An “In Lieu” Continuation Statement Must Contain a Collateral Description to Be Valid
 
February 15, 2007
 
Michael Weissman - Chicago

A decision of an Illinois bankruptcy court pinpoints a problem with “in lieu” continuation statements. Indeed, it opens the door to attacks on these in lieu continuation by competing secured creditors, trustees in bankruptcy and Chapter 11 debtors-in-possession. In fact, such an attack has taken place with disastrous results for the secured creditor in In re Duesterhaus Fertilizer Inc., 2006 Bankr. LEXIS 1902 (C.D. Ill. August 28, 2006).

Although incorporated in Iowa, Duesterhaus had its principal of business in Illinois. It negotiated for, and obtained, a Small Business Administration guaranteed loan in 1994. In return, it granted a security interest in its accounts receivable, inventory and other assets, the usual “blanket lien.” A UCC-1 financing statement was filed with Illinois Secretary of State as mandated by the then-current version of Article 9 of the Uniform Commercial Code (UCC).

Later, Capital Crossing Bank succeeded to the position of the SBA-guaranteed lender. It filed a UCC-3 continuation statement in timely fashion in 1999.

Revised Article 9 became effective in both Illinois and Iowa on July 1, 2001, and provided for a five-year transition period for UCC filings that did not comply with the changed filing requirements.

In response to the enactment of Revised Article 9, Capital Crossing filed an in lieu continuation statement for the Duesterhaus loan in Iowa in 2002. Although the in lieu continuation statement contained a reference to the UCC financing statement filed in Illinois, it failed to comply with the requirements of Revised Article 9 because it did not set forth a description of the collateral.

As fate would have it, the debtor, Duesterhaus, experienced financial stress and filed a petition for relief under Chapter 11 of the Bankruptcy Code in 2005. In its capacity as debtor-in-possession, Duesterhaus challenged Capital Crossings’ security interest arguing its filing failed to comply with Revised Article 9’s requirements.

The court ruled in favor of Duesterhaus based on the absence of the required collateral description in the in lieu continuation statement.

 

What’s the point?

Secured parties that have filed in lieu continuation statements should check to see whether the statements contain a collateral description. If the statements don’t contain a collateral description, an entirely new UCC-1 should be filed in the correct jurisdiction. Filing an in lieu continuation statement would be fruitless because the transition period expired on June 30, 2006. It should be noted, however, that the priority of the security interest created by the new filing will only commence from the new filing date – it will have no retroactive effect.

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