Professor Margit Livingston on Legal Malpractice for Failure to File a U.C.C. Article 9 Financing Statement

Professor Margit Livingston on Legal Malpractice for Failure to File a U.C.C. Article 9 Financing Statement

 Every secured party's nightmare is the realization that it forgot to file a financing statement in the appropriate public office to perfect its security interest. Sometimes that nightmare extends to the secured party's attorney, who may find herself facing a legal malpractice claim for failing to properly perfect a client's security interest. Without perfection, a security interest is subordinated to many third party interests and is avoidable by the debtor's bankruptcy trustee. See U.C.C. §§ 9-317 (Official Text 2013) (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). Over a strong dissent, the Mississippi Court of Appeals recently held that whether an attorney breached a duty of professional care to a client by not filing a financing statement was a question of fact that could not be resolved by summary judgment. Jennings v. Shuler, 2014 Miss. App. LEXIS 55 (Miss. Ct. App. Feb. 4, 2014) (hereinafter Jennings) [an enhanced version of this opinion is available to subscribers]. In so holding, the court reversed the lower court, which had found as a matter of law that the attorney did not owe the client the duty to file a financing statement.

In Jennings v. Shuler, Jennings lent money to her son Luther Allen West. 2014 Miss. App. LEXIS 55, at *3. She later asked West for a security interest in various property, including some farm equipment and West's interest in a partnership. At Jennings's direction, the attorney Shuler drafted a security agreement granting Jennings a security interest in "[a]ll farm equipment now owned or hereafter acquired by [West], including but not limited to those items of equipment set forth on Exhibit 'A' attached hereto." 2014 Miss. App. LEXIS 55, at *3-4. But the parties did not attach an Exhibit A. In December 2002, Jennings and West signed the security agreement; the attorney Shuler told them that he would need West's farm equipment list to file a financing statement. 2014 Miss. App. LEXIS 55, at *4. Because the list was not supplied, Shuler did not file the financing statement.

In April 2003, Jennings assigned her right to receive the loan payments from West to First Security Bank. Jennings, 2014 Miss. App. LEXIS 55, at *4. The Bank asked Shuler to turn over the loan documents, which he did. Shuler encouraged the Bank to obtain the farm equipment list and file an appropriate financing statement. 2014 Miss. App. LEXIS 55, at *5. West finally gave the Bank the list in January 2004, but Shuler was not informed of this fact, and neither the Bank nor Shuler filed a financing statement with respect to any of the collateral, including West's interest in the partnership. 2014 Miss. App. LEXIS 55, at *5.

West filed for bankruptcy in March 2006, and the trustee challenged Jennings's status as a secured creditor based on her failure to perfect her security interest in the collateral.Jennings, 2014 Miss. App. LEXIS 55, at *6-7. Under the strong arm clause of the federal Bankruptcy Code, the trustee may avoid unperfected security interests. 11 U.S.C. § 544 (a) (2011) [an annotated version of this statute is available to subscribers]. Jennings ultimately settled with the trustee after the bankruptcy court found that her claim to West's share in the partnership was superior to that of the bankruptcy estate.Jennings, 2014 Miss. App. LEXIS 55, at *8. She received $15,600 more than the appraised value of West's partnership interest.

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