Monthly Archives:' June 2018

Using the Debtor's Correct Name

According to a recent Indiana bankruptcy case, In re Nay, 563 B.R. 535 (S.D. Ind. 2017), missing one letter in a debtor’s name on a financing statement may alter a creditor’s secured status. In the case, MainSource Bank perfected a blanket security interest in Ronald Markt Nay (“Ronald”) and Sherry Nay’s (“Sherry”) assets, including, without limitation, farm equipment, by filing a financing statement with the Indiana Secretary of State. Subsequently, LEAF Capital Funding, LLC (“LEAF”) obtained purchase-money security interests in two pieces of Ronald and Sherry’s farm equipment (“PMSI Equipment”) which LEAF perfected by filing financing statements with the Indiana Secretary of State.

Sometime thereafter, Ronald and Sherry filed for Chapter 11 bankruptcy, and a priority dispute between MainSource and LEAF ensued. MainSource argued it had first-priority over all farm equipment, including, without limitation, the PMSI Equipment, because LEAF failed to correctly identify the debtor’s name on its financing statements. LEAF had incorrectly listed the debtor as “Ronald Mark Nay” instead of “Ronald Markt Nay”.

Under IC § 26-1-9.1-506, a financing statement is effective even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. Further, a financing statement that fails to sufficiently provide the name of the debtor in accordance with IC § 26-1-9.1-503(a) is seriously misleading. IC § 26-1-9.1-503(a)(4) specifically states that if the debtor is an individual with an unexpired driver’s license, a financing statement sufficiently provides the name of the debtor only if the financing statement provides the name of the individual which is indicated on the driver’s license. (Emphasis added).

The court found that LEAF’s failure to use the exact name shown on Ronald’s driver’s license in the financing statements (though likely inadvertent) was seriously misleading because it failed to comply with the Indiana statute which specifically requires the use of the name on an individual’s driver’s license.

This case demonstrates the importance of correctly identifying the debtor in a financing statement, as even the smallest of errors can leave a lender unperfected. For more information regarding financing statements or other lending matters, please contact Timothy Hurlbut at thurlbut@dblaw.com.

Questioning the "Legal Limit" of Alcohol Licenses as Collateral

An alcohol permit is a liquor store owner’s most valuable asset. This begs the question: why can’t creditors take an enforceable security interest in an alcohol license?

Article 9 of the Uniform Commercial Code (“UCC”) governs the creation of security interests in personal property. Some states have enacted statutes which view alcohol licenses as a privilege rather than a property right. In Indiana, the general rule is that a permittee has no property rights in an alcohol permit. IC § 7.1-3-1-2. The court in Matter of Eagles Nest, Inc., 57 B.R. 337, 341 (Bankr.N.D.Ind. 1986) first addressed the relationship between the Indiana statute and Article 9 security interests. The court held that since licensees do not have property rights in their alcohol licenses, it is impossible for the licensees to grant enforceable Article 9 security interests in them. In coming to its decision, the court gave considerable deference to the state’s policies regarding alcohol control.

Other states have enacted statutes that explicitly preclude the creation of a security interest in alcohol licenses. For example, a California statute prohibits alcohol licenses from being pledged or transferred as security for a loan. Cal. Bus. & Prof. Code § 24076. A California bankruptcy court recently interpreted the statute to prohibit an alcohol license from being used as loan collateral. Smith v. C&S Wholesale Grocers, Inc. (In Re Delano Retail Partners, LLC), No. 11-37711-B-7, 2017 Bankr. LEXIS 2397 (Bankr. E.D. Aug. 14, 2017). In that case, the bankruptcy trustee sold a debtor’s alcohol licenses. The creditor argued the funds were subject to its security interest because the funds constituted proceeds of the alcohol licenses as general intangibles. The court disagreed and held that “in order for a liquor license or its proceeds to qualify as [a] general intangible under Article 9 in the context of a bankruptcy case, and thereby subject to a security interest as such, the liquor license must first qualify as personal property under state law.” Therefore, according to the court, a secured party does not have rights to the proceeds from a bankruptcy sale of the alcohol license.

While creditors may be unable to take a security interest in an alcohol license itself, creditors should be allowed to take a security interest in the proceeds from the sale of an alcohol license. Similar arguments have been successfully raised in the context of other government issued licenses.

For example, the Federal Communications Commission (“FCC”) previously took the position that broadcasting licenses were not assignable or transferrable. The FCC had long enforced a policy that prohibited a licensee from granting a security interest in an FCC broadcasting license. In re Merkley, 94 F.C.C.2d 829 (1983). The FCC’s rationale for enforcing the policy was that it was statutorily required to approve each broadcasting license applicant. If creditors were permitted to take a security interest in broadcasting licenses, the FCC reasoned, licenses could potentially transfer to the hands of new licensees without the FCC’s required approval.

However, the FCC’s position began to shift in the early 1990s. In 1992, the FCC considered the ability of creditors to take a limited security interest in FCC broadcasting licenses. 57 FR 14684. Then, in 1994, the FCC adopted a new policy which allowed creditors to take a security interest in the proceeds resulting from a FCC-approved sale of a broadcasting license. In re Cheskey, 9 F.C.C.Rcd. 986, 987 (FCC 1994). In Cheskey, the FCC reasoned a security interest in the proceeds of the sale of a license was different from a security interest in the actual license. In the former, the licensee’s creditor would have rights only to the money or assets received in a sale of the license rather than rights to the license itself. Id.

Numerous courts have since adopted the FCC’s position. For example, the Ninth Circuit permitted a security interest to be taken in the proceeds of an FCC broadcasting license and held that such a security interest constitutes a general intangible that may be perfected prior to the sale of the license. MLQ Inv’rs. Ltd. P’ship v. Pac. Quadracasting, 146 F.3d 746, 748-49 (9th Cir. 1998). Similarly, in the Eleventh Circuit, the court held a creditor may hold a security interest in the proceeds from the bankruptcy sale of the FCC broadcasting license. Beach Tv Ptnrs v. Mills, 38 F.3d 535 (11th Cir. 1994).

Legislators should look to the approach taken by the FCC and appellate courts to permit security interests in the proceeds generated from the sale of broadcasting licenses and put forth laws applying that approach in the context of alcohol licenses. Permitting creditors to take a security interest in the proceeds from a sale of an alcohol license would allow liquor store owners to use one of their most valuable assets to obtain secured financing while maintaining the integrity of existing state alcohol regulations.

For more information, please contact Timothy Hurlbut at thurlbut@dblaw.com.