Although Article 9 of the
Uniform Commercial Code has attempted to make perfection an easily attainable
goal for secured parties, mistakes still occur, and many of them prove fatal to
the secured creditor's perfected status. The secured party in a recent
bankruptcy case found itself in danger of having received a preference after a
series of mishaps with a termination statement, a correction statement, and a
last-minute financing statement.
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As savvy secured parties are
well aware, perfection of one's security interest in the debtor's collateral is
the key to creditor bliss. Only a perfected security interest will survive
assault by the trustee in bankruptcy and will have priority over other
claimants to the collateral. See U.C.C. §§ 9-317 (Official Text 2009)
(giving perfected security interests priority over lien creditors and certain
buyers); 9-322 (a) (according perfected senior secured parties priority over
later secured parties). See also 11 U.S.C. § 544 (a) (2011) (allowing the trustee in
bankruptcy to set aside unperfected security interests). Although Article 9 of
the Uniform Commercial Code has attempted to make perfection an easily
attainable goal for secured parties, mistakes still occur, and many of them
prove fatal to the secured creditor's perfected status. The secured party in a
recent bankruptcy court case found itself in an unperfected wilderness and then
in danger of having received a preference after a series of mishaps involving a
termination statement, a correction statement, and a last-minute financing statement.
v. Bank of Granite (In re Hickory Printing Group, Inc.) (hereafter
Hickory Printing), No. 10-51051, 2012 Bankr. LEXIS 3354 (Bankr.
W.D.N.C. July 23, 2012).
In Hickory Printing, the debtor had a long-standing line of credit with
the Bank secured by a security interest in the debtor's accounts and inventory.
The Bank filed a proper financing statement to perfect its security interest in
1997 and thereafter continued its effectiveness by filing continuation
statements in 2002 and 2007. 2012 Bankr. LEXIS 3354, at *6-7. In October 2008,
the debtor sought a short-term loan of $600,000 from the Bank to be secured by
the same collateral as the existing three million dollar line of credit. The
Bank granted the loan and did not file a new financing statement since the
existing financing statement covered the collateral. 2012 Bankr. LEXIS 3354, at
*8. Within a week of receiving the short-term loan, the debtor paid it back,
and then the Bank made a catastrophic error. A bank employee, following bank
procedures, filed a termination statement on December 1, 2008, canceling the
original financing statement. 2012 Bankr. LEXIS 3354, at *9-11. Bank records
seemingly did not signal the employee that although the short-term loan had
been repaid in full, the larger line of credit remained outstanding.
Almost a year later, in November 2009, another bank employee discovered the
error and sought advice from the North Carolina Secretary of State's Office on
the proper course of action. Hickory Printing, 2012 Bankr. LEXIS 3354,
at *13. The Security of State's Office apparently told the bank employee that
the Bank should file a correction statement to reinstate the terminated
financing statement. The Bank then filed a correction statement indicating that
the previous termination statement was "IN ERROR." 2012 Bankr. LEXIS
3354, at *15.
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