A Lender Can Secure Priority of its Lien So Long as it Satisfies its Burden Under The UCC

By: Mark LoBiondo

St. John’s Law Student

American Bankruptcy Institute Law ReviewStaff

            In In Re8760 Service Group, a bankruptcy court in Missouri held that a bank’s lien had priority over a subsequent insurance company’s lien on all of a debtor’s assets including equipment that was bolted into the concrete floor of building on the site of the debtor's construction and fabrication business(“Blast Booth).”[1]The debtors in this case were 8760 Service Group, LLC (“8760”) and Pelham Property LLC (“Pelham,” together with 8760, the “Debtors”), two limited liability companies under the same ownership.[2] After debtor 8760 defaulted on its loan, a dispute arose between two creditors, Bancorpsouth Bank (“BCS”) and Hudson Insurance Company (“Hudson”), over 8760’s assets and the Blast Booth. The court held in favor of BCS regarding 8760’s assets because BCS’s collateral description of 8760’s assets in its financing statement was “sufficient to put Hudson on notice” of its lien.[3]The court also held in favor of BCS regarding the Blast Booth because the Blast Booth was a permanent fixture on Pelham’s real property and BCS held a deed of trust on Pelham’s real property.[4]8760 entered into multiple loans with BCS to fund its business[5]and in 2016, BCS filed two financing statements to perfect its lien, the second of which described the collateral as “all accounts receivable, inventory, equipment, and all business assets” located at 8760’s business address.[6]Thereafter, the Debtors issued bonds to Hudson that were secured by liens in all of its property.[7]Following the Debtors’ bankruptcy filing, BCS and Hudson filed complaints to determine the “validity, priority, and extent of the liens on 8760’s equipment and inventory.”[8]

            Under the Uniform Commercial Code (the “UCC”), a financing statement, which is a form filed by a creditor to give notice of its lien, is sufficient if it provides the names of the debtor and secured party and indicates the collateral covered.[9]Hudson’s chief contention was that BCS’s financing statement did not adequately indicate the collateral covered. Under the UCC, a financing statement may indicate the collateral covered if the statement provides that it covers all assets or personal property. The UCC further recognizes that errors or omissions in financing statements do not render them ineffective unless they are materially misleading.[10]The court held that BCS’s financing statement was not seriously misleading and was sufficient to put Hudson on notice because, although it could be interpreted in multiple ways, one interpretation of it could cover the collateral at issue. The court determined that “[t]he ‘and’ in the collateral description between “all Accounts Receivable, Inventory equipment” and ‘all business assets . . .’ could at least have given Hudson an indication that all assets were covered by a prior lien[.]” Accordingly, the court held the description was sufficient to shift the burden to Hudson to further inquire as to the extent of the prior lien. [11]

            The court further determined that BCS’s lien had priority on the Blast Booth.[12]As an initial matter, the court first had to determine whether Pelham or 8760 was the true owner of the Blast Booth.[13]Under the UCC, an owner possesses title to goods if it becomes a fixture on their property.[14]To determine if an item has become a fixture on the real property, such that an interest in the item arises, the three necessary elements are (1) annexation, (2) adaption, and (3) intent of the annexor.[15]The court held that Pelham satisfied each of these elements and accordingly, that Pelham was the true owner of the Blast Booth because it was bolted into the floor of the building and the building was designed specifically to incorporate it through the use of trenchers and augers.[16]Thus, because Pelham was the true owner of the Blast Booth and BCS had a priority lien pursuant to the deed of trust it held from Pelham, the court held that BCS’s lien took priority over Hudson’s.[17]

            The 8760 court’sdecision regarding BCS’s lien on 8760’s assets taking priority over Hudson’s lien was based on the notice standard set forth by the UCC for financing statements. The court held that because BCS’s collateral statement served the fundamental purpose of the UCC, in that it put subsequent creditors on notice that the property was encumbered, its lien took priority.[18]The 8760 court’s decision with respect to the Blast Booth was based mostly on the intentions of Pelham’s owner.[19]The court found that Pelham’s owner intended for the Blast Booth to be a permanent fixture because he bolted it into the ground and designed the building around it.[20]Accordingly, because Pelham’s owner intended for the Blast Booth to be a permanent fixture and BCS held a deed in trust over Pelham’s real property, BCS’s lien took priority.[21]