UCC Financing Statements: The Ins and Outs of “Authorization”

Official Committee of Unsecured Creditors of the Adoni Group, Inc. v. Capital Business Credit, LLC (In re The Adoni Group, Inc.), 530 B.R. 592 (Bankr. S.D.N.Y. 2015) –

A creditors’ committee claimed that a financing statement was void, so that the related security interests were not perfected, and consequently could be avoided using the trustee’s “strong arm” powers. The argument turned on whether a financing statement filed one day before the security agreement was executed was authorized.

Pre-bankruptcy a creditor and the debtor entered into a factoring agreement and a separate inventory security agreement. Under the factoring agreement the creditor made formula based loans to the debtor against the purchase price of the debtor’s accounts and the value of its inventory. The factoring agreement included the grant of a security interest in the following assets:

[A]ll of our accounts, contract rights, computer software, programs, stored data, aging schedules, customer lists, and general intangibles (including all patents, trademarks, and copyrights registered in the United States Copyright or Patent offices, together with the goodwill of the business in connection with which such trademark may be used and the royalties and other fees which become due for the use of such patents, trademarks, or copyrights), whether or not otherwise specifically assigned to you in this Agreement, now existing or hereafter acquired, and in the proceeds and products thereof, any security and guarantees therefor, in the goods and property represented thereby, and in all of our books and records relating to the foregoing, and in all reserves, credit balances, sums of money at any time to our credit with you, and any of our property at any time in your possession. In addition to Receivables and all proceeds thereof, we also assign to you all right, title and interest, and grant to you a security interest in, the following collateral to secure all of our present and future obligations and indebtedness to you: (1) all deposit, savings, passbook or like accounts maintained at any bank, savings and loan or similar institution; and (2) the proceeds of any tax refund due to us by the state or federal government.

The creditor filed an initial UCC‑1 financing statement that described the collateral as follows:

All assets of the Debtor, of every kind and nature, now existing and hereafter acquired and arising and wherever located, including, without limitation, accounts, deposit accounts, commercial tort claims, letter of credit rights, chattel paper (including electronic chattel paper), documents, instruments, investment property, general intangibles (including payment intangibles), software, goods, inventory, equipment, furniture and fixtures, all supporting obligations of the foregoing, and all cash and non-cash proceeds and products (including without limitation, insurance proceeds) of the foregoing, and all additions and accessions thereto, substitutions therefor and replacements thereof.

The factoring agreement also authorized the creditor to “sign” financing statements on behalf of the debtor and to file financing statements without the debtor’s signature “signed only by you as secured party.” (It has been a number of years since debtors were required to sign financing statements.) The security agreement also granted a security interest in the debtor’s current and future inventory.

The factoring and inventory security agreements were dated the day after the financing statement was filed. (The creditor contended that the agreements were actually executed the day before when the financing statement was filed, but for purposes of ruling on summary judgment motions, the court assumed that they were executed on the date of the agreements.)

Relevant sections of UCC Article 9 include (emphasis in opinion):

  • UCC Section 9-502(d) which specifically authorizes filing a financing statement before a security agreement is made or attaches.
  • UCC Section 9-509 which provides that a “person may file an initial financing statement… only if: (1) the debtor authorizes the filing in an authenticated record or pursuant to Subsections (b) or (c)…”
  • UCC Section 9‑509(b) which provides that “by authenticating or becoming bound as debtor by a security agreement, a debtor or new debtor authorizes the filing of an initial financing statement, and an amendment, covering: (1) the collateral described in the security agreement; and (2) property that becomes collateral under Section 9‑315(a)(2) [proceeds], whether or not the security agreement especially covers proceeds.”
  • UCC Section 9‑510(a) which provides that a financing statement is “effective only to the extent that it was filed by a person that may file under Section 9‑509.”

The creditors’ committee argued that the language stating that a party is permitted to file a financing statement only if the “debtor authorizes” the filing means that authorization is required as a condition of filing. In this case the subsequent factoring and security agreements provided the required authorization. However, if authorization must be determined at the time the filing is made, this would not be sufficient.

The court suggested that this might be a reasonable interpretation, however even the committee conceded that there could be “common law ratification” that could give effect to a previously filed statement. In considering the ordinary meaning of “authorizes,” the court found some definitions that contemplated a forward-looking approach (“empower” or give “permission”), while others would include validating a prior act (“sanction” or “approve”).

The court was also puzzled by the language in Section 9‑510(a) that referred to a record that “was filed by a person that may file it.”  While viewing the creditors’ committee interpretation as “the better one,” that position could not be squared with the concept of post-filing ratification.

Given the ambiguity, the court looked to the Official Comments to the UCC. There the court found strong support for the factor’s position. A comment to a section regarding the priority of secured interests stated that “the unauthorized filing of an otherwise sufficient initial financing statement becomes authorized, and the financing statement becomes effective, upon the debtor’s post-filing authorization or ratification of the filing.”

The comment to Section 9‑509 states that authentication of the security agreement “ipso facto constitutes the debtor’s authorization” of the filing. The court did not see any indication that “ipso facto” was limited to a forward looking authorization. Further, the comments specifically referenced law “including the law with respect to ratification of past acts,” as relevant to determining whether a person has the required authorization.

The court also found that its approach was more consistent with the statement in Section 1-102 of the UCC should be “liberally construed and applied to promote its underlying purposes and policies,” which in this case involves a system of “notice filing” to put third parties on notice of security interests.

The court reviewed several cases proposed by the creditors’ committee as support for its position. However, it found that the cases were distinguishable (including a case involving a federal inmate that filed false statements against the judge, the prosecutor and the warden of the prison, and a fraudulent transfer in the context of piercing the corporate veil).

Based on this analysis, the court dismissed the committee’s claims.

As expressed in the Official Comments, there is a general view among UCC practitioners that a UCC filing can be ratified and become effective after the fact. It is less clear what happens during the period between the filing and the ratification and whether the effectiveness is retroactive.

One issue that the court and parties appeared to gloss over was whether the security agreement truly authorized the financing statement that was filed. It is quite common to see a shorthand description in the UCC financing statement, with a more detailed description of the collateral in the security agreement.

The UCC specifically authorizes super generic descriptions in a financing statement, such as “all assets,” but at a minimum requires identification of categories of collateral in a security agreement. In this case the financing statement covered “all assets” including a litany of types of collateral. However, the security interest that was actually granted in this case was more limited.

One view is that the description in a UCC financing statement is limited to the narrower description in the security agreement, but is effective as to that narrower category of collateral. However, an alternate argument can be made that the description that was filed was not authorized, and thus is not effective at all. To avoid this issue, it would be a good idea to include an explicit statement in the security agreement that the creditor is authorized to file a UCC financing statement with the broader description (for example authorizing an “all assets” UCC financing statement).

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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