Lien Portfolio Transparency Can Identify Filing Errors Before They Cost You

By Sheetal Kamani and Michael L. Weissman


When a creditor, whose debtor filed for bankruptcy relief, sought adequate protection payments as a secured creditor, his status as a secured creditor was challenged by an Official Committee of Unsecured Creditors. Based upon filing errors he had committed, he was declared an unsecured creditor of the estate.  Official Committee of Unsecured Creditors of Rancher’s Legacy Meat Co. v. Ratliff, 616 B.R. 532 (Bankr. D. Minn. March 23, 2020).

James Ratliff and Joseph Unger started Unger Meat Company in 2010.  Ratliff provided startup funds to the new company lending $11,885,000 on December 3, 2010 evidenced by a promissory note in that amount, and $2,250,000 on that same date evidenced by a second promissory note.  To secure the notes, Ratcliff was granted a security interest in Unger’s equipment, inventory, accounts receivable, furniture and fixtures, whether then owned or thereafter acquired.

Ratliff perfected his security interest by filing a UCC-1 financing statement with the Minnesota Secretary of State’s office on December 29, 2010.  On January 24, 2011 Ratliff filed a UCC-3 Statement in Minnesota amending the original filing. The opinion does not say why.

Due to operating losses, Unger’s shareholders sold their shares on January 22, 2014.  And on May 6, 2014 the name of the company was changed to Rancher’s Legacy Meat Co.

Ratliff’s UCC filing lapsed on September 9, 2014 since he had done nothing in response to the change of corporate name. He had four months within which to amend his original filing to reflect the name change. On November 12, 2015 he filed a UCC-3 Amendment listing the debtor’s name as “Unger Meat Company.”  And on January 10, 2019 Ratliff filed a UCC-3 Amendment this time listing the name of the debtor as “Rancher’s Legacy Meat Co.”

 In 2019 Ratliff initiated collection of the two promissory notes. That precipitated a Chapter 11 voluntary petition by Rancher’s Legacy on September 20, 2019.  In the bankruptcy case, Ratliff contended he should receive adequate protection payments of $14,300 per month. But that depended on whether he could establish he was a secured creditor of the estate.

Ratliff’s position was that even though his original filing lapsed, his subsequent filings in 2015 and 2019 had revived the original filing and had re-perfected his secured position. He conceded only that he did not have a perfected security interest in collateral that arose between September 9, 2014 (the date of lapse) and November 12, 2015 (the date of the first UCC-3 filing).

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The Committee argued that Ratliff had chosen the wrong course. He should have filed a new UCC-1 if

he wished to reinstate his previously-perfected security interest.  When he filed the two UCC-3 Continuation Statements he was attempting to continue a security interest that no longer existed,

it had lapsed. Ergo, as of the date of bankruptcy, he was an unsecured creditor and was not entitled to adequate protection payments.  The court agreed.

The court noted Section 9-507(c) of the Minnesota Uniform Commercial Code that provides that a change of the debtor’s name makes a previously-filed UCC financing statement seriously misleading and grants the secured party four months in which to file a correcting amendment.  There was no question that Ratliff had not complied.

The court went on to say that the UCC also stipulates that once a security interest becomes unperfected, it is deemed never to have been perfected. But the court observed that lack of perfection did not mean that, as between Ratliff and Rancher’s Legacy Meat Co., Ratliff’s security interest had evaporated. It was still in effect between them. But since it was unperfected, it was at risk of being subordinated to secured creditors claiming the same collateral who properly perfected their position.

Reinforcing its position, the court noted: “…a UCC-3 Continuation Statement is designed to amend a UCC-1 Financing Statement;  it is not designed to stand on its own or operate as a UCC-1.” 

As to Ratliff’s argument that the later filings served to “connect the dots,” the court remarked:

“The first UCC-3 Continuation Statement that Ratliff filed listed “Unger Meat Company” as the debtor’s name, even though the debtor’s name had been changed to ‘Rancher’s Legacy Meat Co.’ more than 14 months prior. Another three years after the first UCC-3. Continuation Statement was filed, Ratliff filed the second UCC-3 Amendment wherein the was changed to ‘Rancher’s Legacy Meat Co’ in an attempt to rectify this issue. The Court cannot find that this series of actions was enough to ‘connect the dots’ and to properly perfect a document rendered ‘seriously misleading’ by operation of the plain language of the UCC.  If for no other reason, this would be dubious because it would essentially authorize one ‘seriously misleading’ document to be rectified with yet another ‘seriously misleading’ document….”

And as the final nail in the coffin for Ratliff’s argument, the court said: “From the moment Ratliff’s interests became unperfected, by operation of law he became—and remained when this bankruptcy case was filed—an unsecured creditor.  He therefore does not have an enforceable security interest and is an unsecured creditor.”

What’s the point?

This case points out the critical importance of familiarity with subsequent events that can make a UCC filing seriously misleading, what to do to avoid its characterization as seriously misleading, and within what time period, so as to prevent later continuation statements to be ineffective and cause the supposed secured creditor to be deemed unsecured.

Partnering with a lien service provider can help you avoid the kind of error that occurred in this case. You should look for a service provider that offers intelligent, automated tools, like debtor monitoring, to catch status events like a name change when they occur so lenders can maintain perfection. A monitoring tool like that could have prevented Ratliff’s loss.

Whether you’re juggling tasks, spread thin or just need guidance, Lien Solutions is here to help. Our comprehensive solutions, automated processes, and outsourcing services help you to maintain perfection, fill gaps in staffing, and reduce risk. These industry-leading products and services help you give your lien management stability under any circumstances.

Call us to discuss your unique situation and let us show you how lenders can utilize lien management to mitigate risk, and challenges that come your way. Call us today at (800) 833-5778 or visit liensolutions.com.

About the authors
Sheetal Kamani is Wolters Kluwer Lien Solutions Director of Product Management.

She leads a team responsible for development and positioning of UCC search, file, and management products and their supporting documentation, sales training programs, and service offerings. In addition, she oversees competitive and market intelligence initiatives.

Prior to joining Wolters Kluwer, Sheetal was an independent marketing consultant leading companies through the definition and development of new products, customer segmentation and marketing planning.

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 US and overseas, and as chairman of the leading legal educational organization in Illinois.

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About the Author

Sheetal Kamani is Wolters Kluwer Lien Solutions Director of Product Management. She leads a team responsible for development and positioning of UCC search, file, and management products and their supporting documentation, sales training programs, and service offerings. In addition, she oversees competitive and market intelligence initiatives.

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 US and overseas, and as chairman of the leading legal educational organization in Illinois.