Magazine article Business Credit

If a Financing Statement Is Seriously Misleading, a Security Interest in After-Acquired Inventory Is Jeopardized If the Account Debtor Declares Bankruptcy

Magazine article Business Credit

If a Financing Statement Is Seriously Misleading, a Security Interest in After-Acquired Inventory Is Jeopardized If the Account Debtor Declares Bankruptcy

Article excerpt

Under 11 U.S. C. 544(a)(1), a bankruptcy trustee has the rights of a hypothetical lien creditor as of the date of the filing of the bankruptcy petition. The rights of a lien creditor are determined pursuant to state law. See In re Kors, Inc., 819 F.2d 19, 22-23 (2d Cir 1987). Under California's version of the Uniform Commercial Code, a lien creditor has priority over an unperfected, though secured, creditor. in the bankruptcy context, therefore, the creditor is reduced to the status of an unsecured creditor if its security interest in collateral is not perfected.

A determination of whether the name of a debtor on a financing statement is seriously misleading is to be made on a case-by-case basis.There is plentiful case law which interprets UCC 9-402 to determine when a financing statement has become seriously misleading. See e.g., In re Gibson's Discount Pharmacy of Bristol, Tennessee, Inc., 15 UCC Rep. Serv. 233 (E.D. Tenn. 1974) The financing statement is in the name of Gibco Discount Drugs, Inc. …

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