Where To File A Financing Statement — A Cautionary Tale

Eager to cash in on the lucrative movie-related video game business, Grendel Games, a company based in Amsterdam, entered into a development agreement with Beodragon, a Delaware corporation with the franchise rights to a blockbuster action movie series.  Although incorporated in Delaware, Beodragon was doing business in Hollywood, California and had its executive offices there.

As part of the deal, Beodragon granted a first-in-priority security interest in all of its personal property to Grendel.  To perfect its security interest, Grendel had to decide where to file its financing statement.  Grendel chose the office of California's Secretary of State … incorrectly, it turns out.

Grendel chose California because it read the Uniform Commercial Code ("UCC") (every state has adopted its own version and they are all substantially identical) to provide that while a debtor is located in a state, the law of that state governs perfection of the security interest.  The UCC also provides that when the debtor is an organization and has more than one place of business, the debtor is located at its chief executive office.  Here, Beodragon was an organization located in Delaware and California, and its executive offices were in California.  Grendel reasoned that Beodragon was located in California and so filed its financing statement with the California Secretary of State.

Grendel's reasoning makes sense, but it should have read further in the UCC.  The UCC also provides that a registered organization that is organized under the law of a state is located in that state.  The UCC defines a registered organization as "an organization organized solely under the law of a single state … and as to which the state … must maintain a public record showing the organization to have been organized."  Beodragon was a registered organization, because it was organized solely under Delaware law, and Delaware is required to maintain public records of Beodragon's organization there.  Grendel should have filed its financing state with Delaware's Secretary of State.

Avoid making Grendel's mistake.  Why?  

• Grendel has a security interest in Beodragon's personal property, but the priority of its security interest is not perfected.  A problem?  Not if Beodragon never has any other secured creditors, but who wants to count on that?
• Although first in time, Grendel's security interest will be subordinate and junior to the security interest of every other secured creditor of Beodragon that files its financing statement in Delaware before Grendel does (if Grendel ever does).
• If Beodragon files for bankruptcy, Beodragon may disregard Grendel's unperfected security interest altogether and turn Grendel's secured claim into a general unsecured claim.  In bankruptcy, a general unsecured claim gets paid last, after secured claims, the bankruptcy's administrative expenses, and unsecured claims the bankruptcy laws give special priority.

If you have any questions or would like additional details about perfecting security interests, you may contact Bob Edmunds or any other member of Buchanan Ingersoll & Rooney's Real Estate Practice Group.  Bob can be reached at 619.685.1962 or robert.edmunds@bipc.com