We financed an LLC’s bulk sale purchase of farm equipment inventory owned by a corporation and filed a blanket financing statement covering the LLC’s existing and later-acquired equipment. Within one month of the sale, a creditor of the corporation filed an amendment to its blanket lien, identifying the LLC as the debtor. After a bulk sale occurs, can the seller’s creditor maintain its lien position in the sold assets, and for how long can its priority be maintained as to future creditors who also file blanket financing statements on the same equipment?

Mar 11, 2019

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Farm Equipment Sold by the Corporation to Your Borrower (the LLC)

We believe that the original creditor can maintain its lien position in the sold farm equipment indefinitely, as long as it files continuation statements for its original financing statement (and provided that no intervening events cause its security interest to lapse — for example, if the original creditor files a termination statement). Because the original creditor did not authorize the sale of the farm equipment free of its security interest, it does not appear that your bank has a priority lien position in the sold farm equipment.

Generally, a blanket financing statement remains effective with respect to assets that are sold unless the original creditor who filed the financing statement authorized the sale free of its lien. In this case, ownership of the farm equipment changed from the original debtor (the corporation) to a new owner (the LLC), but the original creditor’s security interest remains perfected. Additionally, the sale of the farm equipment to the LLC made the LLC a “debtor” of the original creditor under the UCC — in other words, while the LLC was not the borrower, the original creditor now has a claim against the LLC as the purchaser of the collateral (the farm equipment). This is so even if the original creditor does not file an amendment to its financing statement adding the LLC’s name as a debtor.

The original creditor’s financing statement will remain effective for five years after the date of its filing, after which it must file continuation statements every five years. Thus, the original creditor can maintain its priority lien position with respect to the sold farm equipment unless and until it allows its secured interest to lapse, or agrees to subordinate or terminate its secured interest, or loses its perfection for other reasons (such as the debtor moving to a new jurisdiction and the creditor failing perfect its interest in the new jurisdiction).

After-Acquired Property of Your Borrower (the LLC)

The rules governing after-acquired property differ from the rules applicable to the sold farm equipment. As to that after-acquired property, generally your bank’s blanket financing statement should be effective to perfect its security interest in the LLC’s after-acquired property, provided that your bank maintains perfection by filing continuation statements every five years (and amends the financing statement as necessary if the LLC changes its name or moves to a different state, etc.).

However, it is possible that the original creditor could acquire a priority lien position even in the LLC’s after-acquired property if it meets certain conditions. For example, if your borrower signs a security agreement with the original creditor of the seller that covers after-acquired property, then the blanket financing statement that the original creditor filed could operate to perfect its security interest in your borrower’s after-acquired property. Also, if the purchase agreement between the corporation and your borrower provided that your borrower acquired substantially all of the corporation’s assets and became obligated generally for the corporation’s obligations, then again, the original creditor’s blanket financing statement would operate to perfect its security interest in the your borrower’s after-acquired property.

Without more facts, we do not know whether the original creditor has satisfied the conditions required for it to acquire a priority position in your borrower’s after-acquired property, and we recommend continuing your bank’s investigation if it wishes to rely on a priority lien position in such assets, if any.

For resources related to our guidance, please see:

UCC, 810 ILCS 5/9-507(a) (“A filed financing statement remains effective with respect to collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a security interest or agricultural lien continues, even if the secured party knows of or consents to the disposition.”)

UCC, 810 ILCS 5/9-315(a) (“Except as otherwise provided in this Article and in Section 2-403(2): (1) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien

UCC § 9-507, Comment 3 (“As a consequence of the disposition, the collateral may be owned by a person other than the debtor against whom the financing statement was filed. Under subsection (a), the secured party remains perfected even if it does not correct the public record. For this reason, any person seeking to determine whether a debtor owns collateral free of security interests must inquire as to the debtor’s source of title and, if circumstances seem to require it, search in the name of a former owner. Subsection (a) addresses only the sufficiency of the information contained in the financing statement. A disposition of collateral may result in loss of perfection for other reasons. See Section 9-316.”)

UCC, 810 ILCS 5/9-506(b) (“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.”)

UCC, 810 ILCS 5/9-102(a)(28) (“‘Debtor’ means: (A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor

UCC, 810 ILCS 5/9-507(c) (“If the name that a filed financing statement provides for a debtor becomes insufficient as the name of the debtor under Section 9-503(a) so that the financing statement becomes seriously misleading under Section 9-506:

(1) the financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four months after, the filed financing statement becomes seriously misleading; and

(2) the financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the filed financing statement becomes seriously misleading, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four months after the filed financing statement becomes seriously misleading.”)

UCC, 810 ILCS 5/9-515(a) (“Five-year effectiveness. Except as otherwise provided in subsections (b), (e), (f), and (g), a filed financing statement is effective for a period of five years after the date of filing.”)

UCC, 810 ILCS 5/9-515(e) (“Except as otherwise provided in Section 9-510, upon timely filing of a continuation statement, the effectiveness of the initial financing statement continues for a period of five years commencing on the day on which the financing statement would have become ineffective in the absence of the filing. Upon the expiration of the five-year period, the financing statement lapses in the same manner as provided in subsection (c), unless, before the lapse, another continuation statement is filed pursuant to subsection (d). Succeeding continuation statements may be filed in the same manner to continue the effectiveness of the initial financing statement.”)

UCC, 810 ILCS 5/9-316(a) (“A security interest perfected pursuant to the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) remains perfected until the earliest of: (1) the time perfection would have ceased under the law of that jurisdiction; (2) the expiration of four months after a change of the debtor’s location to another jurisdiction; or (3) the expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction.”)

UCC, 810 ILCS 5/9-508(a) (“Except as otherwise provided in this Section, a filed financing statement naming an original debtor is effective to perfect a security interest in collateral in which a new debtor has or acquires rights to the extent that the financing statement would have been effective had the original debtor acquired rights in the collateral.”)

UCC, 810 ILCS 5/9-203(d) (“A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this Article or by contract:

(1) the security agreement becomes effective to create a security interest in the person's property; or

(2) the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.”)

UCC § 9-508, Comment 3 (“Under certain circumstances, a new debtor becomes bound for purposes of this Article even though it would not be bound under other law. Under Section 9-203(d)(2), a new debtor becomes bound when, by contract or operation of other law, it (i) becomes obligated not only for the secured obligation but also generally for the obligations of the original debtor and (ii) acquires or succeeds to substantially all the assets of the original debtor. For example, some corporate laws provide that, when two corporations merge, the surviving corporation succeeds to the assets of its merger partner and ‘has all liabilities’ of both corporations. In the case where, for example, A Corp merges into B Corp (and A Corp ceases to exist), some people have questioned whether A Corp's grant of a security interest in its existing and after-acquired property becomes a “liability” of B Corp, such that B Corp's existing and after-acquired property becomes subject to a security interest in favor of A Corp's lender. Even if corporate law were to give a negative answer, under Section 9-203(d)(2), B Corp would become bound for purposes of Section 9-203(e) and this section. The “substantially all of the assets” requirement of Section 9-203(d)(2) excludes sureties and other secondary obligors as well as persons who become obligated through veil piercing and other non-successorship doctrines. In most cases, it will exclude successors to the assets and liabilities of a division of a debtor.”)

UCC, 810 ILCS 5/9-203(e) (“If a new debtor becomes bound as debtor by a security agreement entered into by another person:

(1) the agreement satisfies subsection (b)(3) with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement; and

(2) another agreement is not necessary to make a security interest in the property enforceable.”)

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