In a recent decision, the Indiana Court of Appeals held that a bank’s security interest was protected even though the financing statement incorrectly identified the collateral.
Vertica, LLC (“Vertica”) purchased computers and related products from Comark, Inc. (“Comark”) for $2,800,000. Vertica granted Comark a purchase money security interest in the goods. In the security agreement, the computer equipment was described as “inventory” even though it would more accurately be described as “equipment” under the Uniform Commercial Code (the “UCC”). Notwithstanding the designation as “inventory,” the goods were very specifically described in the financing statement, including being identified as bearing the tradename and being purchased from Comark. Comark filed a UCC-1 to perfect a purchase money security interest in Vertica’s inventory, again designating the collateral of computer products bearing the tradename and being purchased from Comark as “inventory.”
Subsequently, a bank lent money to Vertica, Inc., an affiliate of Vertica. The bank believed the assets of Vertica were actually the assets of Vertica, Inc., when in fact Vertica, Inc. had no assets. The bank filed a financing statement against Vertica, Inc. to secure its loan.
Vertica, Inc. subsequently defaulted on the loan from the bank. The bank claimed a security interest in the assets of Vertica, but so did Comark. The bank claimed Comark’s erroneous identification of the collateral as “inventory” should deny Comark a security interest in the computer equipment. The Indiana Court of Appeals held in favor of Comark for two reasons.
First, the appellate court observed that the function of a financing statement is to provide notice to creditors so that they may make further investigation to determine the nature and extent of the security interests claimed in the debtor’s collateral. The standard for determining the adequacy of a collateral description in a financing statement is whether it is sufficient to put an ordinarily prudent person on notice of a security interest. The court observed that the UCC is liberally interpreted to determine the sufficiency of the description of collateral. Thus, the court held that Comark’s filed UCC-1 financing statement provided notice to third parties that Comark claimed a security interest in the computer equipment, notwithstanding its designation as “inventory.”
Second, the court noted the description of the computer equipment in the UCC-1 was very specific and identified Vertica and not Vertica, Inc. as the owner. Accordingly, the court also held the bank could not claim a security interest in the collateral since its borrower, Vertica, Inc., was not the owner of the collateral.
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