On January 2, 2020, the US Bankruptcy Court for the Western District of North Carolina, in In re Jarvis, held that a secured party's security interests are not perfected by the UCC-1 financing statement (UCC-1) filed by its parent company ( (Bankr. W.D.N.C. Jan. 2, 2020)).

In October 2015, Jacob D. Jarvis (Jarvis) obtained a loan from Strategic Funding Source, Inc. (Strategic) and executed a related security agreement granting Strategic a security interest in his assets. Strategic filed a UCC-1 to perfect its security interest. The UCC-1 listed Strategic's representative, Corporation Services Company (CSC), as the secured party and did not reference any entities affiliated with the secured party. Further, the secured party representative services agreement between CSC and Strategic only listed Strategic as the customer. Jarvis repaid the balance of the 2015 Strategic loan in February 2016.

In February 2018, Jarvis obtained two additional loans from Money Works Direct, Inc. (Money Works). In connection with these loans, Money Works and Jarvis entered into separate security agreements which granted Money Works a security interest in assets of Jarvis. Money Works failed to:

In March 2019, Jarvis filed for bankruptcy under Chapter 13, and listed Money Works as holding an unsecured claim against the estate valued at $80,356.75. In May 2019, Kapitus Servicing, Inc. (servicing provider for Strategic) filed a proof of claim alleging its claim of $86,139.02 was a secured claim.

Strategic argued that filing a UCC-1 in 2018 was unnecessary because of the original 2015 UCC-1 between Strategic and Jarvis. Strategic and Money Works are part of an investment syndicate, and Money Works is a wholly-owned subsidiary of Strategic. Strategic invested the funds involved in the 2015 and 2018 transactions with Jarvis. Strategic claims that the secured parties were therefore all the same and that Strategic is actually the secured party under the 2018 Money Works security agreements. Strategic also argued that language in the Money Works security agreements referencing obligations owed to Money Works and its affiliates or funders supported its argument that Strategic was the secured party in this transaction. In addition, Strategic argued that it acted on its own behalf and as a representative of Money Works when it filed the UCC-1, so the Money Works security interests are perfected as a result of that UCC-1.

Both loan agreements between Jarvis and Money Works stipulate that disputes arising out of the agreements will be governed by the laws of Virginia. Under Virginia's Uniform Commercial Code (UCC), a security interest is subordinate to the rights of an individual who becomes a lien creditor before the perfection of the security interest (VA. Code Ann. § 8.9A-317(a)(2) (West 2013)). The trustee is granted the status of a hypothetical lien creditor in all of the debtor's property as of the date a debtor filed a bankruptcy petition. Consequently, if Money Works' security interests were not perfected by the petition date, the trustee's interest supersedes, and the Money Works claim would be treated as an unsecured claim.

The Court dismissed the argument that Strategic is the actual secured party under the Money Works security agreements and that Money Works' security interests were perfected by Strategic's UCC-1.

The Court held that the security agreements entered into by Jarvis in favor of Money Works only granted security interests to Money Works and not to Strategic. It referenced the case of In re Adirondack Timber Enter., Inc which involved similar security agreement language, and which held that "a security agreement executed solely between a debtor and creditor does not grant an affiliate of the creditor a security interest in the collateral" ( (Bankr. N.D.N.Y. Apr. 28, 2010)).

The Court held that Strategic did not receive security interests by virtue of the Money Works security agreements, and accordingly Strategic's UCC-1 cannot perfect Money Works’ security interests. Therefore, the Kapitus' claim was allowed only as a general unsecured claim.

The secured party tried many different arguments in this case to attempt to obtain perfected security interests. Ultimately it was unable to rely on an earlier filed UCC-1 in favor of a related party to perfect its security interests. The secured party should instead have filed its own UCC-1. Lenders should be conservative when considering whether to file. If there is any doubt, it should file more often than less.