Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 6

FACTS Camtech Precision Manufacturing, Inc., makes precision parts and assemblies for aerospace and defense customers. Camtech is a subsidiary of R J National Enterprises, Inc. (R J). R J had a nearly $4 million line of credit with Regions Bank in 2010. Regions Bank filed a series of financing statements with the appropriate state offices in Florida and New York to perfect security interests in the assets of R J and its related companies. All of the statements were filed on the UCC financing statement form used in all states. The forms listed R J as the debtor in the "Debtor" box and Avstar Aircraft Accessories, Inc., another R J subsidiary, as an additional debtor in the "Additional Debtor" box.
Neither box, however, indicated that there were more debtors. Attached to each form was a sheet of plain paper that listed Camtech Precision Manufacturing, Inc., and Avstar Fuel Systems, Inc., as additional debtors. In 2010, R J and the others filed a petition in a federal bankruptcy court to declare bankruptcy. A committee of the companies' unsecured creditors asked the court to rule that Regions's financing statements failed to perfect the bank's security interest in the assets of Camtech and Avstar Fuel.
ISSUE Was each financing statement seriously misleading because it did not mention or refer to the additional debtors (including Camtech) that were listed on an attached page?
DECISION Yes. The court found that Regions's statements were seriously misleading and ineffective to perfect security interests in the assets of Camtech and Avstar Fuel. Because Regions failed to perfect its security interests, the bank was an unsecured creditor with respect to those two companies' assets.
REASON Florida and New York have approved the use of a standard UCC form for listing additional debtors. Regions did not use this form, but merely listed Camtech and Avstar Fuel as additional debtors on a single sheet of plain paper attached to each financing statement. Minor errors in a financing statement do not undercut its effectiveness.
Appending a list of additional debtors without a reference in the "Additional Debtor" box on the financing statement, however, was "an error and an omission that made the financing statements seriously misleading." Searches of the two states' records failed to reveal any financing statement that identified Regions as a secured creditor of Camtech or Avstar Fuel. This failure rendered Regions's financing statements ineffective to perfect its security interests in the assets of Camtech and Avstar Fuel. With respect to these assets, the bank's claim was reduced to that of an unsecured creditor.
WHAT IF THE FACTS WERE DIFFERENT? Suppose that searches of the Florida and New York records had revealed that Regions was a secured creditor of Camtech and Avstar Fuel. Would the result have been different in this case? Explain.