Professor Margit Livingston on Mishaps Involving a Termination Statement, a Correction Statement, and a Last-Minute Financing Statement Under U.C.C. Article 9

Professor Margit Livingston on Mishaps Involving a Termination Statement, a Correction Statement, and a Last-Minute Financing Statement Under U.C.C. Article 9

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.

Excerpt:

Note: Case and statute links below are accessible by lexis.com subscribers

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. Ward 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.

Access the full version of "Mishaps With a Termination Statement and a Correction Statement Under Art. 9" with your lexis.com ID. Additional fees may be incurred.

If you do not have a lexis.com ID, you can purchase this commentary and additional Emerging Issues Commentaries from the LexisNexis Store.

Lexis.com subscribers can access the complete set of Emerging Issues Analyses for Commercial (UCC) Law and the Commercial (UCC) Area of Law page.

For more information about LexisNexis products and solutions connect with us through our corporate site.