UCC Priorities Established Under Old Article 9 Retain the Same Status Under Revised Article 9
 
December 22, 2004
 
Michael Weissman - Chicago

In InterBusiness Bank, N.A. v. First National Bank of Mifflintown, 318 F.Supp. 2d 230 (M.D. Penna. 2004), the Court dealt with certain aspects of the interface between Old Article 9 of the Uniform Commercial Code (UCC) and Revised Article 9.

These were the facts. Allied Capital (Allied) made a $1 million loan to Annlick Farm Supply in December 2000. The loan was secured by a mortgage on Annlick’s real estate and a security interest in Annlick’s accounts, inventory, equipment and other property. The mortgage and the security agreement were executed on December 22, 2000. Allied filed UCC financing statements covering all of Annlick’s property, tangible and intangible, now owned or hereafter acquired including all goods, furniture, fixtures, tools, supplies and other tangible personal property centrally and locally in January and February 2001.

Allied made a second loan to Annlick soon thereafter for $1.25 million. Another security agreement was executed granting Allied a security interest in Annlick’s inventory and accounts. A UCC financing statement was filed covering all tangible and intangible property of Annlick now owned or hereafter acquired including all inventory of every kind, nature and description and all accounts, accounts receivable and contract rights. This financing statement was also filed centrally and locally but subsequent to the filing of Allied’s first financing statement.

Then things became more complicated.

In April 2001, Allied assigned its second financing statement to First National but retained an interest in the loan agreement and security agreement. A revolving line of credit of $500,000 (later increased to $700,000) was extended by First National to Annlick in May 2001 and a security agreement was executed giving First National a security interest in all of Annlick’s inventory and accounts.

On July 30, 2001, Allied assigned all of its interest in the first loan to InterBusiness including the loan agreement, mortgage, security agreement and financing statement.

Annlick defaulted on its First National obligation in July 2002 and First National collected Annlick’s accounts and liquidated Annlick’s inventory realizing $450,000.

Other creditors of Annlick filed an involuntary bankruptcy against Annlick in October 2002. In that proceeding, InterBusiness moved for relief from the automatic stay and the stay order was vacated. InterBusiness pursued its remedies under Pennsylvania law, ultimately purchasing Annlick’s real estate by bidding in Annlick’s debt.

On December 12, 2003, InterBusiness sued First National claiming that its security interest was superior to First National’s and demanding the proceeds from the liquidation of Annlick’s assets. First National then filed a third-party complaint against Allied based on Allied’s assurances that First National had a first priority position by reason of the assignment of the second financing statement. Allied then asserted that InterBusiness did not have a perfected security interest in the inventory and accounts of Annlick. InterBusiness responded that it did.

The Court began its opinion with a review of some very basic Article 9 concepts and then said: “From this relatively simple outline emerges a host of intricate issues with respect to the existence and priority of the conflicting claims of InterBusiness and First National in the inventory and accounts receivable of Annlick Farms.” Among the issues was the impact of the adoption of Revised Article 9 in Pennsylvania and its effective date of July 1, 2001.

The Court noted that Section 9-709 of Revised Article 9 recognizes that if the priority of conflicting security interests was established prior to July 1, 2001, all priority issues were to be resolved under Old Article 9. But first, said the Court, it was necessary to determine whether the security interests had indeed been perfected under Old Article 9 and what priority they enjoyed.

The Court said that the security interest assigned to InterBusiness was duly perfected in February 2001. It also said that when First National made a loan to Annlick in May 2001, First National’s security interest was perfected noting that it was immaterial that First National initially received a “bare” financing statement, without assignment of Allied’s second loan and security agreements.

Both parties having perfected prior to July 1, 2001, it was Old Article 9 that determined priority. And the advent of Revised Article 9 did not change the priorities. InterBusiness had first position.

The next issue was whether InterBusiness could claim a security interest in the inventory and accounts receivable of Annlick based on the reference to “goods” and “accounts” in its financing statement. The Court held that InterBusiness did have a perfected security interest in the inventory and accounts receivable of Annlick because the UCC definition of “goods” includes inventory and “accounts” was adequate to describe ordinary commercial accounts receivable.

But having won that battle, InterBusiness lost the war. The Court said that when InterBusiness purchased Annlick’s real estate at a sheriff’s sale by bidding in its debt, it had an obligation to file a petition showing the amount of the debt satisfied by the purchase and the amount of the debt remaining unsatisfied. It failed to do so. And Pennsylvania law gave rise to irrebuttable presumption that a creditor has been paid in full if the petition to fix value is not filed within six months after the sale. InterBusiness was held to have no debt on which to base enforcement of its security interest.

What’s the point? The priority of a security interest perfected under Old Article 9 is preserved under Revised Article 9 provided that perfection was achieved under Old Article 9.

For more information e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.