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Secured Creditors Beware of Your Descriptions, Nomenclature and Terminations
Secured creditors can learn a great deal from a few recent bankruptcy cases involving the Uniform Commercial Code that remind us that the “devil is in the details.” These cases show that it is unrealistic to expect forgiveness by a court after a misstep involving Article 9 of the Uniform Commercial Code (UCC). Once a debtor files bankruptcy, Bankruptcy Code Section 544(a), also known as the “strong arm clause,” provides the trustee or the debtor the rights of a creditor with a judicial lien on the property of the debtor as of the date of the bankruptcy petition. See, Legislative History, Section 544(a).
The consequences of failing to be properly perfected can mean that the trustee or debtor in a bankruptcy case can convert the incorrectly perfected secured claim into a general unsecured claim. Knowing and abiding by the precise terms of Article 9 in your jurisdiction can make a huge difference in the treatment of a claim in a bankruptcy case.
Did You Adequately Describe All the Collateral?
As one bank learned recently, it is a huge mistake to diligently describe your collateral in your security agreement, leave that detailed description out of your financing statement, and then fail to attach the security agreement containing the description to your filed UCC-1.
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