A secured party relies on its properly filed financing statement to allow enforcement of its security interest against a transferee when the debtor disposes of collateral. Generally, the security interest remains effective against the collateral following a transfer, unless the transferee is a buyer in ordinary course of business. However, a security interest that was perfected at the time of the transfer may become unenforceable if the financing statement later lapses. That was the situation in the recent case of The Four County Bank v. Tidewater Equipment Co., 771 S.E. 2d 437 (Ga. Ct. App. 2015).
Shepherd Brother Timber Company, LLC (the “Debtor”) borrowed money from The Four County Bank (the “Bank”) to finance the acquisition of two separate pieces of forestry equipment. The first transaction occurred in June 2003, when the Bank loaned the Debtor funds to purchase a Tigercat® Cutter (the “Cutter”). In November 2005 the Bank financed the Debtor’s purchase of a Tigercat Skidder (the “Skidder). In both cases, the Debtor granted the Bank a purchase-money security interest in the equipment. The Bank properly perfected its purchase-money security interests by filing financing statements for each transaction.
A few years later, while the financing statements were still effective, the Debtor used both the Cutter and Skidder as trade-ins toward the purchase of new equipment from Tidewater Equipment Company (“Tidewater”). Tidewater did not perform any UCC searches before it accepted the Cutter and Skidder. It later resold the equipment to third parties. The Bank received none of the sale proceeds.
The Bank failed to file continuation for its two financing statements during the six-month window immediately before the lapse date. Consequently, the financing statements lapsed shortly after the Debtor transferred the Cutter and Skidder to Tidewater. On October 31, 2008, the Bank filed a new financing statement to re-perfect its security interest in the Cutter. Likewise, on March 10, 2011, the Bank filed a financing statement to re-perfect its security interest in the Skidder.
In 2012, the Debtor filed for bankruptcy. The Bank then sued Tidewater to recover the Cutter and Skidder or the value of the equipment. The Bank argued that Tidewater was liable because it should have known of the Bank’s perfected security interest at the time Tidewater resold the equipment. Both parties moved for summary judgment and the trial court found in favor of Tidewater.
On appeal, the Bank first argued that Tidewater was not entitled to summary judgment because the Bank’s security interests were perfected at the time Tidewater took possession of the equipment. The court, however, noted that the Bank allowed the financing statements to lapse. Under UCC § 9-515(c), security interests that lapse are “deemed never to have been perfected against a purchaser of the collateral for value.” The court then reasoned that even if the security interests remained perfected throughout Tidewater’s acquisition and disposition of the equipment, the same security interests were deemed never to have been perfected as against a purchaser for value when the Bank allowed the financing statements to lapse. Thus, the outcome turned on whether Tidewater was a “purchaser for value.”
The Bank claimed that Tidewater was not a purchaser for value because Tidewater could have discovered the Bank’s perfected security interests by conducting a search at the time it purchased each piece of equipment. The court, however, reviewed the applicable Article 9 provisions and determined that Tidewater would have taken subject to the Bank’s security interest only if it had actual knowledge of the claim. There was no evidence that Tidewater had actual knowledge of the security interests.
Finally, the Bank claimed that because the parties were bound by the UCC obligation of good faith, Tidewater should have conducted a UCC search prior to selling either piece of equipment. The court disagreed based on Tidewater’s lack of actual knowledge regarding any existing security interests in the equipment. Consequently, the court held that Tidewater was entitled to summary judgment in its favor.
The takeaway from this case is that secured parties should never allow a financing statement to lapse until either the underlying obligation has been satisfied or its actions to enforce the security interest have concluded. Moreover, secured parties should ensure that they have robust continuation tracking systems in place to prevent financing statements from lapsing inadvertently just when the secured party needs them the most.
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 firstname.lastname@example.org or 800-927-9801, ext. 61730.