In In re Printing Group, Inc. 2012 WL 2994841 (Bankr. W.D. N.C. 2012), employees of Bank of Granite Falls, North Carolina tried to revive a UCC filing that had been terminated in error. They relied on the advice given by employees of the Secretary of State’s office that was incorrect and, as a result, the bank lost its claim to the collateral securing $3.0 million of debt.
The case factsOn June 4, 1997, the Bank provided Hickory Printing Group, Inc. with a $3.0 million line of credit. The credit facility was secured by the grant of a security interest in Hickory’s accounts receivable and inventory. The Bank filed a UCC financing statement with the North Carolina Secretary of State on June 9, 1997. Periodically thereafter, the lien was renewed by the Bank until late in 2009.
In response to Hickory’s additional credit needs, the Bank provided Hickory with a $600,000 line of credit on October 22, 2008. It was secured by the same collateral that secured the $3.0 million line of credit. No additional UCC financing statement was filed because there already was one on file that had been renewed from time to time.
On October 28, 2008, Hickory paid off the $600,000 short-term loan. And, at that time, the Bank filed a UCC-3 termination statement that referred to the UCC filing made with respect to the $3.0 million credit facility. That was an error that was discovered in November 2009.
In November 2009, when Bank employees inquired at the office of the Secretary of State, they were told the error could be corrected and the erroneously terminated financing statement reinstated by the filing of a Correction Statement. So, they filed a Correction Statement on November 10, 2009. It proclaimed that the UCC termination statement had been filed “IN ERROR.”
Hickory later fell on hard times and had to file for bankruptcy protection. As is common in such cases, the trustee appointed for Hickory’s bankruptcy estate tried to set aside the Bank’s security interest. The court upheld the trustee’s position.
How did the court rule?The court ruled, quite properly, that a Correction Statement (now called an Information Statement) could not reinstate the original UCC filing because UCC Section 9-518(c) states that “the filing of a Correction Statement does not affect the effectiveness of an initial financing statement or other filed record.”
What’s the point?
The court adhered to the philosophy of the UCC that an error in the filing system, once made, cannot be eradicated. All that can be done is to call attention to it with an Information Statement. Finality reigns. The rationale is that if this were not the rule, subsequent secured parties extending credit on the basis of a search showing an earlier UCC filing to have been terminated, might be blindsided by a later revival of the earlier UCC filing.
Issues such as this can be easily avoided by working with an experienced service provider. In that event, the bank employees would have been advised of the failure of the Correction Statement to revive the terminated UCC filing, the need for a UCC search to see if other secured parties had filed after the termination statement (and the need to seek a subordination from them), and the need to immediately file a UCC financing statement to place the Bank back in the line of claimants to Hickory’s assets.
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This piece is authored by Michael Weissman, Of Counsel at Levin Ginsburg
Michael L. Weissman is an attorney in Chicago who has served as Executive Vice President and General Counsel of a banking group, as an adjunct professor at a law school, as a FINRA arbitrator, as an educational trainer in the United States and overseas, as chairman of a leading legal educational organization in Illinois, and as an expert witness in commercial lending cases. Weissman is a winner of the 2018 Addis Hull Award of the Illinois Institute for Continuing Legal Education for speaking, writing, and governance. He serves as a consultant to Wolters Kluwer Lien Solutions and The Risk Management Association.