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Bulletin

Volume 6 Issue 5

May 2007

Financing Statement Alone is not Sufficient to Create a Security Interest.

 

A recent case in Minnesota highlights some problems associated with security agreements covering collateral in one specific location when the borrower operates in multiple locations.

 

Minnesota Power, Inc. negotiated an economic development loan with GEC Engineering, Inc. to develop a technology to convert diesel engines to run on cleaner-burning propane or natural gas. To secure the loan, GEC executed a security agreement granting Minnesota Power a security interest in all of its equipment and inventory located at GEC’s facility in Aurora, Minnesota. A financing statement was filed in Minnesota. The loan was conditioned upon GEC moving its base of operations from its current location in Missouri to the Minnesota facility by April 15, 2001. However, by this date, GEC had not moved to the Minnesota facility and was experiencing financial difficulties.  After learning of GEC’s financial problems, Minnesota Power then filed a financing statement in Missouri covering all equipment and inventory located at the Missouri facility, however it never amended the security agreement to identify the additional collateral located in Missouri. GEC never moved to the Minnesota facility, ceased operations, and defaulted on its loan from Minnesota Power.

 

At issue in this case is a diesel engine purchased by GEC in 1999. GEC purchased the Engine in Minnesota and shipped it to CK Engineering in Missouri. CK was commissioned by GEC to assist it in the testing and development of the engine.  However, GEC never paid CK for its services and abandoned the engine and other property at CK’s facility. To recover costs, CK sold the engine to Danielle Dellhomme. GEC served Dellhomme with a garnishment pleading in Minnesota and asked the District Court to require Dellhomme to surrender the engine. Dellhomme responded that Minnesota Power did not have a security interest in the engine. The District court agreed with Dellhomme and awarded summary judgment in her favor. Minnesota Power appealed.

 

The Court of Appeals affirmed the ruling of the District Court on the grounds that the security agreement executed by GEC did not create a security interest in the engine. The security agreement granted a security interest in equipment and inventory located at the Minnesota facility only, and did not reference any other facilities owned and operated by GEC. The Court ruled that filing a financing statement in Missouri covering all equipment and inventory located in the Missouri facility was not effective to amend the security agreement to cover any collateral located in that state. The Court noted that the purpose of a financing statement is to inform other potential creditors that there is a lien outstanding on particular collateral, not to amend a security agreement. The Court also noted that since the engine was never located in Minnesota, Minnesota Power could not have had a security interest in that particular engine.

 

This case demonstrates the confusion between financing statements and security agreements.  Filing and additional financing statement to include additional collateral is

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