By Paul Hodnefield, Esq.
The UCC3 Amendment Form includes a collateral change action that allows the secured party to restate the described collateral. The purpose of this action is to allow multiple collateral changes on the same form. Otherwise, the secured party would need to file separate UCC3 records to make the required collateral additions and deletions.
While the collateral restatement can reduce the number of filings required, secured parties often do not understand how to properly use this action. If done incorrectly, a collateral restatement may leave the secured party with an unperfected or subordinate priority security interest. The recent case of In re: Northern Beef Packers LP, 2014 Bankr. LEXIS (Bankr. D. S.D. March 11, 2014) demonstrates the potential consequences for the secured party that fails to correctly restate the collateral.
Northern Beef Packers, LP (“Northern Beef”) entered into separate financial transactions with Axis Capital, Inc. (“Axis”) on April 30, 2012, and again on October 22, 2012. In both cases, Northern Beef granted Axis a security interest in all of its assets to secure performance of the obligation.
Also on October 22, Northern Beef and Axis entered into a cross-collateral and cross-default agreement. In that agreement, Northern Beef acknowledged that all of its assets would secure the payment or performance of all liabilities or obligations to Axis.
Axis filed two financing statements to perfect its security interests. The first was filed on May 8, 2012, and described the collateral as including “all personal property of the debtor.” Axis filed the second financing statement on November 6, 2012, with substantially the same “all personal property” collateral description.
Both financing statements were later amended. On September 10, 2012, Axis filed a UCC3 form that referenced the May 8 financing statement, indicated it was a collateral change, and provided a check in the “give entire restated collateral description” box. The new collateral description referenced all equipment subject to one or more of the security agreements entered into by the parties, but omitted the “all personal property” language.
Axis amended the November 6 financing statement on January 10, 2013. The UCC3 indicated that it was a collateral change and included a check in the “give entire restated collateral description” box. Again, the new collateral description referred to equipment subject to the security agreements, but did not include the broader “all personal property” text provided on the initial financing statement.
Later in 2013, Northern Beef filed for bankruptcy. Two of Northern Beef’s other secured creditors brought an adversary action so the court could determine the extent and priority of competing liens against the debtor’s assets.
Meanwhile, a significant portion of the personal property Northern Beef used in its operations (the “Operating Assets”) was sold at auction. The successful bidder was White Oak Global Advisors, LLC (“White Oak”), one of Northern Beef’s many other secured creditors. White Oak claimed that it held the priority security interest in all of the debtor’s assets. Before the sale closed, White Oak brought motions for judgment on the pleadings and partial summary judgment in its favor to ensure it could obtain and retain possession of the Operating Assets for its own use.
Axis had previously obtained relief from the automatic stay with respect to the specific equipment subject to the security agreements. However, Axis objected to White Oak’s motions with respect to the Operating Assets. The court, therefore, had to determine whether Axis had a perfected security interest in the Operating Assets by virtue of its security agreements and financing statements.
The court began by noting that to have the priority perfected security interest a creditor must have an enforceable security agreement and file a financing statement covering the collateral. White Oak claimed that Axis no longer had a security interest in the Operating Assets because the UCC3 amendments removed the blanket lien language and narrowed the collateral to specific equipment. The court found this argument dispositive.
The court reasoned that the amendments narrowed the financing statements only to the collateral covered by security agreements between Axis and Northern Beef. The amended financing statements did not extend to Northern Beef’s other personal property.
Because Axis’s amended financing statements no longer referenced any personal property other than equipment covered by agreements between Axis and Northern Beef, Axis did not retain a perfected blanket security interest in other personal property, including the Operating Assets, which was superior to subsequent encumbrance holders, including White Oak. Accordingly, the court held that White Oak held the superior security interest in the Operating Assets.
The important thing to take away from this case is that secured parties must be careful when filing an amendment to restate the collateral. The restated collateral is intended to replace all prior collateral descriptions, not supplement the existing financing statement description. An amendment to restate the collateral must fully describe all the collateral that the secured party intends to cover as part of the financing statement. Any oversight in the restated description may leave the secured party unperfected with respect to omitted collateral.
Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 62375.