Collateral Descriptions & Interpreting “And All” – With a Dab of Fixture Filings
The U.S. Bankruptcy Court in Missouri recently determined a creditor’s priority in collateral at one address and priority in a blast booth installed on another property, based on the creditor’s properly perfected security interest. Bonus? The Court also reviewed whether a blast booth meets the 3 parameters of a fixture.
Parties Involved & a Bit of Background
To make it a bit easier to understand a somewhat confusing case, here’s a breakdown of the parties involved:
- Primary Lender: Bancorpsouth Banc (BB)
- Debtor 1: 8760 Service Group, LLC (8760), sole managing member is Buck Barnes
- Debtor 2: Pelham Property, LLC (Pelham), sole managing member is 8760
- Surety issued performance & payment bonds to 8760: Hudson Insurance Company (Hudson)
- Bankruptcy Trustee (Trustee)
BB was the primary lender for debtors 8760 and Pelham. According to the Court, Pelham was the obligor on the loan from BB, and 8760 was the guarantor. In consideration for the loan, debtors granted BB a security interest in inventory, equipment and A/R. BB filed a UCC to perfect its security interest. The initial UCC was filed in 2014, and a subsequent amendment was filed in 2015.
Hudson issued a performance & payment bond for 8760, and as collateral for the bonds, 8760 granted a security interest in its inventory, equipment and A/R. Hudson filed a UCC to perfect its security interest in 2017.
Both creditors, BB in 2015 & Hudson in 2017, were granted a security interest in the debtor’s inventory, equipment and A/R. So, who has priority? Based simply on “first in time, first in right,” BB would have priority. However, if BB’s collateral description makes its UCC seriously misleading, Hudson jumps to the front of the line.
BB’s Collateral Description, too Vague?
The primary issue was whether BB’s collateral description was sufficient, or if its UCC was seriously misleading. Hudson, 8760 and Pelham argued that because BB’s collateral description included a street address, it was restricted to only collateral located at that address.
Collateral Description from 2015 UCC:
“All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301.”
and included an additional page with:
“the above collateral, whether now owned or hereafter acquired, together with all supporting obligations, proceeds, products, software, accessories and accessions, including, but not limited to the items listed…”
As you can see, the collateral description includes a street address. What you may not see, and I admittedly did not see initially, is the collateral description can be interpreted one of two ways, depending on how you understand the words “and” and “all.”
Hudson argued the collateral description was limited to A/R, inventory, equipment and business assets ONLY located at 1803 W. Main Street.
Whereas, BB argued the collateral description included ALL accounts receivable, inventory, equipment AND ALL business assets located 1803 W. Main Street.
Fortunately for BB, the court was persuaded by its argument. BB’s collateral description should have prompted Hudson to further investigate, when Hudson went to file its UCC 2 years after BB.
“The ‘and’ in the collateral description between ‘[a]ll Accounts Receivable, Inventory, equipment’ and ‘all business assets, located at 1803 W. Main Street, Sedalia, MO 65301’ could at least have given Hudson an indication that all assets were covered by a prior lien and cause it to inquire into the collateral description contained in the security agreement.”
The result? BB has priority.
“Thus, [BB’s] collateral description in the financing statement was not seriously misleading and was sufficient to put Hudson on notice that it should inquire into the extent of [BB’s] lien. Because [BB] indisputably filed prior to Hudson, it holds a first priority security interest in 8760’s non-office equipment and inventory.”
Blast Booth Bonus: is it a Fixture?
8760/Pelham’s assets included a blast booth. Hudson argued the booth should be considered equipment and not a fixture. While the argument is moot because BB has already been granted priority in all assets, the court did review whether the booth is equipment or fixture.
In its opinion, the court cites the 3 requirements, set forth by Missouri Supreme Court, an item must meet to be deemed a fixture: annexation, adaption, and intent of the annexor.
The court advised an item is annexed if it is, in some way, physically attached to the real property. Adaptation exists, if the building was designed specifically to accommodate the item or if the “alleged fixture was necessary for the particular use to which the premises are devoted.” And lastly, intent of the annexor, is whether the intention existed for the item to become an integral part of the real property.
“[T]he Blast Booth was bolted into the concrete floor of the 5105 Pelham Drive building and the building was specifically designed to incorporate the Blast Booth by installing special trenches for augers in the concrete floor. He testified that if the Blast Booth was removed the trenches would have to be covered or filled with concrete and the bolts would have to be cut off flush with the floor and driven down into the concrete floor to repair the area where the Blast Booth was located. Further, he testified that when Debtors installed the Blast Booth in the building he did not intend for the Blast Booth to ever be removed.”
Therefore, the blast booth met the parameters: it was affixed to the property, the building was built to accommodate it, there was no intention for it to be removed.
Blasting Booth = Fixture
Note: This case was rather interesting, and it wasn’t limited to the items discussed above. You can read the full text here: IN RE 8760 SERVICE GROUP, LLC, Bankr. Court, WD Missouri 2018