Failure to Use the Proper Forms Can Prevent Perfecting Your Security InterestNCS Credit - April 28, 2014
When preparing documentation to perfect a UCC filing, the requirements are often complex. Precise compliance with federal and state requirements is necessary to prevent a secured debt from being treated as unsecured during bankruptcy and to protect a secured creditor’s priority position.
You may only discover your UCC filing is unperfected when it is treated as unsecured debt during a bankruptcy. UCC perfection prior to a debtor filing bankruptcy is essential because of the bankruptcy trustee’s strong-arm powers under Section 544(a)(1) of Title 11. The debtor or trustee can avoid an obligation that is not perfected and treat it as an unsecured obligation.
The case In Re Camtech Precision Mfg. Inc. v. Regions Bank, 443 B.R. 190 (2011) provides a concise example of how the incorrect use of forms, when perfecting a UCC, can have devastating consequences. The debtors in the jointly administered cases were R & J National Enterprises, Inc. (“R&J”), Avstar Fuel Systems, Inc. (“Avstar”) and Camtech Precision Manufacturing, Inc. (“Camtech”), collectively (“Debtors”). Through a series of finance agreements, the Debtors owed Regions Bank (“Regions”) $4,153,137.79 at the time of the bankruptcy filing. Regions claimed it was protected by a security interest that had been properly perfected.
Although Florida had an approved addendum for listing additional debtors, the attorney who prepared the UCC filings provided an affidavit that he did not use the approved form. Instead, the attorney listed Camtech and Avstar on a separate attachment. There was nothing noted in the additional debtor box of the UCC form referencing an attachment for additional debtor information. Because the approved addendum for additional debtors was not used and there was no indication on the UCC-1 form in the additional debtor box to review the attachment for other debtors, the court ruled that the security interests were, in fact, not perfected.
Failure to indicate other debtors on the approved addendum or to reference them on the unapproved attachment meant the UCC filings were not indexed properly and therefore determined by the court to be “seriously misleading.” It was deemed that Regions failed to have perfected its security interest in the assets of Camtech and Avstar, relegating the bank’s status to that of an unsecured creditor. Correct use of the approved form would have ensured that searches would have revealed the additional debtor names.
Although few states still require the use of a “paper” form, this seemingly minor error cost Regions $4,153,137.79. This case illustrates how a subtle deviation from the appropriate procedures in perfecting a security interest can eliminate the protections provided by the security interest in collateral. This type of mistake can be avoided simply by hiring experts to complete, review and file your UCC Financing Statements.