Accessions the UCC and the Bankruptcy CodeBeware of Secret Liens
Pursuant to Article Nine of the Uniform Commercial Code (UCC), a secured equipment creditor with a first lien could easily find itself subordinated to a subsequent secured accessions creditor. In fact, after foreclosure, a first-priority secured creditor may find itself with a conversion claim due to UCC §9-314. Thus, even a first-priority secured creditor, not to mention a subsequent purchaser, is wise to look past an alleged first priority lien for UCC §9-314's accession lien.
Section 9-314 defines goods affixed to other goods as "accessions," much like goods affixed to realty are defined as "fixtures." The exact definition of an accession varies by state, just as the UCC varies by state. To further compound this variance, state accession common law may vary from its own UCC. Despite such variances, however, the issue remains the same: who's on first?
Accession priority depends upon the time of perfection versus the time of attachment. If a good qualifies as an accession and the accession creditor perfects its security interest prior to installation, or affixation to the "whole," then the accession creditor's security interest takes priority as to the accession over the claims of all security interests in the whole. UCC §9-314 (1972). Thus, as to the accession, a prior secured creditor is subordinate to the secured accession creditor. This subordination occurs regardless of the prior secured creditor's knowledge or consent.
Section 9-314 applies only to "accessions." Non-accessions, or goods that become a part of the whole so as to be indistinguishable from the whole, fall under UCC §9-315. Section 9-315 states that when a good becomes part of a product or a mass, the security interest continues in the product or mass if the goods are so manufactured, processed, assembled or commingled that their identity is lost in the product or mass. UCC §9-315 (1973). When goods are so commingled, the secured accession creditor receives a pro rata share of the "whole's" sale proceeds. Id.
"Results may vary," however, when an accession affixes to a vehicle, depending upon the specific state certificate of title provisions. While some states require notation of an accession upon the certificate of title, other states merely require perfection by UCC-1 financing statements. This is the proverbial secret lien that is not found in mere title notations.
Therefore, to a perfected secured party, the preferred facts are the late or lack of perfection of an accession security interest. Otherwise, the timely perfection of an accession and the perfection of a non-accession are similarly detrimental. Accordingly, a secured creditor must consider §9-314's priority rules in the bankruptcy context, particularly when (a) obtaining relief from the automatic stay; (b) obtaining permission to sell under §363; or (c) a trustee uses his avoidance powers.
Accessions and the Stay
A creditor desiring to foreclose on its collateral, subject to the automatic stay, must obtain judicial relief from the automatic stay. 11 U.S.C. §362 (West 1998). Suppose, however, the secured collateral is a vehicle, to which a secured accession creditor attached oil-drilling equipment. The original secured creditor's relief may not encompass relief as to the accession. Accordingly, the subsequent sale of the vehicle, with the oil drilling equipment attached, may violate the automatic stay. Further, retention of sale proceeds attributable to the accession may constitute a conversion. Thus, joinder of an accession creditor or removal of the accession after the stay lifts, but prior to foreclosure and sale, is advisable.
Further, one must consider other applicable UCC provisions that require notice to other creditors. Section 9-504(c) of the UCC provides for notification to other secured parties with a security interest in the same collateral who duly filed a financing statement, or from whom the secured party received written notice of an interest in the collateral. UCC §9-504 (1977).
The failure to give reasonable notice also may result in a cause of action for damages. UCC §9-504 (1972); see, e.g., First National Bank & Trust Co. of Tulsa v. Hutchins, 2 B.R. 92 (Bankr. N.D. Okla. 1979); Barr v. White Oak State Bank, 677 S.W.2d 707 (Tex. App.—Tyler 1984, writ ref'd n.r.e.). In fact, since conversion is an intentional tort, punitive damages could result, depending upon the applicable state law. Consequently, when dealing with accessions and the automatic stay, remember that your interests in an item of collateral are not necessarily the only interests in it.
