Secured Transactions February 2004 Flashcards
(4 cards)
Summary
First Bank will prevail over Luke, the subsequent lien creditor, if First Bank had a prior, perfected security interest in the disputed equipment. First Bank had a prior, perfected interest in PC’s equipment, but not in PC’s accounts receivable. Thus, First Bank prevails as to the equipment, but not as to the accounts receivable. Luke prevails as to the accounts receivable. Moreover, because First Bank improperly filed a financing statement covering PC’s accounts, First Bank is liable to PC for any damages caused by that improper filing.
Because PC had authenticated a security agreement granting First Bank a security interest in PC’s equipment, First Bank perfected its security interest by filing, even though PC did not specifically authorize First Bank to file a financing statement. To that extent, First Bank had priority over Luke as to PC’s equipment.
As between a lien creditor and a secured party, the secured party has the superior claim to a debtor’s assets if the secured party has a perfected security interest that predates the judicial lien. In this case, First Bank obtained a security interest in PC’s equipment, filed a financing statement covering the equipment, and advanced funds to PC on the strength of that arrangement.
As a result, First Bank had a perfected security interest in PC’s equipment. Moreover, these steps were taken before Luke acquired a lien against PC’s assets. Consequently, First Bank has the superior claim to PC’s equipment. Uniform Commercial Code (UCC) § 9-201 (except as otherwise provided in the UCC, a security agreement is effective against other creditors of the debtor); § 9-317(a)(2) (a lien creditor prevails over a secured party only if the lien creditor obtains an interest before security interest is perfected).
It makes no difference that PC did not sign or expressly authorize the filing of the financing statement. Under the old version of Article 9, financing statements were required to be signed by the debtor. Under new Article 9, the debtor’s signature is not necessary. See UCC § 9-502(a) and comment 3. Although filings must still be authorized by the debtor, see UCC § 9-509(a), the debtor’s authentication of a security agreement covering particular collateral is ipso facto an authorization for the secured party to file a financing statement covering that collateral. UCC § 9-509(b)(1) and comment 4. Because PC authenticated a security agreement granting First Bank a security interest in equipment, First Bank was entitled to file a financing statement covering equipment, which was effective to perfect First Bank’s interest.
Luke has a superior claim to PC’s accounts because First Bank had no security interest in the accounts and the inclusion of the accounts in its financing statement was unauthorized and ineffective.
First Bank has no security interest in PC’s accounts. To obtain a security interest in a debtor’s assets, a creditor must receive the debtor’s agreement to grant such an interest. In general, no security interest will attach to collateral unless “the debtor has authenticated a security agreement that provides a description of the collateral.” UCC § 9-203(b)(3)(A). Here, First Bank has absolutely no claim to a security interest in PC’s accounts because the PC-First Bank security agreement did notinclude accounts receivable in the description of collateral, but mentioned only equipment. There is nothing in the facts to suggest that there was any intention to include accounts. To the contrary, the facts suggest that the security interest was intentionally limited to equipment.
If no security interest has attached, it cannot be perfected no matter what the creditor does. See UCC § 9-308(a). Here, no security interest ever attached to the accounts. Because First Bank has no security interest in the accounts and no other basis for claiming a property interest in the accounts, Luke’s interest prevails.
The financing statement does not help First Bank in this regard because it is not a security agreement and, also, because it was overbroad. First Bank did not have the right to file a financing statement covering additional collateral unless PC authorized such a filing, which PC did not. A financing statement is effective “only to the extent that it was filed by a person that may file it.” UCC § 9-510. Because First Bank was not entitled to file a financing statement covering PC’s accounts receivable, the financing statement is not effective to cover those accounts. See UCC § 9-317(a)(2). Thus, Luke has a superior claim to the accounts receivable.
First Bank violated Article 9 by filing an overbroad financing statement and by refusing to correct that filing. As a result, it is liable to PC for any loss caused by those violations, including losses caused by PC’s inability to secure financing from Second Bank.
Revised Article 9 provides generally that “a person is liable for damages in the amount of any loss caused by a failure to comply with this article.” UCC § 9-625(b) (emphasis added). Damages may be recovered by a person who isa debtor at the time of the failure of compliance with Article 9. UCC § 9-625(c).
On our facts, First Bank filed an overbroad financing statement. The problem, as noted earlier, is that First Bank had no express authorization from the debtor to file the financing statement, and the authorization provided ipso facto by debtor’s authentication of a security agreement extended only to the collateral mentioned in the security agreement, equipment. See UCC § 9-509(a), (b). Hence, by filing an overbroad financing statement, First Bank violated its “duty to refrain from filing [an] unauthorized financing statement.” UCC § 9-625, cmt. 2. See UCC § 9-509(a) (a secured party may file a financing statement only if authorized). Moreover, a secured party has a duty to terminate an unauthorized filing when termination is requested by the debtor. UCC § 9-513(c)(4). First Bank also failed to comply with this duty.
First Bank is liable for any loss caused to PC by its breach of these duties. Recoverable losses include losses “resulting from the debtor’s inability to obtain . . . alternative financing.” UCC § 9-625(b). In this case, those losses may be substantial. First Bank’s overbroad financing statement made it impossible for PC to secure a loan from Second Bank. PC’s inability to secure financing for its business expansion prevented it from adequately servicing its contracts. As a result, the City of Eden canceled its contract, which had been expected to yield significant revenue for PC. PC must, of course, establish both the amount of the loss and that the loss was caused by First Bank’s failure to comply with the Code. Moreover, damages should be limited to an amount “reasonably calculated to put [PC] in the position that it would have occupied had no violation occurred.” UCC § 9-625, cmt. 3.
