Banking & Finance Law Report

Archives: Lien Perfection

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Location is Not Everything When Perfecting a Security Interest

Most of us are familiar with that old saw “location, location, location”. While location might enhance the value of real estate, including the location as part of the collateral description in the UCC financing statement can limit the protections provided to a secured creditor and may provide a strategy for attack by a bankruptcy trustee.  First Niagara Bank learned this valuable lesson but only after spending substantial legal fees to protect a security interest where perfection should have been routine.

In the case of Ring v. First Niagara Bank, NA (In Re: Sterling United, Inc.),____F.3d ____, 2016 U.S. App. LEXIS 23009 (2d Cir. Dec. 22, 2016) (No. 15-4131-bk.), the Chapter 7 Bankruptcy Trustee for Sterling United, Inc., (“Debtor”) sued First Niagara Bank (“First Niagara”) asserting that First Niagara’s security interests in Debtor’s assets were avoidable under 11 U.S.C. § 547.  Under U.S.C. § 547(b)(4)(A), a trustee may avoid any “transfer of an interest of the debtor in property … made … on or within 90 days before the date of the filing of the petition” for bankruptcy, provided that those interests are not perfected security interests pursuant to 11 U.S.C. § 547(c)(3).…

Does your construction mortgage really protect you from mechanic’s liens?

If you are a lender/mortgagee and your borrower/mortgagor is adding more real property collateral to the mortgage (in Ohio), how do you retain your first priority position in all mortgaged property while adding that property to the mortgage? This question is especially relevant when the borrower is assembling property as part of a development. The answer may not be as simple as you think.

You could do an amended and restated mortgage, but that could be construed as replacing the original mortgage, which would cause the priority of the mortgage to be changed from the recording date of the original mortgage to the recording date the amended and restated mortgage. So, instead you could record an amendment or modification which adds property to the mortgage. Naturally you would include a provision that states that all of the original mortgage provisions continue in full force and effect. That should do it, right? Well, recently one Ohio Court said “no.”

In 2003, Bridgeview Crossing LLC (“BC”) began assembling properties for a commercial development. In 2006 BC signed a $24,000,000 Cognovit Note and granted an open-end construction mortgage (the “Original Mortgage”) in favor of its lender (the “Mortgagee”). There was evidence that Panzica …

Amendment to Agricultural Lien Law Reinforces Decision in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association

A recent change to Ohio’s agricultural lien law clarifies the interplay between security interests governed by Article 9 of the UCC and those governed by Ohio’s agricultural lien statutes, and confirms the ruling of the Sixth Appellate Court of Erie County in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association, 2013-Ohio-3061.

Central Erie Supply & Elevator Association (Central Erie) operated a grain elevator that it used to receive grain and other commodities from farmers (known as “claimants” under the statutory scheme) and sell the commodities to third parties. This made Central Erie an “agricultural commodity handler” under Ohio Revised Code Chapter 926. Pursuant to ORC § 926.021(C), the claimants who provided commodities to Central Erie retained a statutory lien on the commodities until they were paid.…

Lending Issues to Consider With Respect to The Perishable Agricultural Commodities Act of 1930

Secured lenders extending financial accommodations to borrowers whose collateral includes perishable food items should consider certain specific risks associated with such collateral. Notably, the Perishable Agricultural Commodities Act of 1930 (PACA) creates a statutory trust for the benefit of persons who originally sell the perishable agricultural commodities to such borrowers and are not paid. The PACA trust creates a tier of claims that “float above” the secured lenders’ priority interests in the perishable agricultural commodities. Thus, until all suppliers of perishable agricultural commodities to a borrower are paid in full, a secured lender’s security interests in the borrower’s collateral consisting of perishable agricultural commodities or the proceeds thereof are trumped by the sellers’ PACA claims. Types of borrowers whose collateral may be subject to these PACA statutory trusts include restaurants, grocery stores, or any other businesses that deal with perishable agricultural products.

The burden is on the borrower/PACA debtor (as opposed to the beneficiary of the PACA trust) to establish that the subject assets (including inventory and accounts receivable) are not PACA trust assets. See Sanzone-Palmisano C. V. M. Seaman Enterprises, 986 F.2d 1010 (6th Cir. 1993) (finding that the PACA debtor had the burden of proving the assets …

A Hypothetical in Agricultural Lending — Meet Farmer Bob, AgBank and Massive Grain Elevator

In this hypothetical, we will consider the following circumstances.

  • “Farmer Bob” grows wheat (i.e., crops)
  • “AgBank” has loaned Farmer Bob money secured in part by his wheat
  • “Massive Grain Elevator” wants to purchase Farmer Bob’s wheat

Can Massive buy the wheat and not get the shaft from AgBank? It depends. In 1985 Congress passed the Food Security Act; the provision 7 U.S.C. Section 1961, titled Protection for Purchasers of Farm Products (FSA), constitutes a wholesale preemption of the Uniform Commercial Code (UCC). UCC Revised Article 9-320(a) provides that:

“a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, take free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”

In addition, Official Comment 4 to 9-320(a) provides that:

“this section does not enable a buyer of farm products to take free of the security interest created by the seller … however, a buyer of farm products may take free of a security interest under Section 1324 of the Food Security Act of 1985, 7. U.S.C. Section 1631”

Meanwhile, FSA Section 1324 provides that notwithstanding …

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