Accessions and §363 Sales
The sale of a debtor's property raises many of the same issues as foreclosure sales conducted after obtaining relief from stay. One must consider the res of the sale compared to the court's order. If a debtor or trustee wants to sell the "whole," he must consider what attachments to the "whole" exist. If an accession exists, the debtor/trustee must obtain an order allowing the sale of the accession, or arrange for removal of the accession.
Failure to remit sale proceeds attributable to an accession security interest creates a cause of action for conversion. See, e.g., IDS Leasing Corporation v. Leasing Associates Inc., 590 S.W.2d 607 (Tex. Civ. App.—Houston [1st Dist.] 1979, writ ref'd n.r.e.). In IDS, the assignee of purchase money security interests in refrigerator units, which were attached to Leasing Associates' trailers, claimed a priority security interest in the trailers' sale proceeds in an amount equivalent to the value of the refrigerator units. The court held that IDS's perfected security interest in the refrigerator units prevailed over Leasing Associates' interests. IDS was therefore entitled to recover the value of the refrigerator units from Leasing Associates.
Additionally, §9-314 provides that an accession security interest takes priority over a subsequent purchaser as long as the subsequent purchaser had knowledge of the security interest and the subsequent purchaser advanced funds after perfection of the security interest. UCC §9-314 (1972). Since the accession security interest survives sale, the secured accession creditor may recover from the subsequent purchaser. The subsequent purchaser, however, may seek reimbursement for the value of the accession from the seller. See, e.g., Mills-Morris Automotive v. Baskin, 462 S.W.2d 486 (Tenn. 1971).
Thus, selling goods to which an affixed accession may result in liability for the seller when the accession creditor removes the accession from the "whole," to the angst of a subsequent purchaser, or when the secured accession creditor seeks recovery directly from the seller. Once again, beware of secret liens.
Bankruptcy Avoidance Powers
A trustee stands in the shoes of a judicial lien creditor. 11 U.S.C. §544(a) (West 1998). Under certain §9-314 provisions, even a timely perfected accession security interest will not take priority over a creditor with a lien on the "whole," subsequently obtained by judicial proceedings. A trustee may therefore gain standing to assert the secured accession creditor's lien against the first priority secured creditor. See, e.g., In re Ron Fisher Inc., 107 B.R. 574 (Bankr. S.D. Ohio 1989). In Fisher, a trustee objected to a secured creditor's motion for relief from stay. The court held that since the vehicle's body (the sheet metal) was an accession, to which the trustee had an interest as a judicial lien creditor, his accession interest had priority over the competing secured creditor's interest in the entire vehicle. However, the court lifted the stay based upon the lack of equity and adequate protection, but allowed the trustee to remove the vehicle's body prior to sale.
Conversely, a trustee may also represent the interests of the whole as property of the estate. In such situations, the trustee must demonstrate that his §544(a) interests arose prior to the perfection of the accession security interest. See, e.g., In re Lyford, 22 B.R. 222 (Bankr. D. Maine 1982). In Lyford, the court lifted the stay because the secured creditor, who sought relief from the automatic stay, perfected its interests prior to the time the trustee acquired any interest. Id.; see, also, In re Fields, 56 B.R. 149 (Bankr. S.D. Ohio 1985).
An accession security interest may therefore work for or against a trustee in bankruptcy. The controlling factors are not only timing, but also the specific UCC version. Thus, even though §544(a) is part of a "uniform" federal statute, the extent and effect of the trustee's §544(a) power can vary widely.
The law of accessions varies by state due to varying UCC provisions. Despite the differences, at least one provision remains generally consistent. An accession creditor who perfects its security interest prior to attachment, takes priority over a security interest as a whole. This provision is more treacherous in some states than in others, depending upon the specific UCC provisions involved. No matter the state, however, §9-314's existence is a factor to consider.
The failure to consider the existence of UCC §9-314 may lead to subordination of a prior security interest, or the undermining of an otherwise proper motion to lift stay. Further, ignoring §9-314's existence can lead to sanctions or damage claims. Consequently, the wise practitioner will always look past its security interest to that of a potential accession creditor.