One itty, bitty mistake, and your security interest goes up in smoke.
The Uniform Commercial Code requires punctilious compliance for a security interest to attach, as Bankruptcy Judge Robert E. Nugent of Wichita, Kan., demonstrated in an opinion on March 30.
The owner of a limited liability corporation borrowed $25,000 from a bank to buy a truck. As borrower, the owner signed the note and security agreement in his own name, and not as the sole manager of his LLC. Naturally, the bank intended to end up with a security interest in the truck.
You know where this is going.
You guessed it. When the title comes in, it shows the bank with a lien, but the LLC was listed as the owner of the truck. It isn’t clear whether the borrower or the bank had applied for the title.
As Judge Nugent said, the loan documents nowhere mentioned the LLC.
The bank repossessed the truck. You know what happens next.
Both the owner and the LLC end up in chapter 11. The owner doesn’t list the truck among his assets, but he shows the bank as a creditor with a deficiency claim.
The bank says “oops” and files a motion asking for a modification of the automatic stay. The bank wanted to obtain a corrected title showing the LLC’s owner as having title to the truck, subject to the bank’s security interest, of course.
You know the result. Judge Nugent denies the lift-stay motion, ruling that the bank had no lien on the truck. His analysis is straight out of a law school casebook on secured transactions.
Evidently represented by a lawyer who took a course on Article 9 in law school, the owner objected to the lift-stay motion. The owner contended that the bank’s security interest never attached, nor was it perfected.
If you’re up on your Article 9, you’ll know that Judge Nugent only needed to reach the question of attachment before pouring out the bank.
Attachment has three requirements under UCC § 9-203: (1) the lender must give value; (2) the borrower must have rights in the collateral, and (3) the borrower must sign the security agreement.
Only (2) mattered. The LLC’s owner had no rights in the truck, Judge Nugent said.
To correct the mistake, the bank needed to file an affidavit signed by the owner stating that he, not the LLC, should have title to the truck. Without our saying so, you know that filing an affidavit was barred by the automatic stay because the activity would amount to exercising control over the LLC’s property.
Facing defeat, the bank was forced to get creative. The bank argued that the owner’s signature on the loan documents bound the LLC. Au contraire, said Judge Nugent.
Under Kansas law, members manage LLCs, but they don’t have interests in specific LLC property. Furthermore, Judge Nugent said that “a single LLC member cannot act to bind the company without indicating he or she is acting in a representative capacity.” Recall that the LLC was mentioned nowhere in the loan documents.
Judge Nugent summed it up: The owner never acquired rights in the collateral because the LLC took title to the truck. Since the owner never had rights in the truck, the security interest never attached. The LLC was the record owner on the filing date, but the security interest was unenforceable.
Lacking attachment, the bank had no lien on the truck and therefore “lacked a colorable claim for relief from the automatic stay,” Judge Nugent said.
The bottom line: Judge Nugent denied the motion to modify the stay.
One itty, bitty mistake, and your security interest goes up in smoke.
The Uniform Commercial Code requires punctilious compliance for a security interest to attach, as Bankruptcy Judge Robert E. Nugent of Wichita, Kan., demonstrated in an opinion on March 30.
The owner of a limited liability corporation borrowed $25,000 from a bank to buy a truck. As borrower, the owner signed the note and security agreement in his own name, and not as the sole manager of his LLC. Naturally, the bank intended to end up with a security interest in the truck.
You know where this is going.
You guessed it. When the title comes in, it shows the bank with a lien, but the LLC was listed as the owner of the truck. It isn’t clear whether the borrower or the bank had applied for the title.
As Judge Nugent said, the loan documents nowhere mentioned the LLC.