Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX
ssather@bn-lawyers.com
In a lesson that the Uniform Commercial Code is not always uniform
between various states, the Fifth Circuit resolved a lien priority
dispute pertaining to a Texas debtor who brought agricultural products
in Oregon, Michigan and Tennessee. The opinion in a valuable primer
in choice of law issues in UCC cases as well as how failure to strictly
comply with state statutes can lead to loss of lien priority. Fishback Nursey, Incorporated v. PNC Bank, National Association, Case No. 18-10090 (5th Circuit 4/10/19).
What Happened
BFN Operations, LLC was a wholesale grower of trees, shrubs, and
other plants, with headquarters in Texas and offices in Michigan,
Oregon and Tennessee.
PNC held a blanket lien in the debtor's assets which pre-dated the claims of two vendors to the debtor, Fishback and Surface.
Fishback sold agricultural products to the debtor and filed UCCs in
Oregon, Michigan and Tennessee. It listed the debtor as BFN
Operations, LLC abn Zelenka Farms. It also filed a notice of lien in
Oregon.
Surface filed a UCC in Michigan using the name "BFN Operations, LLC abn Zelenka Farms.
When BFN filed chapter 11, PNC extended debtor-in-possession financing
which would outrank other liens "subject and junior only to . . . valid,
enforceable, properly perfected, and unavoidable pre-petition liens."
Fishback and Surface filed suit against PNC in the U.S. District Court
for the Northern District of Texas seeking a declaration that their
liens were superior to those of PNC.
The District Court ruled that applicable choice of law rules dictated
that the law of the states where the agricultural products were shipped
should govern the lien perfection and priority dispute. It then found
that PNC had the prior lien because Fishback and Surface had failed to
properly perfect.
The Court's Ruling
The first thing that the Fifth Circuit had to do was decide whether the
District Court correctly determined that the law of the states where the
agricultural products were shipped would apply. The Court noted that
choice of law could be applied based upon either the law of the forum
state or under federal choice-of-law rules. This is an open question
in the Fifth Circuit. The District Court found that it did not have to
pick a side because both answers pointed to the states where the ag
products were shipped. The Fifth Circuit agreed. Under the Texas
UCC, if farm products are located in a jurisdiction, the local law of
that jurisdiction applies to perfection, the effect of perfection and
the priority of an agricultural lien on farm products.
Tex.Bus.&Com. Code Sec. 9.302. Federal law relies on the
Restatement (Second) of Conflicts of Law Sec. 251(2) which provides that
absent "effective choice of law by the parties" the court should give
"greater weight . . . to the location of the chattel at the time that
the security interest attached."
Fishback argued that Oregon law should apply because its contracts
contained a choice of law provision selecting Oregon law. However,
those provisions were included in a contract between the Debtor and
Fishback. As a result, they were not binding on PNC.
Each of the laws of the forum states had some quirky provisions. In
Michigan and Tennessee, a UCC must be filed based on the debtor's name
exactly as it appears on the public documents creating the entity. In
this case, the company's legal name was BFN Operations, LLC, not BFN
Operations, LLC abn Zelenka Farms. This may seem like a trivial
distinction given that the name given was correct but added extra
verbiage. However, the Court found that it was "undisputed that, under
the strict search logics in these states, searching with BFN’s correct
name would not uncover the incorrectly named liens." While this seems
foolish, the states set out their search logic in regulations adopted
to implement the UCC and that search logic would not catch the longer
name.
Oregon was a different matter. Agricultural liens in Oregon are
automatically perfected until 45 days after the debt is due. After that
date, the party must file an extension supported by an affidavit.
Fishback did file an extension but it was not within the 45 day window
so that PNC's lien jumped in front of its. Fishback argued that its UCC
filing met the requirement for the affidavit, but the Fifth Circuit
found that it lacked the requisite information and would be misleading
as an affidavit.
Takeaways
As bankruptcy lawyers, we are usually called in after the filings have
been made and the lien perfection facts have been established.
Therefore, the biggest lesson for bankruptcy lawyers is that when
dealing with multi-state perfection issues, there may be room to look
for strategies to upset other parties' lien expectations.
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