UCC Terminations: An “Oops” Filing Can Be Fatal

Crop Production Services, Inc. v. Wheeler (In re Wheeler), 580 B.R. 719 (Bankr. W.D. Ky. 2017) –

A chapter 7 debtor was a farmer who obtained various loans for equipment and land and to put crops in the field. One of its lenders asserted a senior lien in the debtor’s crops and sought to avoid the lien of a competing lender. The case turned on the effect of an inadvertently filed UCC termination statement.

Farmer’s Bank and Trust Company was the competing lender. In 2005 the debtor granted the bank a lien on collateral that included crops growing or to be grown in fields together with proceeds. (In 2012 the bank and an entity formed by the debtor also entered into a security agreement that purported to grant the bank a lien on crops growing or to be grown.)

The lender asserting a senior interest was Crop Production Services, Inc. (CPS). In 2011 the debtor obtained credit from CPS. CPS’ collateral also included crops growing or to be grown and proceeds.

The debtor remained in business through the 2015 crop year and continued to pay the bank. When CPS failed to receive payment from the 2015 crops, it sued to collect. Shortly afterwards the debtor filed a chapter 7 bankruptcy. Both the bank and CPS filed proofs of claim asserting that their claims were secured by collateral that included crops growing or to be grown and proceeds. (No other parties asserted any claims against the 2015 crops or crop proceeds.)

The liens of both creditors were perfected by UCC financing statements. So, priority depended on the order and effectiveness of the UCC filings. The details were as follows:

  • July 2005: The bank filed a UCC financing statement that included crops and proceeds in the description.
  • May 2011: CPS filed a financing statement that included crops and proceeds in the description.
  • May 2015: The bank filed a timely continuation statement.
  • [June 2015: The debtor filed bankruptcy.]
  • July 2015: A termination statement was filed listing the bank as the secured party of record authorizing the amendment.
  • July 2015 (same day): About 10 minutes after the termination statement was filed, an amendment was filed attempting to add the bank as the secured party to the inadvertently terminated financing statement.
  • [March 2016: the debtor received a crop insurance check for a little over $100,000.]
  • April 2016: The bank filed a UCC-5 Correction Statement asserting that the termination was accidental.
  • April 2016 (a week later): The bank filed a new UCC-1 almost identical to the July 2005 financing statement.
  • May 2017: CPS filed a timely continuation statement.

It was undisputed that the 2005 bank lien was valid and properly perfected. The critical question was the effect of the inadvertent July 2015 termination statement.

Under the applicable UCC statute “upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective.” On the face of it, this meant that the 2005 bank lien became unperfected, and it was immaterial that there was an attempt to amend the terminated financing statement 10 minutes later.

But the bank argued that the termination statement filing was unauthorized. Under the UCC an amendment that terminates a financing statement must be authorized by the secured party of record. The secured party of record is “a person whose name is provided as the name of the secured party or a representative of the secured party” in an initial financing statement or in an amendment.

However, the argument that a filing is not authorized because the secured party did not intend to terminate the security interest fails: “Authorization relates to the act of filing, not necessarily to the effect of that act. As long as the usual person handling such statements filed it, authorization exists” (citation omitted). (The court also noted policy considerations raised by the Second Circuit relating to who is in the best position to deal with mistakes.)

In this case the court found that the termination statement named the bank as the secured party authorizing the amendments, and it was filed by a loan processor of the bank that handled financing statements. Accordingly, the bank’s lien became unperfected, and thus CPS prevailed because a perfected security interest has priority over an unperfected security interest.

If there is any area where attention to detail is critical and it does not pay to be in too much of a hurry, it is UCC financing statements. Picturing the loan processor realizing almost immediately that a mistake had just been made and unsuccessfully trying to fix it is a sobering thought.

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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