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Parent of Secured Creditor Does Not Automatically Gain Secured Status
In In re Jarvis, Case No. 19-10085; the U.S. Bankruptcy Court for the Western District of North Carolina determined that the grant of a security interest to a corporate lender will not necessarily "spread" that security interest to the lender's affiliates. This decision underscores the need for precision and care in the drafting of loan documents, particularly with respect to the granting language contained in security agreements.
Background
Jacob D. Jarvis obtained a $17,000 loan from Strategic Funding Source, Inc. on Oct. 6, 2015 and, in connection therewith, granted Strategic a security interest in certain of its assets, including all accounts, documents, equipment, inventory and general intangibles. Two days later, Strategic, through its representative, Corporation Services Co., filed a UCC-1 financing statement to perfect Strategic's security interest. The financing statement listed only Corporation Services Co. as the secured party, and did not reference Strategic or any of Strategic's affiliates (indeed, pursuant to the Uniform Commercial Code, an agent or other representative of the principal/secured party may file a financing statement in its own name, with the effect of perfecting the security interest of the unnamed principal in the collateral. See, UCC Section 9-503(d)). Jarvis paid Strategic's loan in full in February 2016.
Thereafter, on Feb. 20, 2018, Jarvis obtained two additional loans from Money Works Direct, a wholly-owned subsidiary of Strategic. Money Works and Jarvis entered into separate security agreements for these loans, both of which contained language granting Money Works a security interest in certain of Jarvis's assets. In pertinent part, the security agreements provided as follows: "To secure … obligations to … its affiliates … Mr. Jarvis hereby grants to Money Works a security interest …."
The bankruptcy court noted that Money Works failed to file a UCC-1 financing statement covering either of these agreements. In addition, Strategic did not assign its own financing statement to Money Works, nor did it amend its financing statement to name Money Works as a secured party.
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