Page Title

Text Box: collateral by filing a UCC financing statement generally will have priority over subsequent lenders who rely on the same collateral to secure the loan.” The Court stressed that a financing statement may be filed before the security agreement is drafted. In such a case, a security interest is perfected when the security agreement is executed, assuming all of the applicable requirements have been met. The Court also noted that the financing statement is effective for five years, during which time it may be relied on to perfect multiple security interests, including those that attach after the filing of the financing statement. In this case, the Court of Appeals held that Lexington Bank’s security interest became perfected when the Bank and Forsyth executed a security agreement in June 2002 listing the accounts receivable as collateral. Since CM did not perfect its security interest until the following year, Lexington Bank’s security interest had priority over CM’s. The Court further held that the financing statement amendment purporting to assign Lexington Bank’s security interest to United Capital had no effect because a security interest cannot be transferred unless the underlying debt is also assigned. This case reminds us of the importance of obtaining lien searches prior to advancing any sums to a debtor to determine priority in the collateral pledged. In addition, there may be situations when it is advantageous to record a financing statement prior to closing a loan. Please contact us to discuss the proper procedures for prefiling financing statements. The case is cited as Rentenchach Constructors, Inc. v. CM Partnership et. al., No. COA06-242 (N.C. Ct. App. 01/02/07) Lender Can Pursue Prepayment Premium After Default In January, the U.S. District Court, Southern District of Ohio, found that a lender did not breach a contract when it imposed prepayment penalties on a defaulted loan. In 2002 Chillicothe Telephone Company entered into two loan agreements with Variable Annuity Life Insurance Company and Modern Woodmen of America in order to borrow $42 million. Included in the terms of the agreements were provisions that required Chillicothe to (1) maintain a certain net worth (approximately $30 million) and (2) have minimum total debt. If Chillicothe defaulted on either of these covenants the lenders could, at their option and after written notice was sent, accelerate the loan and assess a prepayment premium as a penalty. In 2004 Chillicothe transitioned from a publicly-owned company to a privately-owned company. Chillicothe and the lenders amended the note agreements in order to permit Chillicothe to remain in compliance with the covenants regarding total net worth and minimum debt. Unfortunately for Chillicothe, the cost associated with the transfer from public to private was more than twice the original estimate and caused the company to be in violation of the amended covenants regarding both total net worth and minimum debt. Variable and Woodmen demanded that Chillicothe obtain new financing to pay off the principal balance of the loan as well as the amount needed for the prepayment premium. In July 2005 Chillicothe obtained replacement financing and attempted to pay off the principal balance of the loan but not the prepayment premium. The payment was rejected by the lenders. In October 2005 Chillicothe tendered total payment to the lenders, including the prepayment premium and filed suit against the lenders for recovery of the prepayment premium. Chillicothe asserted that the lenders (1) imposed an improper penalty, (2) breached the loan