Professor Margit Livingston on Changes in a Debtor's Business Structure under U.C.C. Article 9

Professor Margit Livingston on Changes in a Debtor's Business Structure under U.C.C. Article 9

 A secured party that perfects its security interest without flaw at the outset can lose its perfected status because of post-filing changes in the debtor's business structure. It is incumbent upon secured parties to keep track of such changes and to act swiftly to preserve perfection at all times. In particular, the tricky relationship between UCC §§ 9-508 and 9-326 can leave secured parties surprised by the unexpected loss of priority.

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Secured parties under U.C.C. Article 9 are always in need of achieving and maintaining perfection of their security interests. Unperfected security interests are avoidable in bankruptcy and also subordinated to the interests of most other claimants to the collateral. See 11 U.S.C. § 544 (a) (2011) (allowing the trustee in bankruptcy to set aside unperfected security interests); 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). Filling out and filing a financing statement as a means of achieving perfection can be a relatively straightforward task for secured parties, given the increasingly simplified requirements of Article 9. See U.C.C. §§ 9-502 (a)(1) (requiring only the names of the debtor and secured party and an indication of the collateral on a financing statement); 9-301(1) (designating the debtor's location as the jurisdiction of filing in almost all cases). But even a secured party that perfects its security interest without flaw at the outset can lose its perfected status because of post-filing changes in the debtor's business structure. It is incumbent upon secured parties to keep track of such changes and to act swiftly to preserve perfection at all times. In particular, the tricky relationship between two Code sections-§§ 9-508 and 9-326-can leave secured parties surprised by the unexpected loss of priority.

Assume the debtor is a corporation incorporated under the laws of Delaware. Its official registered name is Jones Equipment, Inc. SP desires to take and perfect a security interest in Jones's inventory and accounts, current and after-acquired. To achieve attachment/enforceability of its security interest, SP should have the debtor authenticate a security agreement describing the collateral, should give value to the debtor (e.g., a loan), and assure itself that the debtor has rights in the collateral. U.C.C. § 9-203 (a), (b). To perfect its security interest, SP should file a properly filled out financing statement in the central filing office in the state where the debtor is located. U.C.C. §§ 9-301 (1); 9-501 (a)(2). A registered organization, such as a corporation, is located in its state of formation-in this case, in Delaware, the debtor's state of formation/incorporation. U.C.C. § 9-307 (e).

The filed financing statement should contain the names and addresses of the debtor and the secured party and an indication of the collateral. U.C.C. §§ 9-502 (a), 9-516 (b)(4), (5). Choosing the correct debtor name for the financing statement is crucial for the secured party as debtor name errors will render the financing statement fatally defective, with one "safe harbor" exception. For a registered organization debtor, Article 9 dictates that the debtor's name is its officially registered name in the public record showing its formation. U.C.C. § 9-503 (a)(1). See also the 2010 Amendments to U.C.C. § 9-503 (a)(1) (clarifying that a registered organization's "name" for Article 9 purposes is the "name on the public organic record most recently filed with or issued or enacted by the registered organization's jurisdiction of organization which purports to state, amend, or restate the registered organization's name."). Thus, in the example above, SP should use the name "Jones Equipment, Inc." on its financing statement.

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