy code the trustee could claw back the money Bruno’s paid Blue Bell. (It’s the “ordinary course of business” defense)

But this story wouldn’t be as sweet if it stopped now. Blue Bell argued the payments it received from Bruno’s provided “new value” which is in line with 547(c).

I like the bankruptcy court’s explanation of new value for this case

“… lots of ice cream products that [Bruno’s] was able to sell to its customer in its efforts to remain financially afloat.”

If the court agreed with the new value defense, the trustee couldn’t go after those payments. But the court didn’t agree, stating the new value defense requires the new value to remain unpaid.

There is a confusion related to the idea of remaining unpaid. I’m not going to create a brain freeze by explaining too much about it, but here’s a high level look:

Essentially, Blue Bell wouldn’t have been permitted to use the new value defense because Bruno’s actually paid them for the goods Bruno’s received from Blue Bell — Blue Bell could have used the new value defense if it continued supplying to Bruno’s and Bruno’s didn’t pay them.

Fortunately for Blue Bell, the Court of Appeals determined Blue Bell could use the new value defense, despite payments received from Bruno’s. Why?

In part, it’s because the “one of the ‘principal policy objectives underlying the preference provisions of the Bankruptcy Code’ is ‘to encourage creditors to continue extending credit to financially troubled entities while discouraging a panic-stricken race to the courthouse.’” Despite the rumors, and subsequent realities of Bruno’s fiscal situation, Blue Bell continued to supply its delicious treats.

You can view the Court of Appeals case here: Kaye v. Blue Bell Creameries, Inc.

UCC the Proverbial Sundae Topper

Could a properly perfected security interest have saved Blue Bell from this melty mess? Quite possibly. A properly perfected UCC provides an additional defense against preference payments.

We’ve previously discussed the higher risks of supplying to foodservice, beverage and hospitality industries. This is no different. Never assume, no matter how large your customer is, your customer is immune to insolvency. File UCCs and ensure you are in the best possible position to get paid.