“Responsive service and practical advice when you need it.”

Bulletin

Volume 6 Issue 4

April 2007

When Financing Statement Is Pre-Filed, Perfection Occurs Upon Execution of Security Agreement

 

                 The North Carolina Court of Appeals ruled earlier this year that if a security agreement is executed after a financing statement has been filed, perfection of the security interest will occur upon execution of the security agreement, as long as the same collateral is listed in both instruments.

 

             In Rentenchach Constructors, Inc. v. CM Partnership et. al., Lexington State Bank loaned money to Forsyth Drywall and Fireproofing LLC, secured by Forsyth’s inventory, accounts, equipment, and other collateral.  Lexington Bank filed its UCC financing statement on February 12, 1999.

 

             In 2001, United Capital Funding Corp. was interested in loaning money to Forsyth secured by some of Forsyth’s accounts receivable, but requested a “first lien position” before it would do so. On September 24, 2001, Lexington Bank filed an amendment to its financing statement, purporting to make a partial assignment to United Capital of its security interest in a certain amount of Forsyth’s accounts receivable.  On June 20, 2002 Forsyth entered into a factoring agreement with CM Partnership to finance all of Forsyth’s accounts receivable. CM advanced money to Forsyth, which Forsyth used to repay the United Capital loan.  Forsyth and CM had executed a security agreement, however CM did not file a UCC financing statement until January 2003.

 

             On June 26 2002, Lexington Bank extended a second loan to Forsyth, secured by the same collateral as the 1999 loan. The Bank perfected its security interest in this collateral by relying on its 1999 financing statement. In February 2003, United Capital executed a “reassignment” of the first lien position to Lexington Bank.  Forsyth later defaulted on its obligations to both Lexington Bank and CM, and filed a Chapter 7 bankruptcy petition in March 2003. Thereafter, Lexington Bank and CM each claimed a first priority, perfected security interest in a portion of Forsyth’s accounts receivable.

 

             Lexington Bank argued that it had priority in the account receivable because its June 2002 security interest related back to its 1999 financing statement.  CM conceded that it did not perfect its security interest until January 2003 but that Lexington Bank lost its perfected security interest in Forsyth’s accounts when it assigned its rights to United Capital.  The trial court ruled in favor of Lexington Bank and CM Appealed.

 

             To answer the question of priority, the North Carolina Court of Appeals found that under Article 9 of the Uniform Commercial Code, the “first party to perfect its security interest in