Article courtesy of Michael Robson (Greenberg Traurig)
In re First to the Finish Kim & Mike Viano Sports, Inc., 649 B.R. 763 (Bankr. S.D. Ill. 2023)
The Debtor operated its business using different legal entities and names. Since December 7, 1988, however, the business was operated as “First To The Finish Kim and Mike Viano Sports, Incorporated” (“First Incorporated”) registered with the Illinois Secretary of State. On May 2, 1994, First Incorporated was involuntarily dissolved. On December 20, 1999, “First To The Finish Kim and Mike Viano Sports, Inc.” (“First Inc.”) was registered with the Illinois Secretary of State. CNB Bank & Trust, N.A. (“CNB”) provided notes, security agreements and other loan documentations executed by borrower being First to The Finish Inc. or First To The Finish Kim and Mike Viano Sports, Incorporated in 1992, 2014 and 2018, including, particularly, a security agreement dated October 22, 2014 showing borrower as First to The Finish Inc. and a security agreement dated December 24, 1992 showing borrower as First To The Finish Kim and Mike Viano Sports, Incorporated and a Commercial Code financing statement dated January 4, 1993 showing the borrower as First To The Finish Kim and Mike Viano Sports, Inc.
The Debtor’s Chapter 11 case was filed on October 7, 2020. On May 19, 2021, CNB filed an emergency motion for the appointment of a Chapter 11 Trustee to which Nike USA, Inc. (“Nike”) joined. The Chapter 11 case Trustee (“Trustee”) was appointed. Nike, a supplier to the Debtor, filed its claim in the total amount of $913,907.10 and CNB filed its claim in the total amount of $9,691,291.86. Each of Nike and CNB requested summary judgment in its favor regarding the attachment of the 1992 and 2024 security agreements and the subsequent perfection of CNB’s security interest. CNB sought the determination that the two security agreements properly attached prior to the filing of the bankruptcy proceeding and properly perfected its security interest per the 1993 UCC 1 financing statement. Nike and the Trustee, on the other hand, sought the determination that neither of the security agreements attached and thus CNB’s security interest was never properly perfected.
Nike and the Trustee contended that CNB was not a secured creditor and it failed to authenticate the loan documentation, so there was no attachment of its security interests under the relevant agreements as required by Article 9 of the Uniform Commercial Code. The basis of their contention was twofold. First, there was no authentication by the Debtor as the correct name of the Debtor was The Finish Kim and Mike Viano Sports, Inc. while the name on the loan documentation (except for the 1992 security agreement) is First to The Finish Inc. Second, in order for authentication and attachment to have occurred, the loan documentation must be reformed.
The bankruptcy court of the Southern District of Illinois (the “Court”) noted that perfection and attachment are two requirements for a creditor to claim a security interest in personal property against a debtor that has priority over third parties. Whether there is an attachment at this case is the issue whether the Debtor authenticated a security agreement. The Court noted that 810 Ill. Comp. Stat. § 5/9 203 (2022) does not require a debtor be identified by name, and while the names in the loan documentation are not identical to the Debtor’s name, they are not totally dissimilar. The Court concluded that the dissimilarity in names did not prevent authentication and attachment. Regardless of the Debtor’s name or the name used in the loan documentation, there had been and was a single business entity with the same owners who had been operating the business entity with the same business operations and the loan proceeds were used by the business entity.
The Trustee and Nike also sought to avoid the 1992 security agreement. This security agreement used the correct name – First To The Finish Kim and Mike Viano Sports, Incorporated, but avoidance was sought on the grounds the 1992 security agreement ceased having a legal effect when the corporation was involuntarily dissolved in 1994 that when the corporation dissolved, the 1992 security agreement was automatically terminated as the grantor no longer existed. The Court noted that a corporate debtor cannot unilaterally avoid a lien on assets by merely dissolving, particularly when the assets subject to the lien are transferred to another entity which uses those assets in a continuing operation of business. When the prior corporation was terminated, its assets, liabilities and obligations, including those to CNB under the 1992 security agreement, did not just cease to exist, but instead passed to the unincorporated entity which continued to operate the business and passed to the Debtor who continued to operate the business. Additionally, in 2014, a second security agreement was executed by the Debtor, without canceling the 1992 security agreement. The execution of the 2014 security agreement subsumed the 1992 security agreement for it is a basic concept that pre contract negotiations or terms are consumed by a subsequent written contract.
The Trustee and Nike also took issue with the order of the perfection and attachment and arguing that the involuntary dissolution and later incorporation caused problem with attachment as it was after the 1992 security agreement and perfection as it was after the 1993 financing statement. The Court noted that the Commercial Code does not require perfection and attachment to occur in any particular order and accordingly, the Court held that the name difference is a misnomer under Illinois State law and not fatal and found it appropriate to grant summary judgment in favor of CNB.
