Misplaced Bank Financing Statement Still Notice of Creditor

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Diane Davis Washington Reporter/Editor Jay Horowitz Washington Managing Editor

By Diane Davis

A bank financing statement incorrectly indexed by the West Virginia’s Secretary of State was still adequate notice of the creditor, the U.S. Bankruptcy Court for the Northern District of West Virginia held.

Peoples Bank N.A. took “reasonable, practicable steps to provide the Trustee with constructive notice” under the Uniform Commercial Code when it lodged the statement with the Secretary of State, Judge Patrick M. Flatley wrote March 13.

Proper notice to all parties is important in recording liens to protect senior secured lenders’ interests and to make junior secured lenders and purchasers aware of all liens.

The Feed Store LLC executed a promissory note and security agreement to Peoples Bank. Itcompleted a financing statement, and paid the proper fee to the West Virginia Secretary of State.

The Secretary of State erroneously assigned one indexing number to two files, so Peoples Bank’s financing statement didn’t appear in a search of The Feed Store’s property in the Secretary of State’s database. When The Feed Store filed Chapter 7, the trustee filed a lawsuit alleging that the financing statement was “seriously misleading” and deprived him of “constitutionally-sufficient notice” as a judicial lien creditor with priority over Peoples Bank’s lien.

Due process requires only notice reasonably calculated to inform interested parties of the debt and afford them an opportunity to be heard, the court said.

Here, the incorrectly indexed financing statement didn’t deprive the trustee of a priority lien, the court said. West Virginia law, following the UCC, provides that the filing office’s error in misindexing a record doesn’t render ineffective an otherwise effective record, the court said.

Imposing the risk of a filing-office error on those who search the files rather than on those who file provides predictability for all parties, security for senior lenders in their interests, and notice to potential junior secured lenders and purchasers, the court said.

Sheehan & Nugent PLLC represented the trustee .

The case is Sheehan v. Peoples Bank, N.A. (In re The Feed Store, LLC) , 2018 BL 85634, Bankr. N.D. W.Va., 5:16-bk-1257 Chapter 7 Adversary No. 5:17-ap-8, 3/13/18 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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