By Paul Hodnefield, Esq.
Financing statement collateral descriptions often contain text that some searchers might find confusing, contradictory, or ambiguous. This is especially the case when a statement in the collateral description suggests that the record was filed for a purpose other than to perfect a security interest. A court recently determined the effect of such collateral language in the recent case of Winfield Solutions, LLC. v. Success Grain, Inc., 2018 U.S. Dist. LEXIS 55684 (E.D. Ark. Apr. 2, 2018).
Success Grain, Inc. (the “Debtor”) was engaged in the business of selling crop seed, fertilizer, and similar goods to farmers in Arkansas. In 2007, the Debtor entered into a financing transaction with Farm Credit Midsouth PCA (“Farm Credit”). To secure the obligation, the Debtor granted Farm Credit security interests in certain assets. Farm Credit perfected its security interests by filing a financing statement with the Arkansas Secretary of State on June 28, 2007.
The Farm Credit financing statement collateral description was quite extensive and covered all accounts, inventory, fixtures, and equipment. At the end of the collateral description, Farm Credit included the following statement: “THIS FILING FILED AS AG LIEN.” Farm Credit did not check the “AG LIEN” box in the Alternate Designations section of the UCC record.
Less than a month after Farm Credit filed its financing statement, the Debtor entered into a financing arrangement with United Suppliers. To secure the loan, the Debtor granted United Suppliers security interests in the Debtor’s equipment, farm products, and inventory. United Suppliers perfected its security interests by filing a financing statement with the Arkansas Secretary of State on July 18, 2007. United Suppliers later merged with Winfield Solutions, Inc. (“Winfield”) and Winfield became United Suppliers’ successor in interest.
A few years later, the Debtor sold its equipment at auction. Winfield brought suit against the Debtor to enforce its security interest against the proceeds of the equipment sale. However, Farm Credit objected, claiming that it held the priority security interest and was entitled to the proceeds. Farm Credit argued that its financing statement was filed before Winfield filed its financing statement and therefore Farm Credit held the superior interest under the Article 9 priority rules.
Winfield disputed Farm Credit’s claim on the grounds that the “AG LIEN” indication rendered the financing statement seriously misleading. Therefore, Farm Credit’s security interest was subordinate to Winfield’s. Both parties then moved for summary judgment on which held the priority security interest in the proceeds.
The sole issue the court faced to resolve the competing motions for summary judgment was whether Farm Credit’s collateral statement was sufficient with the “AG LIEN” language. Winfield made no argument that the Farm Credit’s financing statement was otherwise incorrect.
The court first determined that the Farm Credit financing statement fulfilled the intended purpose of providing notice to third party creditors. In this case, the court observed, a third party searcher looking for security interests filed under the Debtor’s name would have found Farm Credit’s financing statement.
Next, the court looked at what effect the inclusion of “THIS FILING FILED AS AG LIEN” had on the record. An agricultural lien means an interest in farm products. “Equipment,” as defined by UCC Article 9, cannot be farm products. Based on the applicable definitions, the court determined that a financing statement covering equipment cannot be an agricultural lien. The result is that the added text created an ambiguity.
The court then addressed the effect of such an ambiguity. It began by noting that an ambiguous statement is not the same as a seriously misleading statement. Citing prior case law, the court reasoned that the UCC places the burden on those who search the UCC record to act diligently. That requires interested parties to conduct further inquiry beyond the financing statement. In this case, a third party creditor could have easily resolved the ambiguity by contacting either the Debtor or listed secured party. Consequently, the court held that the “AG LIEN” indication did not render Farm Credit’s financing statement seriously misleading.
The takeaway from this case is that those who search the UCC records cannot assume that ambiguities in a collateral statement or elsewhere on the record will render the financing statement seriously misleading. The courts will determine the effect of any ambiguity long after it is too late for the parties involved to change the outcome. Therefore, searchers must contact the parties involved to resolve any ambiguities in the record.
Paul Hodnefield is associate general counsel for CSC® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.