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Any language that asserts that specific personal property is encumbered as security for a debt creates or provides for a security interest under Ark. Code Ann. § 4-9-105(1).
On September 3, 1999, the debtor, Tracy's Flowers and Gifts, Inc., executed a note in favor of the First Bank of South Arkansas ("Bank") on a form prepared by the United States Small Business Administration ("SBA"). The note evidenced a loan by the Bank to Tracy's Flowers & Gifts, Inc. in the amount of $ 40,000.00, which was guaranteed by the SBA. No document titled “Security Agreement” was executed by the debtor at the time of making of the loan guaranteed by the SBA. However, the language in the financing statement, promissory note, and loan application provided for a security interest in debtor's accounts, inventory and equipment. Thereafter, the debtor filed for bankruptcy protection, and the plaintiff bankruptcy Trustee was appointed. The Bank then moved for relief from stay and abandonment, claiming it had a valid first lien in the accounts, inventory and equipment of the Debtor. According to the Bank, under the composite document rule, the specific language in the financing statement, promissory note, and loan application provided for a security interest in the collateral. The Trustee filed an adversary proceeding to avoid the Bank's lien in the personal property as unperfected, alleging that the Bank's security interest did not attach because no security agreement existed expressly granting a security interest.
Did the Bank have a valid first lien in the accounts, inventory and equipment of the Debtor, notwithstanding the fact that no security agreement existed expressly granting a security interest?
Although the Arkansas Supreme Court had not decided the issue of whether language actually conveying a security interest was necessary to create a security interest, the court concluded that the Arkansas Supreme Court would hold the broad view that any language that asserted that specific personal property was encumbered as security for a debt created or provided for a security interest under Ark. Code Ann. § 4-9-105(1). Applying this view to the instant case, the court found that the financing statement executed by the parties and filed with the county clerk served as a valid, enforceable security agreement. The financing statement provided for a security interest in the personal property of debtor, was signed by debtor, and contained a description of the collateral. Accordingly, the Trustee’s complaint to avoid the Bank's lien was denied.