An assigned security interest in substantially all of a debtor’s assets held by a creditor serving as an agent for a group of lenders was superior to competing interests claimed by loan participants, despite the fact that the creditor’s interest was assigned after the participants purchased their interests. Applying Delaware law, the U.S. Bankruptcy Court for the Eastern District of New York concluded that the creditor’s interest related back to a financing statement filed by the assignor with the Delaware Secretary of State in 2001.
The facts. The debtor, Oak Rock Financial, LLC, is a failed asset-based lending company which operated out of offices located in Bohemia, New York. In July 2001, the debtor entered into a security agreement (2001 security agreement) with Israel Discount Bank (IDB) and granted IDB a security interest in all of the debtor’s “personal and fixture property of every kind and nature…” The agreement also authorized IDB “at any time and from time to time to file in any Uniform Commercial Code jurisdiction any initial financing statement and amendments” that described the collateral “as all assets of the [Debtor] or words of similar effect.
The same month, a financing statement was filed with the Delaware Secretary of describing the collateral covered by the 2001 financing statement as:
All of Debtor’s now owned and hereafter acquired assets, including without limitation all accounts, goods, inventory, equipment, instruments, documents, chattel paper, deposit accounts, letter of credit rights, commercial tort claims, financial assets, securities, and all other investment property, general intangibles and all supporting obligations and products and proceeds of the foregoing.In May 2006, the debtor entered into two new agreements (2006 security agreement) to obtain a line of credit extended by an agented group of lenders, including IDB. The debtor granted to Israel Discount Bank of New York, as Administrative Agent (IDB as Agent), for the benefit of the represented lenders, a lien in the debtor’s accounts, bank accounts, chattel paper, documents, general intangibles, payment intangibles and other collateral described in the new security agreement. Two UCC financing statement amendments were filed that amended the name of the secured party of record from “Israel Discount Bank of New York” to “Israel Discount Bank of New York, as Administrative Agent” and assigning the 2001 financing statement from IDB to IDB as Agent. In 2011, a continuation statement was filed to extend the 2001 financing statement.
At some point prior to the 2006 assignment, North Mill Capital, LLC , Medallion Bank, and Medallion Financial Corp (collectively, the True Participants) purchased interests in specific loans of the debtor.
In April 2013, IDB and other lenders filed a petition for involuntary relief under Chapter 7 of the Bankruptcy Code against the debtor. In July 2013, an order was entered the sell the debtor’s interest in loan agreements to satisfy IDB as Agent’s lien. The True Participants objected to IDB as Agent’s lien.
Timing of perfection. Under Revised Article 9, as adopted by Delaware, loan participations are treated as secured transactions. Upon purchasing their interests in specific loans, the True Participants’ interests were automatically perfected under Section 9-309, without the need to file financing statements. Therefore, under applicable law, the True Participants were deemed to have a perfected lien with respect to the subject loans as of the effective date of each loan participation in question. Because IDB as Agent claimed to have a perfected lien on the same collateral, the court was called on to determine whether IDB as Agent had a prior perfected lien, and whether it lapsed at any point in time.
- IDB’s loan to the debtor was satisfied in 2006, and as a matter of law, the 2001 UCC financing statement was extinguished;
- the 2001 UCC financing statement became “seriously misleading” when it was assigned from IDB to IDB as Agent;
- the lien granted by the debtor to IDB in security agreements executed in 2001 and then in 2004 was never assigned to IDB as Agent, and
- the debtor and IDB as Agent relied on a different UCC financing statement filed in 2006 to perfect IDB as Agent’s lien on the debtor’s assets, which lapsed in 2011.
Relates back. The court concluded that under applicable Delaware UCC law, IDB as Agent’s perfected lien status relates back to the date the original financing statement was filed in July 2001, which did not lapse at any point pre-petition. IDB’s lien attached when the debtor granted a lien to IDB on substantially all of the debtor’s assets in 2001, pursuant to the 2001 security agreement. IDB as Agent’s security interest attached when the debtor granted it a lien in substantially all of the debtor’s assets in 2006, pursuant to the 2006 security agreement. As of 2006, IDB as Agent was listed as a “secured party” on a financing statement that was first filed in 2001, and it was undisputed that the 2001 financing statement never lapsed from 2001 through the petition date.
The 2001 financing statement put the public on notice that a third party may have a security interest in the debtor’s assets, wrote the court. Any third party, including the True Participants bore the burden of inquiry into the debtor’s true state of financial affairs, and so long as the 2001 financing statement remained of record, they were deemed to have assumed the risk of entering into any transaction with the debtor in the face of such financing statement, wrote the court.
Effect of assignment. In addition, the court concluded the assignment of the 2001 financing statement from IDB to IDB as Agent did not render the 2001 UCC financing statement “seriously misleading” because the descriptions of collateral in the 2006 security agreement granting the interests to IDB as Agent sufficiently matched the collateral identified in the 2001 financing statement.
“Any third party searching the public record would discover that the 2001 financing statement was assigned to IDB as Agent, and upon reviewing the operative documents, would discover that the debtor granted to IDB as Agent a security interest in substantially all of its assets in 2006,” wrote the court.
Filing prior to attachment. The court also held that the fact that IDB as Agent was not granted a security interest in the debtor’s assets until 2006 had no bearing on the date its lien was deemed perfected. Under Section 9-502, a financing statement may be filed prior to the grant of a security interest. Thus, the fact that the 2001 financing statement was originally filed for the benefit of IDB, and was filed approximately five years before the debtor granted a lien to IDB as Agent, did not affect its effectiveness under the Delaware UCC.
Utah provisions. Lastly, IDB as Agent was not required to take any additional steps to maintain its priority position over Medallion. Medallion’s purchase of loan participations from the debtor did not cause it to fit within the definition of a “debtor”—Medallion was a secured creditor with respect to the loans it purchased. Because Medallion was not a “debtor,” IDB as Agent’s lien status was unaffected by its failure to file any documentation with the Utah Secretary of State.
