Financing Statement. In 1994, SouthTrust Bank, N.A., loaned funds to Environmental Aspecs, Inc (EAI), and its subsidiary, EAI of NC. SouthTrust perfected its security interest by filing financing statements that listed only EAI as the debtor, described

Question

only EAI's assets as collateral, and were signed only on EAI's behalf. SouthTrust believed that both companies were operating as a single business represented by EAI. In 1996, EAI of NC borrowed almost $300,000 from Advanced Analytics Laboratories, Inc (AAL). AAL filed financing statements that listed the assets of EAI of NC as collateral but identified the debtor as EAI. The statements referred, however, to attached copies of the security agreements, which were signed by the president of EAI of NC and identified the debtor as EAI of NC. One year later, EAI and EAI of NC renegotiated their loan with SouthTrust, and the bank filed financing statements listing both companies as debtors. In 1998, EAI and EAI of NC filed for bankruptcy. One of the issues was the priority of the security interests of SouthTrust and AAL. AAL contended that its failure to identify, on its financing statements, EAI of NC as the debtor did not give SouthTrust priority. Is AAL correct? Why or why not?

Answer 1

Financing statement
The bankruptcy court resolved the issue in AAL's favor, and EAI of NC and SouthTrust appealed to a federal district court, which affirmed the decision of the bankruptcy court. The federal district court concluded in part that AAL perfected its security interest in the assets of EAL of NC before SouthTrust perfected its interest as part of the renegotiated loan. The court reasoned that AAL's financing statements contained minor errors but that those errors "were not seriously misleading." The court explained that "the attached Security Agreement, clearly referenced on the financing statement itself as an ‘attachment,' identified EAI of NC as the debtor, contained the signature of [the] President of EAI of NC, and accurately described the collateral at issue. It is also worthy of note that . . . a copy of the Security Agreement, in and of itself, is sufficient as a financing statement if it contains the requisite information and is signed by the debtor." The court added, "There is no question that the financing statement and Security Agreement filed by AAL would put any potential creditors of EAI of NC on notice of AAL's lien against EAI of NC's assets. . . . [T]he omission of the words ‘of North Carolina' in two spaces on the otherwise informative and adequate financing statement, which was attached to a valid security agreement, did not render the statement ‘seriously misleading.' " Regarding SouthTrust's 1994 financing statement, however, the court pointed out that had a creditor examined it, he or she "would have no reason to believe that SouthTrust claimed an interest in the assets of EAI of NC." EAI of NC did not sign the statement, and the description of collateral did not identify EAI of NC's assets. (This case was decided before the effective date of the revision of Article 9, but the result under the revised Article 9 would likely have been the same.)