In the spirit of the New Year, and in the spirit of par-plus-interest recoveries for secured lenders everywhere, we would like to share five New Year’s resolutions culled from recent case law and our experience assisting secured creditors in pre-bankruptcy planning for a defaulted borrower. These resolutions, of course, assume that you have the opportunity to perform a transaction review before the bankruptcy is filed, preferably well before the bankruptcy is filed, in case a documentation tweak is needed that would otherwise fall within the 90-day preference period.[1]
If your client’s security interest is not properly perfected going into a bankruptcy, the client will likely end up an unsecured creditor once the bankruptcy case is filed. To avoid this outcome, convince your client that a full transaction review at the outset of any bankruptcy representation is money well spent. Likewise, when you take on new business, make it a habit to conduct a full review yourself to confirm that your client’s security interests have been properly granted and are perfected. Otherwise, the sins of those who originally documented the transaction may be unfairly visited upon you. Now, on to the resolutions….
Confirm your financing statement has not lapsed and is not on the brink of lapsing before the bankruptcy case is filed. Remember the effect of a post-petition lapse of perfection. A lender must file a UCC-3 continuation statement within six months before the expiration of the financing statement to prevent its lapse under the Uniform Commercial Code (UCC). The Middle District of Florida in Colony Beach & Tennis Club Ass’n v. Colony Lender LLC (In re Colony Beach & Tennis Club Inc.), 508 B.R. 468 (Bankr. M.D. Fla. 2014), joined the current trend[2] when it held that a financing statement lapse post-petition makes the security interest vulnerable only to liens that are perfected later in time. But why push your luck? Based on a plain reading of UCC § 9-515 and 11 U.S.C. § 362(b)(4), the filing of a continuation statement is permitted post-petition, so counsel should advise a lender client to file continuation statements during a bankruptcy to maintain perfection.[3]
Make sure you have properly named the debtor in the financing statement. The failure to timely file a financing statement with the debtor’s proper legal name may render the financing statement ineffective. In In re Lower Bucks Hospital,[4] the secured creditor had a financing statement on file, but it did not timely amend its financing statement after the debtor’s legal name changed. The adversary proceeding seeking to avoid the creditor’s security interest was settled without a binding decision on the UCC issues. The lesson, however, is the same: Stay on top of the debtor’s name changes and check, then double-check, the legal entity name before the debtor files bankruptcy. For a debtor that is a registered organization, counsel should confirm the debtor’s full legal name by referencing the organization’s public organic record (typically the certificate of incorporation or formation filed with the secretary of state for a registered organization)[5] — even if the debtor is under a contractual obligation to inform the creditor of any name change. Keep in mind that the UCC debtor name rules are very specific. Even the placement of commas, periods and capitalized letters in a debtor’s name may be critical.
Make sure you have properly described the collateral in both the security agreement and the financing statement. In order to have priority over future security interests and liens in the same collateral, a valid security interest must properly identify the collateral. This goes for both the security agreement and the financing statement. For example, the Sixth Circuit in 1st Source Bank v. Wilson Bank & Trust[6] held that a bank did not have a perfected security interest in certain accounts receivable belonging to the debtors because the bank had failed to include the terms “accounts” or “accounts receivable” as part of the bank’s collateral in its financing statement — notwithstanding the inclusion of the term “accounts” as collateral in the security agreement. All creditors seeking to perfect a security interest in assets taken as collateral should make it a practice to conform the description of their collateral to both the security agreement and the financing statement.
Confirm you are properly perfected, properly. Security interests in different collateral are perfected in different ways. For example, the manner in which you perfect an interest in a certificate of deposit (typically, by possession) may be different from the manner in which you perfect a security interest in a general intangible. Know what the primary security is, and be sure you know how the interest in that property is to be properly perfected. Then verify that your client has followed all steps. If the client has not, then fix it, and engender good relations with the borrower for 91 days.[7]
Check the UCC database to confirm that you have what you think you have. The Delaware Supreme Court recently ruled that a termination statement intended to terminate a lender’s security interest in collateral securing a synthetic lease inadvertently operated to terminate the same lender’s security interest in collateral securing a separate $1.5 billion syndicated loan because the secured creditors had (mistakenly) authorized the filing through their attorneys.[8] Several individuals involved in the filing reviewed the paperwork and approved the filing without noticing the mistake — until GM entered bankruptcy. The best practice to ensure that your perfection documents are in order is to check your file documents against the public record.
While this list is in no way exhaustive, we hope that ticking through these resolutions will invigorate your initial to-do list in any new distressed matter for your secured lender clients. Happy New Year!
[1] Security interests that are acquired in the 90 days leading up to the bankruptcy filing may be subject to avoidance as preferences under 11 U.S.C. § 547(b). See TTOD Liquidation Inc. v. K. Jin Lim (In re Dott Acquisition LLC), 520 B.R. 588, 631 (Bankr. E.D. Mich. 2014).
[2] See, e.g., Highland Constr. Mgmt. Servs. v. Wells Fargo N.A. (In re Highland Constr. Mgmt. Servs.), 497 B.R. 829 (Bankr. E.D. Va. 2013).
[3] See In re Wilkinson, No. 10-62223, 2012 WL 1192780, at *4 (Bankr. N.D.N.Y Apr. 10, 2012) (noting that acts to maintain or continue perfection of an interest in property are permitted post-petition by Congress’s express exception to the automatic stay in 11 U.S.C. §§ 362(c)(3) and 546(b)).
[4] 571 F. App’x 139 (3d Cir. 2014).
[5] See U.C.C. § 9-102(68).
[6] 735 F.3d 500 (6th Cir. 2013).
[7] Cf. Will Rogers, original source unknown, “Diplomacy is the art of saying ‘nice doggy’ until you can find a rock.”
[8] See Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank N.A., No. 345, 2014, 2014 WL 5305937 (Del. Oct. 17, 2014).