22 COMPETITIONS FOR COLLATERAL - Trustees in Bankruptcy Against Secured Creditors: The Strong Arm Clause Flashcards
What is the strong arm clause?
Under §544(a) of the bankruptcy Code a trustee or DIP has the power to avoid most kinds of security interests that remain unperfected as of the time of filing of the bankruptcy case.
(a) What happens when a creditor has attachment but the financial statement that was filed omitted all the information required by UCC §9-516(b)(5) and a trustee/DIP moves to avoid a lien?
(b) How would this happen?
(a)
Under UCC §9-338 “If a security interest or agricultural lien is perfected by a filed financing statement providing information described in Section 9-516(b)(5) which is incorrect at the time the financing statement is filed” THEN the security interest is subordinate to (1) a perfected security interest in the collateral AND (2) a bonafide purchaser.
Therefore:
JLC< §9-338 SC < A9 P-SC.
*JLC needs BFP to beat it.
(b)
filing officer’s error; they should have rejected it. See UCC §9-520(a).
However, “[a] filed financing statement satisfying Section 9-502(a) and (b) is effective, even if the filing office is required to refuse to accept it for filing under subsection (a). However, Section 9-338 applies to a filed financing statement providing information described in Section 9-516(b)(5) which is incorrect at the time the financing statement is filed.” UCC §9-520(c).
How long is a filed financing statement generally effective for?
Subject to exceptions, it is effective for five years.
(a) When the filed financing statement is no longer effective, what must a secured creditor do to preserve its interest?
The creditor must file a continuation statement. See UCC §9-515(c).
What happens if a debtor has filed for bankruptcy and the creditor’s financing statement is or will no longer remain effective?
The creditor may still file a continuation statement because under BC §362(b)(3) “any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that the trustee’s rights and powers are subject to such perfection under 546(b)…” does not violate the automatic stay.
Can a creditor fill in the collateral description after a debtor files for bankruptcy?
Who would have priority in either event?
No; b/c doing so would be a violation of the automatic stay under BC §362(a)(4).
At the time debtor filed there was no attachment. UCC §9-203(b). And w/o attachment there is no perfection, so the creditor loses to a judicial lien creditor. UCC §9-317(a)(2).
What is the post-petition grace period for creditors to perfect their purchase money security interest in collateral?
20 day grace period.
20 days “if a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.” UCC §9-317(e).
What are two important considerations when analyzing whether a security interest is or may be perfected when the interest in collateral is for a vehicle?
(1) Uniform Vehicle Certificate of Title Act - 10 day grace period - no PMSI required.
(2) Under UCC §9-311 the filing of a financing statement is not necessary or effective to perfect a security interest in property subject to … a certificate-of-title statute of [the state] or regulations promulgated thereunder, to the extent such statute or regulations provide for a security interest to be indicated on the certificate as a condition or result of perfection;
Delivery of certificate of title to DMV (or certain state officials) would be sufficient to perfect a security interest.
What is the grace period for unperfected secured claims?
There is no grace period.
What section of the UCC covers the situation for when there is an error or omission on the secured creditor’s financing statement?
UCC §9-506.
What happens if the name of the debtor is misspelled on the financing statements in regards to the legal effect of the defect?
Depends whether the error or omission make the financing statement “seriously misleading.” If it is, the financing statement is ineffective against JLC and avoidable.
UCC §9-506.
(a) [Minor errors and omissions.]
A financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.
(b) [Financing statement seriously misleading.]
Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.
