State law may require use of the UCC financing statement for purposes other than those within the scope of Article 9. For example, law other than Article 9 may require a claimant to perfect judgment liens or other statutory liens by filing a UCC financing statement. However, the filing of the financing statement generally does not create the non-UCC lien. If the lien does not exist, the filed UCC record may be of little value, as a creditor recently discovered in the case of In re: Central Engineering & Construction Associates, Inc., 2015 Bankr. LEXIS 820 (Bankr. S.D. Ind. March 16, 2015).
The case involved perfection of a judgment lien on personal property under Indiana law. The debtor, Central Engineering & Construction Associates, Inc. (“Central”), as its name suggests, was engaged in the engineering and construction business. Central purchased cement on account from Holcim (US), Inc. (“Holcim”).
Central fell substantially behind on its payments for the cement and Holcim filed suit. In November, 2011, Holcim obtained summary judgment in its favor for just over $81,000. In proceedings supplemental to its lawsuit against Central, Holcim was able to place a hold on one of Central’s bank accounts and eventually obtained a partial payment of $30,000.
In January 2013, more than a year after it obtained the judgment, Holcim filed a UCC financing statement with the Indiana Secretary of State. The financing statement named Central as debtor and described the collateral as:
A lien upon the debtor’s personal property by judicial proceedings pursuant to the judgment entered judgment entered in the Hancock Circuit Court in Cause No. 30C01-1107-CC-1336, including all inventory, equipment, chattel paper, accounts (including accounts receivable), deposit accounts, contracts, instruments, investment property and general intangibles; whether any of the foregoing is owned or acquired later; all records of any kind relating to any of the foregoing; all proceeds relating to any of the foregoing (including insurance, general intangibles and other account proceeds).
A few months later, Holcim obtained a final order of garnishment against two more of Central’s bank accounts. However, this action resulted in the collection of only about $6,200.
Shortly thereafter, Central began working with its creditors to conduct an informal liquidation of its assets. The plan involved auctioning off Central’s heavy equipment and other personal property. Prior to the sale, however, several creditors, including Holcim, asserted that they held secured claims against the assets and demanded that they be paid in full.
Central disputed the secured claims. To preserve the scheduled sale and determine the rights of the parties, Central filed a voluntary Chapter 11 petition. The sale went on as scheduled and the proceeds were placed in escrow pending further court order.
Holcim filed a secured claim with the bankruptcy court for approximately $82,000. Central contested the claim and brought an adversary action to determine the validity of Holcim’s asserted interest. The parties then made cross-motions for summary judgment.
Holcim argued that it held a valid perfected lien under the state trial court rules. The court rules provide for a notice of lis pendens on personal property by filing a UCC financing statement in compliance with the provisions of Article 9. Holcim’s contention was that this rule provided a mechanism for a creditor to perfect its resulting judgment lien.
The court rejected Holcim’s claims for the simple reason that it never had a lien in the first place. Under Indiana law, a judgment lien is created only through levy and execution. Holcim never followed this process with respect to the auctioned assets. Therefore, it could not claim a lien in the sale proceeds.
The court rules did not change the result. The Indiana lis pendens rule for personal property has only two uses. The first is for a creditor that has initiated judicial action to provide notice of its alleged claim to the described assets. The other is to perfect a pre-existing lien obtained by judicial action. Neither of these uses applied to Holcim’s situation. Holcim had already obtained a judgment and the lien did not exist without levy and execution. Consequently, the court granted summary judgment to Central.
The takeaway from this case is that levy and execution is an essential step for enforcing a judgment lien on personal property in many states, not just Indiana. Levy and execution are often required to either create a judgment lien on personal property or, depending on particular state’s law, to perfect a judgment lien on personal property.
There are, however, some exceptions. A few states do permit a judgment creditor to perfect its lien on personal property by filing a UCC financing statement in accordance with Article 9. However, law other than Article 9 may govern filing location and the sufficiency of the financing statement. Judgment creditors therefore must pay close attention to the judgment lien requirements for a particular state.
Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at email@example.com or 800-927-9801, ext. 61730.