In this priority dispute two nurseries sold trees and shrubs to a commercial wholesale farm that went bankrupt. They claimed their agricultural liens in the debtor’s assets were senior to a third-party bank’s security interests. The district court found in favor of the bank, and the nurseries appealed to the Fifth Circuit.
The debtor’s headquarters were located in Texas, and it filed bankruptcy in Texas. The nurseries sold over $1 million worth of trees and shrubs to debtor locations in Michigan, Oregon and Tennessee. The nursery that sold plants to all three locations filed UCC financing statements in all three states. The other nursery sold only in Michigan and filed a UCC financing statement in that state. All of the nursery UCC financing statements identified the debtor’s name as “BFN Operations, LLC abn Zelenka Farms” although the official name of the debtor in its formation documents was “BFN Operations, LLC” (i.e. did not include the assumed business name).
The bank provided the debtor prepetition financing as well as DIP financing during the bankruptcy. The bankruptcy court ordered that the DIP financing would include the prepetition financing and would be secured by a lien that was “subject and junior only to . . . valid, enforceable, properly perfected, and unavoidable pre-petition liens[.]”
The first issue was choice of law. Although the nurseries argued that a contractual choice of law provision should govern, there was no basis for applying a provision in a contract between a nursery and the debtor to a dispute between a nursery and a third party. Rather, the choice was between the rules of the forum state (Texas) and federal law.
However, there was no need to make a choice since the result would be the same. The Texas choice of law rule would determine priority using the law of the state where the debtor received the goods, while the federal choice of law would look to the state with the most significant relationship, which again was the law of the state where the products were located.
Turning to the priority of the UCC interests, the nursery UCC financing statements were defective under the laws of Michigan, Oregon and Tennessee. The debtor’s name was incorrect since the official name did not include the dba, and “substantial compliance” did not apply since a search on the official name using the state search logic would not disclose the financing statements filed by the nurseries. Consequently, the nursery UCC security interests were unperfected.
The nursery that provided plants in Oregon also claimed an agricultural lien. Under Oregon law, a filing is not required to perfect and agricultural lien. However, the lien expires 45 days after the due date for the final payment. The lien may be extended to up to 255 days after the due date by filing a notice. The notice must be supported by an affidavit containing specified information and must be filed before the lien expires.
Although the nursery filed a notice, it did not serve to extend the lien since it was filed late. So, in an effort to rescue its position, the nursery argued that its UCC financing statement could serve as the required notice using a theory of substantial compliance. The court rejected this argument since the UCC financing statement failed to meet the agricultural lien requirements in a number of ways that would prejudice other creditors by failing to provide them adequate information about duration of the lien. Consequently, the agricultural lien was unenforceable.
Accordingly, the Seventh Circuit affirmed the district court’s ruling that the nursery liens were not senior to the bank liens.
In the early days after revised UCC Article 9 was adopted, errors in the debtor’s name in a UCC financing statement were not uncommon. Prior to the revisions not only did people often include a dba as part of the name, it was also common practice to use a format such as: “[Debtor’s Name], a [state] corporation.” However, that is not the debtor’s proper name and the typical state search logic has a limited list of disregarded words. Although “corporation” would be disregarded and excluded from the search term, “[state]” would not, so the search would fail. It is a little surprising to see this kind of mistake made today.
Vicki R Harding, Esq.