18 Hoosier Banker November 2014 LENDING / CREDIT In a decision sure to make a secured creditor’s blood boil, the court in Prairie State Bank & Trust v. Deere Park Associates, Inc., 2014 Ill. App. (4th) 130819, on Sept. 14 held that the bank, a secured creditor, had waived its perfected security interest. The court based its ruling on the grounds that the bank had not adequately monitored the activities of the debtor, Just Sofas and Mattresses LLC (“Just Sofas”). What the court overlooked is that the Uniform Commercial Code (UCC), which clearly articulates the requisites for a perfected security interest, does not require that the secured party provide continuous monitoring of the debtor. This misinterpretation is a judicial gloss on the UCC that is likely to generate few, if any, adherents. The situation began on June 22, 2007, when Prairie State Bank & Trust made a five-and-a-half-year, SBA-guaranteed loan of $200,000 to Just Sofas, along with a short-term loan of $100,000. The collateral was the inventory of Just Sofas and the proceeds from the sale thereof. A UCC-1 financing statement was filed in Illinois. On June 27, 2008, the $100,000 loan was rolled over. The following month, Just Sofas asked for an additional $75,000 to open another store. The bank declined the request, but Just Sofas proceeded to open the new store regardless. On March 4, 2009, the bank granted an additional $25,000 loan to Just Sofas. All of the loans were current at that time. Shortly thereafter Just Sofas entered into a consulting agreement with Deere Park Associates (DPA), a liquidator. The purpose of the agreement, dated April 6, 2009, was “to conduct store closing and going out of business” sales at Just Sofas’ two stores. The sales were to include all of Just Sofas’ existing inventory, plus inventory that DPA would purchase and add to the sale. All proceeds were to be deposited in a single account controlled by DPA, which was to receive a percentage commission on sales, plus reimbursement of expenses and a percentage of the profits from the sales at one of the stores. DPA received an advance of $30,000 before the sales began. Neither DPA nor Just Sofas informed the bank of the consulting agreement. DPA was aware of the bank’s secured position, however, as it had reviewed a UCC search that disclosed the position. DPA did send notice of its purchase money security interest to the bank. The liquidation sales commenced in April 2009. Around that time, the bank became aware that one of the stores was closing, when a bank loan officer spoke with the president of Just Sofas. The Just Sofas president said that one store was closing, but that the other store would remain open; no mention was made of DPA. At that time, Just Sofas’ loans were current. From the proceeds of the sales, DPA reimbursed itself for the cost of the additional inventory it had purchased, for the cost of conducting the sales and for the commissions it was due. DPA also paid $40,000 to an unsecured creditor, with the balance of $181,000 going to Just Sofas. The bank received none of the $181,000. The bank finally became aware of DBA’s involvement in August 2009, when a bank officer was informed for Secured Party Waives Security Interest Due to Failure to Monitor Debtor About the Author Michael L. Weissman is of counsel to the Chicago law firm of Levin & Ginsburg Ltd. His practice is focused on the representation of financial institutions. He is a frequent author and lecturer. Weissman can be reached at 312-368-0100, ext. 6142, email: mweissman@lgattorneys.com.
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