Furniture Liquidation Warehouse, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
FURNITURE LIQUIDATION
WAREHOUSE, INC.
DEBTOR
CASE NO.
05-02203-5-ATS
ORDER REGARDING MOTION FOR RELIEF FROM STAY
AND DETERMINING PRIORITY OF LIENS
The matter before the court is the motion for relief from the
automatic stay filed by First-Citizens Bank & Trust Company. A hearing
took place in Raleigh, North Carolina on September 28, 2005.
Furniture Liquidation Warehouse, Inc. filed a petition for relief
under chapter 11 of the Bankruptcy Code on May 25, 2005. First
Citizens and CIT Small Business Lending Corporation assert liens on
the debtor’s cash collateral, among other assets. On June 14, 2005,
the debtor, First Citizens, and CIT entered a stipulated order
regarding the debtor’s use of cash collateral. The stipulated order
provided that the debtor would provide First Citizens a continuing
postpetition lien to the extent of the use of cash collateral, and that
the debtor would continue to make timely payments to First Citizens as
called for in the note. In addition, the stipulated order required the
debtor to provide copies to First Citizens of reports and information
regarding the progress of the sale of the debtor’s assets. The debtor
has made no payments to First Citizens, nor has it provided any reports
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or information on the sale progress. Accordingly, First Citizens
requests relief from the automatic stay to pursue its remedies under
the note.
CIT opposes First Citizens’ motion, contending that First Citizens
does not have a perfected security interest and CIT’s lien on the cash
collateral has priority over any claim of First Citizens. CIT further
contends that there will be insufficient funds to pay CIT after the
sale is complete, and First Citizens ultimately will not be entitled to
any distribution. The debtor filed a response asking for a hearing,
and generally supports CIT’s objection.
The debtor failed to comply with the terms of the stipulated
order, and relief from the automatic stay is appropriate. However, no
distribution should be made at this time. The debtor is no longer
using its cash collateral, and the secured parties’ positions are not
at risk. The debtor’s sale of assets will be complete in a few days,
and it will soon be clear what funds will be available for distribution
to creditors.
The court now turns to the issue of CIT and First Citizens’
relative priority. The parties agreed that all necessary
information is before the court to make this determination.
The debtor entered into a Commercial Security Agreement with First
Citizens Bank on November 26, 2002. First Citizens Bank filed a UCC
Financing Statement with the North Carolina Secretary of State on
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December 2, 2002. The debtor’s name appears on both the Commercial
Security Agreement and the UCC Financing Statement as "Furniture
Liquidations Warehouse, Inc." (emphasis added). The debtor’s legal
name as filed with the North Carolina Secretary of State on
September 30, 1999, was "Furniture Liquidation Warehouse, Inc."
CIT received a Search Report from Unisearch, Inc. dated
October 28, 2004, indicating that all indices, including the index for
UCC Financing Statements, were clear. CIT filed a UCC Financing
Statement with the North Carolina Secretary of State on November 17,
2004. Counsel for CIT submitted an information request to the North
Carolina Secretary of State for all UCC Filings made through June 9,
2005, naming Furniture Liquidation Warehouse, Inc. as the debtor. The
search results included only the CIT UCC Financing Statement filed on
November 17, 2004.
According to North Carolina General Statute § 25-9-310(a), the
general rule is that a financing statement must be filed to perfect all
security interests. The exceptions in North Carolina General Statute
§ 25-9-310(b) do not apply. A financing statement is sufficient only
if it provides the name of the debtor, name of the secured party or a
representative of the secured party, and indicates the collateral
covered by the financing statement. N.C. Gen. Stat. § 25-9-502(a). If
the debtor is a registered organization, a financing statement
sufficiently provides the name of the debtor only if the financing
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statement provides the name of the debtor indicated on the public
record of the debtor’s jurisdiction of organization that shows the
debtor to have been organized. N.C. Gen. Stat. § 25-9-503(a)(1).
According to North Carolina General Statute § 25-9-506(b), a
financing statement that fails sufficiently to provide the name of the
debtor in accordance with North Carolina General Statutes § 25-9-503(a)
is seriously misleading. "If a search of the records of the filing
office under the debtor’s correct name, using the filing office’s
standard search logic, if any, would disclose a financing statement
that fails sufficiently to provide the name of the debtor in accordance
with G.S. 25-9-503(a), the name provided does not make the financing
statement seriously misleading." N.C. Gen. Stat. § 25-9-506(c).
Official Comment 2 to North Carolina General Statutes § 25-9-506
provides that a financing statement that is seriously misleading under
this section is ineffective even if it is disclosed by using a search
logic other than that of the filing office to search the official
records, or using the filing office’s standard search logic to search
a database other than that of the filing office.
Although First Citizens filed a UCC Financing Statement, it used
a debtor name that was not the debtor’s legal name as provided in the
public record. As such, the filed financing statement is seriously
misleading. Because a search of the records of the filing office of
the debtor’s legal name did not disclose First Citizens’s filing
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statement, that filing statement is ineffective. If a financing
statement is ineffective, then the security interest is not perfected.
According to North Carolina General Statute § 25-9-322(a)(2), a
perfected security interest has priority over a conflicting unperfected
security interest. Therefore, CIT’s security interest takes priority
over First Citizens’s security interest, and First Citizens is not
entitled to any distribution, if at all, until CIT’s lien has been
paid. Whether First Citizens has a security interest that is
enforceable against the debtor is not presently before the court.
Based on the foregoing, the motion for relief from the automatic
stay is ALLOWED; however, no distribution is to be made to First
Citizens until further order of the court.
SO ORDERED.
DATED: September 30, 2005
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