In re D&L Equipment: Michigan District Court Finds Successor Floor Plan Lender's Security Interest Perfected under UCC | Practical Law

In re D&L Equipment: Michigan District Court Finds Successor Floor Plan Lender's Security Interest Perfected under UCC | Practical Law

The District Court for the Eastern District of Michigan affirmed that a successor floor plan lender perfected its security interest in collateral, even though the collateral description in the original UCC-1 financing statement was not amended to reflect assets financed by the successor lender.

In re D&L Equipment: Michigan District Court Finds Successor Floor Plan Lender's Security Interest Perfected under UCC

by PLC Finance
Published on 19 Oct 2011 • USA (National/Federal)
The District Court for the Eastern District of Michigan affirmed that a successor floor plan lender perfected its security interest in collateral, even though the collateral description in the original UCC-1 financing statement was not amended to reflect assets financed by the successor lender.
In D&L Equipment Inc. v. Wells Fargo Equipment Finance, Inc., the US District Court for the Eastern District of Michigan affirmed that a successor lender had perfected its security interests in equipment and inventory financed under a floor plan financing, even though the collateral description in the original UCC-1 financing statement (UCC-1) only described assets financed by the predecessor lender and had not been amended to reflect assets financed by the successor lender.
The CIT Group/Equipment Financing, Inc. (CIT) originally provided commercial floor plan financing to D&L Equipment Inc. (D&L), enabling it to buy certain inventory and equipment. D&L granted CIT a security interest in any equipment and inventory acquired through the financing. CIT's UCC-1 described the collateral as "equipment and inventory financed by The CIT Group/Equipment Financing, Inc." Wells Fargo Equipment Finance, Inc. (Wells Fargo) subsequently purchased CIT's interest in the floor plan financing arrangement and filed a UCC-3 amendment identifying itself as the secured party, but failing to revise the collateral description to include itself as successor lender. A later UCC-3 continuation statement filed by Wells Fargo also failed to revise the collateral description, leaving the description as equipment and inventory "financed by [CIT]".
D&L argued that because the UCC-1 was never amended to reflect collateral financed by Wells Fargo, Wells Fargo had only perfected its security interest in the collateral initially financed by CIT, but not in the collateral later financed by Wells Fargo.
The District Court disagreed, noting that:
  • The UCC's system of "notice filing" requires only that the filing indicate to other parties that a further inquiry must be made to disclose the "complete state of affairs." In this case, the District Court reasoned that:
    • Wells Fargo had put other creditors on notice that it was now the secured party of record; and
    • the resulting inquiry by other creditors would have revealed that Wells Fargo was a successor lender to CIT under the CIT floor plan financing arrangement.
  • The UCC requirement that the collateral description "reasonably identify the collateral" is satisfied by referencing a type of collateral defined in the UCC (UCC § 9-108). Because the CIT UCC-1 referenced two UCC defined terms, "equipment" and "inventory", failure to further specify the particular items of equipment and inventory subject to the security interest did not invalidate CIT's and Wells Fargo's filings.
  • The qualifying language, "financed by [CIT]", did not specify which items of collateral were subject to the security interest in a way that would eliminate the need for further inquiry. Rather, it invited inquiry about which assets were covered.
  • Because the cumulative effect of CIT's and Wells Fargo's filings was to give notice to third parties that inventory obtained by D&L through a CIT/Wells Fargo floor plan financing arrangement may be subject to a security interest, the filings were not deficient because of the qualifying language.
  • Under UCC Section 9-506(1), a financing statement is effective, even with minor errors or omissions, provided it is not "seriously misleading". The District Court held that the defects in Wells Fargo's filings did not make the financing statements "seriously misleading" because:
    • the filings accurately identified the financing arrangement through which a security interest would arise, which would require an inquiry into whether Wells Fargo assumed a security interest in items financed by both CIT and Wells Fargo or just CIT alone;
    • the subsequent Wells Fargo filings further alerted third parties to include Wells Fargo in this inquiry; and
    • D&L's other secured creditors were not confused about which items were covered by CIT's and Wells Fargo's UCC filings.
While the District Court acknowledged that Wells Fargo could have avoided any possible confusion by amending the UCC-1, this omission did not automatically mean that its security interest was not perfected because the omission did not make the financing statement seriously misleading.
This decision highlights the factors a court may consider when determining the effectiveness of financing statements with respect to successor lenders. It suggests that while a court may find that a filing defect is not seriously misleading so as to render the financing statement ineffective, a successor creditor should be careful to amend all UCC financing statements relating to its security interest to prevent this type of litigation.
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