How does the four-month refiling rule for security interests apply to satellite stores in other states?
The Four-Month Rule and Satellite Stores A creditor took a secured interest in all inventory of a computer retail chain to secure a loan. The chain operated mostly in Florida, but had a satellite store in Kentucky and another in Missouri. The creditor filed a financial statement in Florida, but failed to file in the other two states. One year later, the chain defaulted on the note and voluntarily turned over all its assets to the secured creditor. Less than 90 days later, the chain filed for bankruptcy.
The trustee complained that the creditor had no right to inventory located at the Kentucky or Missouri stores. Since the creditor had failed to properly file in those states within four months of the time inventory was shipped, the trustee argued that the value of that inventory--nearly $200,000--should be returned to the bankruptcy estate. The creditor disagreed. It said that none of the inventory had been at either satellite store for more than four months. Therefore, the inventory was still covered under the Florida financing statement. The trustee claimed that the four-month rule did not apply when inventory was continuously shipped out of state. He said that the creditor should have filed in the other states the very first time secured goods were shipped to those stores. By failing to file within the first four months, the creditor lost its rights to all property removed thereafter. The creditor argued that each shipment was a separate entity and that with each shipment, the four-month rule applied anew. Two Theories, But Only One Makes Sense The court found that only the creditor's argument could be "reconciled with the statutory scheme." It said that a creditor's security interest "attaches in specific items of property" when the debtor has rights to that collateral. The financing statement covers the collateral as long as it is "filed in the state where the property is located." Here, the retail chain took all of its shipments at one Florida store and then distributed the inventory to various stores--including those in other states. Thus, the court ruled that the items were secured in Florida and the creditor would have four months to file on any goods moved to another state. The trustee argued that this gave the creditor a "secret lien," since other creditors in the satellite states could not know the inventory was previously secured. The court disagreed. It said that a "responsible" third-party creditor or purchaser would not or should not presume that any property that had not been in the state for four months was unencumbered. "Indeed, as a practical matter, it is difficult to perceive how a diligent potential creditor in Missouri or Kentucky would not discover that the one satellite store in each of those states was receiving all its goods from another location in Florida, where the goods might in fact be encumbered." Thus, the court ruled that the creditor could retain the inventory from the satellite stores. In re PC Systems, Inc., 163 B.R. 382 (S.D. Fla. 1994) Comment: Before accepting any goods or inventory as collateral from a debtor, check to make certain the collateral has been in the state for more than four months. If it hasn't, a UCC search may not reveal security interests from other states. If goods have recently been brought into the state, a thorough UCC search must include a search of any states the goods had been stored in during the past four months. Failing to do so may leave you with a worthless security interest. Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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